Cryptocurrencies are taking over the world. The price of bitcoin is nearing $32,000 and the total market cap of BTC has soared to more than $580 billion. Long-time critics of bitcoin, including companies like PayPal and institutional investors like JP Morgan and MassMutual, have become recent converts.
At the same time, banks of all sizes have started embracing the future of cryptocurrency banking. Let us look at the banking potential of cryptocurrencies in Africa’s banking industry.
Global banks have embraced digital currencies
In many aspects, Africa tends to act as a follower, not a leader. As such, the continent’s institutions tend to wait for their global peers to launch new projects and then they implement their local versions.
Fortunately, many global banking groups have already embraced cryptocurrencies and blockchain. For example, in the United States, JP Morgan, the country’s biggest bank, has already launched JPM Coin and uses it to facilitate trillions of dollars’ worth of transactions every day. Indeed, in December, the firm announced that it had completed a live blockchain-based repo transaction using JPM Coin.
After initially criticising cryptocurrencies, Goldman Sachs appointed a head of digital assets in 2020. Meanwhile, Morgan Stanley has been offering crypto services for more than two years. Wells Fargo is running a pilot project for its own Wells Fargo Digital Cash. Other American banks that are offering blockchain products are Bank of America, PNC Financial, and Citigroup. In September 2020, Kraken became the first crypto exchange to become a cryptocurrency bank in the US.
Similarly, several banks have joined Ripple in using its technology to facilitate large cross-border transactions. These include banks like Santander, Westpac, and Standard Chartered, among others.
At the same time, countries are also launching their digital currencies, which could incentivise banks to take a leading role in crypto development. China is already testing the digital yuan while Riksbank has started exploring digital krona.
Cryptocurrency potential in Africa
Experts believe that African banks could take an active role in promoting digital currencies because of their growing acceptance. Nigeria, for instance, is the world’s second-biggest bitcoin market after the US.
For one, cryptocurrencies have become ideal alternatives to local currencies in Africa. For example, in 2020, the Zambian kwacha dropped by more than 50% against the dollar. According to media reports, that has seen more people shift to digital currencies like Bitcoin and ETH.
Sadly, the trend is happening across Africa. In Kenya, the shilling has dropped by more than 10% while Zimbabwe does not have an effective currency. With digital currencies growing in popularity and with the economic situation worsening, it creates an ideal market positioning for Africa banks.
Indeed, African banks can learn a lot from bigger Western companies. A good example of this is Square, which is generating a substantial amount of income from small Bitcoin transactions in its Cash App app.
How African banks can incorporate crypto in their models
Fortunately, there are many ways in which African banks can incorporate digital currencies into their business models.
First, well-capitalised banks can build local digital custodial services for companies. In recent months, we have seen many companies like MicroStrategy and Square convert part of their treasuries into digital assets. This trend is just getting started, meaning that more international firms will start embracing this technology. Therefore, African banks can create local custodial services for these companies.
Second, African investment banks can start providing digital assets investment solutions possibly tailored to high net-worth individuals. That would be a good approach for them to diversify their solutions from traditional assets like bonds and stocks.
Third, African banks should consider partnering with well-established global firms to come up with products that simplify their solutions. For example, we have seen JP Morgan settle repo transactions using the JPM Coin. We believe that African banks could do well by creating blockchain-based partnerships.
Finally, another low-hanging fruit is to incorporate bitcoin into their digital banking offerings. For example, wouldn’t it be nice to be able to invest in bitcoin or ETH direct from a banking app?
The biggest challenge African banks will face when it comes to blockchain technology will be regulations. For one, most regulators are not well-versed with the technology. Perhaps there is a fear over the role of their fiat currencies if most people start using cryptocurrencies. Still, most of the regulators will have to learn from their developed country peers and come up with progressive cryptocurrency banking regulations.
Crispus Nyaga is a Kenyan financial analyst, coach, and trader with more than eight years in the industry. He has worked for leading companies like ATFX, easyMarkets, and OctaFx.