Figure of the week
The use of cryptocurrencies in Africa is on the rise, as digital currencies offer a swift, convenient, and direct peer-to-peer channel for remittance payments, international commerce, and savings. To better understand the global landscape around cryptocurrency use, Chainalysis, a leading cryptocurrency market research firm, recently released a report examining key geographic trends around the financial tool, including in the nascent African crypto market.
Although Africa captures only 2 percent of the global value of all cryptocurrencies received and sent (Figure 1), making it the world’s smallest cryptocurrency economy, the rising prominence of this innovative form of money is altering traditional financial flows to and from the continent.
Figure 1. Summary of Africa’s cryptocurrency usage (July 2019-June 2020)
Source: “The 2020 Geography of Cryptocurrency Report,” Chainalysis, 2020.
Chainalysis finds that the largest crypto channel connects Africa to East Asia, although channels to Northern and Western Europe and then North America trail closely behind (Figure 2). According to the report, the particularly high volume of funds sent from Africa to East Asia stems from the magnitude of Chinese nationals working in Africa.
Figure 2. Africa’s cryptocurrency inflows and outflows by region (July 2019-June 2020)
Importantly, access to these digital currencies is providing an alternative to both traditional intra-regional transfer payments and international remittance systems, as transferring funds via cryptocurrencies circumvents paying transfer fees that remain higher in Africa than in the rest of the world. While transferring money through cryptocurrencies does incur a fee, the authors suggest its lower fee structure and the easy, universal access to cryptocurrency networks via mobile phones make these digital assets more convenient than rigid traditional-banking and money-wiring services.
Given the data challenges stemming from the decentralized exchanges that mediate crypto transactions, the authors warn that, beyond identifying the market share of retail-sized transfers (transactions under $10,000) it is very difficult to estimate the share of African cryptocurrency transfers dedicated to remittance networks (Figure 3). Notably, compared to other regions, Africa engages in the highest rate of retail-sized crypto transfers in the world, which the report attributes to the digital currency’s rising popularity for remittance payments.
Figure 3. Market share of retail-sized (less than $10,000) transfers (July 2019-June 2020)
Chainalysis speculates the simplification and cost-competitiveness of sending and receiving money with cryptocurrency will fuel continued growth of digital currency utilization in the region. Alongside the use of cryptocurrencies as a medium of exchange, stablecoins, a cryptocurrency variant whose value remains stable by pegging its price 1:1 with the U.S. dollar, offers Africans facing unstable currencies an alternative outlet in which to save money without the anxiety of devaluation. Based on the multitude of advantages over traditional financial systems, the authors suggest that the relatively small cryptocurrency market in Africa is generating significant value for the early adopters who utilize the novel tool.
For more on cryptocurrency and financial flows in Africa, read “Keep remittances flowing to Africa,” “How finance flows to Africa” and Brookings Senior Fellow Eswar Prasad’s new book “The Future of Money.“