African nations have long been at the forefront of technological innovation with payment solutions like M-Pesa quickly spreading through the continent. While these mobile payment technologies had a major impact on the everyday lives of Africans, a new wave of digital innovation is now rapidly growing in Africa thanks to the emergence of innovative financial technologies like blockchain.
Based on a “distributed ledger”, at its most basic level blockchain is a form of secure and distributed database technology. Any data can be stored on the blockchain, including contracts and transactions, and all of these digital assets are transparent and trackable.
When used correctly, sensitive data, such as transaction details, customer KYC data or cross-border trade documentation, is sharable between parties without the need for a middleman to establish trust. There are even opportunities to enhance outdated and siloed banking systems by ensuring secure connections between critical infrastructure using blockchain technology.
In recent years, banks and other financial institutions across the world have warmed to the prospect of blockchain solutions. African banks, too, are increasingly working with partners to embrace the benefits of blockchain. As long ago as 2016, African banks were looking for ways to adopt blockchain technologies with ABSA, then Barclays Africa Group, joining R3, an association of 45 firms developing blockchain for financial services applications.
With a drive to simplify transactions, African banks view blockchain technologies as important for innovation. As regulators increasingly look for ways to regulate these technologies, banks are also growing more confident that their use of blockchain technologies will be above-board and will not attract fines.
Reducing operational costs
When it comes to how financial institutions can implement blockchain solutions, it’s difficult to single out one way where these technologies can have the most impact, as there are so many banking operations that blockchain could improve.
From the South African Reserve Bank (SARB) announcing earlier this year that it is undertaking a feasibility study of a central bank digital currency (CBDC) to the Standard Bank Group establishing Africa’s first Hedera network node, an enterprise-grade distributed public ledger, to remove pain points from cross-border trade; innovation is rife in the blockchain space.
“Distributed ledger technology (including blockchain) can facilitate standardization across the financial services sector locally and globally in some back-end and customer product/service processes,” a spokesperson from ABSA, the South African-based financial services group, told Alke Finance. “This could lead to vast improvements in transaction speed, security and efficiency.”
In an industry like finance, where administrative and operational costs are high, even a relatively small improvement in efficiency could have a major positive impact on the bottom line.
Research from McKinsey found that, by adopting blockchain technology, banks could reduce operational costs by around $13.5 to $15 billion a year, as well as decrease the cost of risk by up to $1.6 billion.
As a result of the transparency offered by blockchain, risk is significantly reduced in a range of financial settings for both customers and banks. ABSA brings up the example of the self-sovereign digital identity (SSDI) concept, which gives customers a secure digital location to store sensitive identity data, which banks can verify, helping to stop identity fraud.
In practice, ABSA is actively seeking ways to develop an SSDI concept, based on government-issued ID documents, that can be securely shared with financial institutions. Instead of requiring new clients to physically bring an ID document as proof of identity, the SSDI could be used to reduce transaction costs, limit cybercrime and protect sensitive customer information.
Bridging the gap
Clearly, there is still a great deal of work to be done before Africa is truly able to maintain a vibrant financial blockchain ecosystem. From building out a skilled base of developers to establishing global partnerships with financial firms who have expertise in this area, there are an array of ways to expand this burgeoning sector.
The world’s largest cryptocurrency exchange, Binance, has also set its sights on the African blockchain space with its $1 million fund being launched early last year. The aim is to support African developers building projects on the Binance Smart Chain, as well as developing the Binance Masterclass virtual crypto education program.
As of the beginning of this year, more than 400,000 Africans have signed-up to learn about crypto fundamentals, technical analysis and crypto trading through Binance.
Jeff Mkungusi, CEO of The Africa Blockchain Center, an organisation working to build a blockchain ecosystem in Africa, is one of the individuals actively seeking to create a space where blockchain firms can flourish.
For Mkungusi, one of the advantages of blockchain-based tools is their ability to facilitate transactions faster than can currently be achieved for banks that don’t have an established relationship to transact without having to rely on a network of correspondent banks. “Blockchain technology can help in interbank transactions through the initiation of transactions across different geographical regions,” he adds.
