Crypto Regulation In Africa: A Detailed Report For Investors and Traders

In Africa, where citizens of various countries are constantly battling against inflation — as seen in Nigeria with inflation rates up to 25.8% — and its energetic, talented citizens are seeking work-from-home opportunities as freelancers, cryptocurrencies, particularly stablecoins, have provided a haven for many. Several factors have contributed to the growing adoption of cryptocurrencies across the continent. More recently, data indicates that one out of every three Nigerians — citizens of Africa's most populous country — has owned or used cryptocurrencies for various purposes. This growth has brought hope to those who benefited from being early adopters and losses to those who fell victim to scams.

Africa remains a prominent adopter of cryptocurrency globally, leveraging the decentralization of digital assets beyond traditional financial systems and the financial benefits associated with trading them. The expansion is significant, especially given many regions' lack of government approval. ChainAnalysis reports that Nigeria and Morocco are among the top 20 countries actively engaging in crypto-based services and innovations, with transactions in these nations reaching $20 billion in 2021.

The regulatory landscape for crypto in various African nations is varied and unclear. Most have either completely banned it, imposed some restrictions, or supported it to varying degrees. Six countries – Cameroon, Ethiopia, Lesotho, Sierra Leone, Tanzania, and the Republic of Congo – have completely prohibited cryptocurrency. In contrast, two-thirds of sub-Saharan African countries, including Nigeria, Kenya, and South Africa, have imposed certain restrictions.

South Africa, however, has made significant strides by expanding its regulatory framework to include oversight of crypto entities operating within its jurisdiction. Nigeria, in contrast, has displayed inconsistency in its approach. After lifting a three-year ban, the government permitted financial institutions to open accounts for crypto companies. However, it soon reversed course, blaming Binance – the largest cryptocurrency exchange by trading volume – for the depreciation of the naira, its currency. This resulted in the detention of Binance's top executives, demands for substantial sums of money, and active bans on other exchanges from operating within the country.

The call for stringent regulation intensified following the cryptocurrency exchange FTX filing for Chapter 11 bankruptcy, severely impacting several African startups. For instance, the Nigerian Web3 startup Nestcoin lost a portion of its raised funds, resulting in the termination of several staff contracts.

Clearly defined regulations and policies supporting cryptocurrency in African countries could greatly benefit businesses, citizens, and governments. Many startups across Africa have attributed their failures to the absence of a clear regulatory framework. For instance, the Bitcoin marketplace startup Paxful cited regulatory issues as a major setback, while Pillow, a crypto-enabled startup in West Africa, pointed to the 'current regulatory climate and its impact on associated financial infrastructure' as a reason for ceasing operations.

With improved policies and a clear path for cryptocurrencies and digital assets, there's potential for business growth, which can contribute to economic factors like job creation. However, Africa may not fully realize its potential without embracing this new technology and the financial opportunities it offers. Insights from the International Monetary Funds (IMF) reveal that despite restrictions, adoption is growing in countries like Kenya (8.5%, 4.5 million people), South Africa (7.1%, 4.2 million people), and Nigeria (6.3%, 13 million people). 

“Less stringent regulation will enable African nations to participate in the digital asset economy,” said Roselyne Wanjiru, a Forbes writer.

She also noted that “Cash inflows have been unofficial, suppressed, or redirected to countries that are more friendly to virtual asset service providers. Legitimacy will enable local job creation, easier revenue reporting, and gradual tax collection.”

Citizens remain vulnerable to crypto scams without solid regulatory oversight and enhanced security measures. Reports from the blockchain analysis firm Whitestream identify Lagos as a 'focal point' for certain investor scams.

In a recent incident, the Nigerian influencer Danny Walter was exposed by ZachXBT for scamming followers by dumping a large amount of a token valued at 31 ETH (approximately $96,500), causing significant losses for followers (he advised to buy) who held the cryptocurrency, using them as exit liquidity. With effective regulation, this influencer [Danny Walter] would have been brought into check by the government.

The application of cryptocurrency in Africa is extensive, offering numerous advantages, from hedging against rising inflation to facilitating financial gains and simplifying cross-border transactions. In nations like Nigeria and Sudan, where inflation rates are alarmingly high at 25.8% and 256.17%, respectively, cryptocurrencies and stablecoins such as USDT, USDC, and DAI have become popular choices. They safeguard against the continuous devaluation of local currencies, helping maintain purchasing power.

The preference for stablecoins and cryptocurrencies over traditional stable assets like gold or public market investments is primarily due to the easier accessibility of cryptocurrencies. Many individuals are attracted to cryptocurrencies for their potential financial returns, typically through buying low and selling high.

In a LinkedIn post, an experienced growth and marketing expert shared insights from their work with some of Africa’s largest cryptocurrency exchanges. They noted that "a significant number of people are not merely sending BTC, ETH, or other tokens; they are holding onto them, anticipating a rise in value and planning to sell at a peak." The expert believes this behavior has contributed to the closure of several crypto exchanges across Africa.

It means that many people [Africans] are holding onto their cryptocurrency, waiting for its value to increase significantly. Once they achieve substantial gains, they sell off their holdings and move on to the next investment opportunity. This pattern can lead to the closure of crypto exchanges, as it reduces the ongoing trading activity on these platforms.

For African freelancers and remote workers participating in the global digital economy, cryptocurrencies and stablecoins have become essential tools for receiving and making international payments.

Cryptocurrency adoption has a high potential for massive growth in several African countries, provided a proper regulatory framework is in place to enable crypto-based businesses to thrive and users to benefit from added financial advantages. Countries like Nigeria, Kenya, Morocco, and South Africa are expected to be major contributors to the overall adoption across the continent if these structures are implemented.