Relentless depreciation of currencies in most African countries and rising inflation rates in the past year have increased grassroots adoption of cryptocurrencies as people turn to the unconventional assets as hedge.
The latest Geography of Cryptocurrency report by US-based research firm Chainalysis reveals a connection between the economic challenges that have faced Africa since last year, and interest in and use of cryptocurrencies.
Digital currencies have proved to be a better store of value than local African legal tenders, driving crypto adoption faster in countries where inflation and depreciation have been highest, threatening countries’ monetary sovereignty.
“Many countries in the region have struggled with rising inflation and debt, making cryptocurrency an attractive means of storing value, preserving savings, and attaining greater financial freedom,” says Chainalysis in a breakdown of the report.
As countries still struggle to navigate the challenges posed by cryptocurrencies to their economies, the increased use for hedging could exacerbate the threat they pose to the monetary independence of nations, as it risks replacing currencies deemed to be ‘weak’.
Kenya, Nigeria, Ghana, and South Africa, which are amongst the leading countries in crypto adoption on the continent, are the most affected by this phenomenon, the report says.
Swinging in tandem
Statistics show that in these countries, the number of cryptocurrencies – specifically Bitcoin and stablecoins – received over the last two years was highest whenever the local currencies decreased in value and grew as the local fiat currency continued to depreciate.
In Nigeria for example, the amount of Bitcoin and stablecoin received increased to over $2.6 billion in June this year, when the Naira hit a record low exchange rate to the dollar, a trend also observed in January and every other month that the currency depreciated.
Generally, Nigeria’s crypto transaction volume increased 9 percent in the year to June 2023, while the Naira depreciated by about 46 percent in the same period, highlighting the positive relationship between the two.
In Kenya, however, the currency depreciated by 18 percent between July 2022 and June this year, but the amount of crypto currency received nearly halved in the same period, from the $19 billion received in a similar period last year.
Nonetheless, interest in crypto surged in the same period, as indicated by trends of online searches, which could also highlight a correlation between these economic woes and crypto activity in the country.
Nairobi-based blockchain researcher, David Otieno, says there is indeed rising curiosity on crypto in Kenya and adoption is growing, but that is likely to be driven by a number of factors and not just the desire to hedge against inflation and currency depreciation.
“Governments’ interest in regulating digital assets and subsequent discussions on the same has sparked genuine interest among people. But let’s also not forget the free publicity that Worldcoin (eyeball identity registration) has given the crypto space,” said Mr Otieno.
“Inflation can be a driving factor, but if you look at the trend maybe in the developed nations like the United Kingdom, it is reported that it is the same inflation and economic issues that have caused has caused the value of Bitcoin to fall,” he added.
The Chainalysis report also acknowledges that the growing regulation of the crypto space is also fuelling interest and adoption. In Kenya, there is a draft bill that seeks to have cryptocurrencies considered as securities, and the State is currently seeking to tax gains realised through their trade among the digital services tax.
In last year’s Geography of Cryptocurrency report, Chainalysis found that unemployment and lack of opportunities were driving crypto adoption in Africa as young people used them as a means of wealth creation.