These correspondent banks would otherwise settle the transaction in exchange for a fee, with blockchain offering these firms not only an increase in the speed of such transactions but also reduced costs.
More also needs to be accomplished when it comes to the legal and regulatory environment in Africa, according to Mkungusi.
“Laws are being developed to govern crypto transactions but at the moment there are no specific regulations governing cryptocurrencies. The state in some countries haven’t fully accepted it but they have created different task forces to look into it,” said Mkungusi.
Vital international partnerships
Continuing with innovative programs and turning theory into practice is the next step for many African financial institutions. Project Khokha, a collaboration between the South African Reserve Bank, ConsenSys and 7 Commercial Banks (ABSA, Standard Bank, Nedbank, FirstRand, Investec, Capitec and Discovery Bank), was a vital Proof of Concept (POC).
The project used a privately permissioned Ethereum blockchain that provides access controls, called Quorum, to create the tokenisation of the South African Rand (ZAR) and demonstrated that it could be transferred between commercial banks on a blockchain. This program was launched to find a way to increase the resilience of interbank payment systems and reduce costs. It achieved its goal of completing more than 70,000 transactions in less than two hours, while protecting customer privacy.
Collaboration and innovation are key hallmarks of success in Africa’s blockchain ecosystem. ABSA believes that if blockchain is to reach its full potential, it’s vital that public and private sector collaboration occurs.
“To this end, ABSA participates in several local and global initiatives to explore opportunities as well as the policy and regulatory implications of innovation in financial markets driven by distributed ledger technology (including blockchain),” said the spokesperson.
Monica Singer, South African Lead and Senior strategy for blockchain technology firm ConsenSys, believes that blockchain will give rise to various new digital instruments created to match investor demands.
“These new assets are made possible by the instantaneous and customisable nature of digital securities issuance which can be programmed to seamlessly perform different kinds of business functions,” she adds.
While not widely used today, with banks first performing internal tests to understand the potential of this technology, in the near future, smart contracts, asset-backed digital tokens and fully decentralized finance are likely to play a substantial role in the offering from African financial institutions. It’s equally clear that those banks that do not embrace the benefits of blockchain are likely to fall behind competitors, sooner rather than later.
“This is the time for Africa to spearhead the world using this technology. Mobile phone penetration is big enough to ensure that innovation and adoption will spread and improve the quality of life of the many,” concludes Singer.
Hedging against currency devaluation
Viewed either as a potential competitor or a powerful set of innovative tools, Decentralised Finance (DeFi), financial services fully built on the blockchain need to be on the radar of African financial institutions.
“Innovation on the internet of value in particular in the Decentralised Finance (DeFi) eco-system waits for no one. If legacy financial institutions do not invest time and resources to catch up and innovate using this technology, they will be left behind,” says Monica Singer, South African Lead and Senior strategy for blockchain technology firm ConsenSys,
A Nigerian start-up called XendFinance has developed a product that is able to bypass is-sues around currency devaluation by offering credit unions access to decentralised stable-coins, a type of cryptocurrency linked to fiat currency, such as DAI and BUSD, to protect against inflation and currency devaluation.
As users of DeFi solutions do not require any bank intermediary or even a bank account, there is a risk that these tools will take customers away from traditional banks. However, this will only be the case if banks are not able to offer a product that meets their customer needs as well as, this particular use-case of DeFi, does.
DafriBank have already begun to offer digital DeFi loans to customers and thanks, in part, to this innovative product, the bank has grown by 500% over the last six months. It re-cently raised $800 million from investors.
Thanks to the strong reputation African banks have built up in their communities, they are well placed to take the lead in this area and compete with innovative start-ups.
“This is the beginning of the end for those that do not offer value-added services as inter-mediaries. On the other hand, it is a massive opportunity to create new products and ser-vices to meet the needs of users,” she adds.