African central banks gearing up for new era of digital currencies
• Analysts say Kenya, SA and Nigeria are among the top 10 crypto-adopting nations worldwide
Economies in subSaharan Africa are developing digital financial services. In the larger markets, regulators have taken policy and regulatory measures to support financial institutions’ digital transformation.
While emphasising the importance of robust cybersecurity and consumer protection measures, the pandemic has generated a strong appreciation for the digital economy. With it comes the expectation that the digital economy will bring growth.
Of the emerging and new technological developments, there are a few we believe are most likely to bring growth to regional capital markets.
Central bank digital currencies (CBDCs) have grabbed the attention of financial authorities worldwide, with governments weighing their feasibility and inherent risks against the potential economic value. Five of the 40 countries the IMF has approved to issue digital currencies are in Africa. Notably, the SA Reserve Bank began CBDC experimentation in 2016, and the Bank of Ghana aims to publish the findings of its work on CBDCs in 2021. African nations’ progress in CBDC research and implementation lays the groundwork for successful adoption in the future. Moreover, it signals the continent’s ability to participate meaningfully in the emerging universal digital payments network.
In 2020, blockchain data analytics firm Chainalysis published its Global Cryptocurrency Adoption Index, listing Kenya, SA and Nigeria among the top 10 crypto-adopting nations in the world. These countries are also the region’s leading economies. Cryptocurrencies are attractive to African consumers as a mechanism for managing currency devaluation and avoiding high transaction costs. However, their regulatory status is uncertain and varies from country to country in the region.
While this forces institutional portfolios to stay on the sidelines of cryptocurrency investment, it doesn’t stop local corporates from making proprietary investments in cryptocurrency. Cryptocurrency is an essential building block of the digital economy; its growing adoption and use by consumers and corporates in sub-Saharan Africa points to the direction of change. Also, it provides the impetus for financial service providers to add crypto capabilities to their technology infrastructure and offer crypto products and services.
The Nigerian Securities and Exchange Commission has stated that it will recognise digital assets as securities, pledging to formulate regulations and policies that will help encourage innovation and adoption in the market. The recognition extends to digital asset token offerings, security token initial coin offerings and “other blockchainbased offers of digital assets”.
TOKENISATION PROMISE
This position is congruent with the Financial Sector Conduct Authority’s definition. The progressive development of regulation will promote growth in the tokenisation of illiquid realworld assets and allow fractional ownership. Tokenisation holds specific promise in Africa, where the strength of local investors is still growing.
Accelerators, fintech venture capital firms and business incubators have spawned many start-ups with innovative and robust financial products and services. In step with this development, the concept of open banking has challenged large financial institutions’ monopoly over customer financial data and become mainstream.
Open banking in the region is
nascent; the environment continues to evolve rapidly. In December 2020, the SA Reserve Bank published a consultation paper on an open-banking policy for the national payment system.
In Nigeria, the Open Technology Foundation, known as Open Banking Nigeria, was formed in 2017 to co-ordinate open application programming interface (API) standards for the financial services industry. Open Banking Nigeria petitions the nation’s central bank to extend its role in regulating open banking.
The Central Bank of Kenya published its Kenya National Payments System Vision and Strategy 2021-2025 and asserted defining standards for API development and regulating secure data portability. Central Banks in Ghana, Mauritius, Rwanda and Tanzania have adopted similar approaches.
New Zealand software company Xero and one of SA’s leading
banks, Nedbank, are launching the country’s first fully digital direct API bank feed. The solution gives small businesses access to daily financial data for the general purpose of cash flow management. Financial institutions thinly service a large portion of Africa’s population; in these circumstances, open banking promotes financial inclusion by making customer financial data accessible and affordable for fintech firms.
Companies are increasingly using data and analytics techniques to manage their performance, for fraud prevention, to enhance the customer experience, and to secure growth.
Artificial intelligence has become pervasive in financial services. Applications include investment tools such as roboadvisory and discrete internal implementations in claims processing and robotic process automation. In this way, posttrade providers are developing
the operational tools to compete and deliver service in the emerging digital economy.
Africa’s potential is considerable. Its population has a mobile penetration rate that is higher than its internet penetration rate; financial institutions can leverage mobile apps, digital technology and fintech partnerships to reach more consumers and create an inclusive economy.
CBDCs are the link to the global digital economy. The largest economies in Africa are participating meaningfully in the digital evolution of the posttrade industry by enacting legislation that fosters technology adoption and innovation. The steadily growing global interest in such financial technologies will pave the way for Africa to advance into the new age.
● Tinavapi is principal and regional head of market insights, Standard Chartered Bank Africa & Middle East.