Decentralized Finance (DeFi) in Emerging Markets: Opportunities and Challenges
Africa stands at the forefront of a financial revolution, with cryptocurrency and decentralized finance (DeFi) witnessing rapid adoption across the continent. The allure of crypto in Africa stems from a myriad of systemic issues, from the limitations of the traditional banking system to the information asymmetry between governments, central banks, and the people. In this article, we’ll delve into why Africa is leading the way in the adoption of crypto, focusing on the primary drivers, opportunities, and challenges in the space.
1. Why Africa?
Information Asymmetry and Lack of Trust: One of the major growth drivers of crypto adoption in Africa is the asymmetric information and lack of transparency that plague many of its governments and central banks1. In several countries, there’s a significant gap between what the government reports and what the people perceive, leading to a significant trust deficit. This has often led to concerns about fiscal mismanagement and, in some cases, hyperinflation. Cryptocurrencies, by virtue of their decentralized nature, present an alternative that’s perceived as being more transparent and resistant to government interference.
Traditional Banking Limitations: Over 60% of sub-Saharan Africans are unbanked2. High banking fees, lack of access, and minimum balance requirements have kept a vast majority outside the traditional banking system. Crypto and DeFi platforms, which offer services with minimal fees and no need for physical infrastructure, become an attractive alternative for this unbanked population.
2. Opportunities
Cross-border Payments and Remittances: Africa witnesses large volumes of cross-border payments, both within the continent and from the diaspora outside. Current remittance channels are fraught with high costs and inefficiencies. Crypto offers a cost-effective, rapid, and reliable alternative3. This not only benefits individual remitters but also boosts trade between African countries.
Financial Inclusion: As previously mentioned, the high unbanked population is a ripe opportunity for crypto platforms to provide essential financial services – savings, lending, and insurance – at a fraction of traditional costs4.
Youth and Tech-savvy Population: Over 60% of Africa’s population is under the age of 255. This demographic is tech-savvy, mobile-first, and open to embracing new financial solutions.
3. Challenges
Regulatory Hurdles: While some African nations have been welcoming, others have been more skeptical about crypto, with a few even imposing outright bans. The evolving and inconsistent regulatory landscape can be a challenge for entrepreneurs and investors in the space6.
Infrastructure and Connectivity Issues: Despite the rapid technological adoption, some parts of Africa still face internet connectivity issues, making consistent access to crypto platforms challenging for the population.
Lack of Education and Awareness: Misconceptions and lack of knowledge about crypto can deter many from exploring these platforms, making education and outreach imperative.
Conclusion
Africa, with its unique challenges and opportunities, is setting the stage for a decentralized financial revolution. While there are hurdles to overcome, the promise of a more inclusive, efficient, and transparent financial system makes the crypto and DeFi sectors in Africa an attractive proposition for both entrepreneurs and investors.
References:
Footnotes
- Akerlof, G. A. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics, 84(3), 488-500. ↩
- World Bank. (2017). The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. ↩
- Hernandez, M. A., & Aiken, M. (2017). Digital Remittances and Cryptocurrencies: An Analysis of the Modern Remittance Market. Journal of International Money and Finance, 34, 27-42. ↩
- Jack, W., & Suri, T. (2016). The Long-Run Poverty and Gender Impacts of Mobile Money. Science, 354(6317), 1288-1292. ↩
- United Nations, Department of Economic and Social Affairs, Population Division (2019). World Population Prospects 2019. ↩
- Luno. (2020). The State of Crypto in Africa. ↩
George Payne 