The Role of Cryptocurrency in Reducing Costs of Cross-Border Payments

The Role of Cryptocurrency in Reducing Costs of Cross-Border Payments

After Russia besieged Ukraine in late February, the global financial system experienced a significant upheaval. Apart from affecting markets, it has also become a showcase to show the importance of technology in today’s world. For example, Elon Musk, the world’s richest tech mogul, provided a truckload of Starlink dishes to keep the Ukrainian internet alive. What’s even more fascinating is how Ukraine raised over $47 million in donations from benefactors around the world using cryptocurrencies. This has become a teachable moment about how a permissionless, borderless financial system could benefit the world.

Cryptocurrencies are becoming more popular day by day, especially in emerging markets. Last year, Africa had the fastest rate of cryptocurrency adoption despite government restrictions in key markets like Nigeria and Kenya. There are many reasons for this growth, one of them being that cross-border transactions are problematic with the traditional banking system.

According to world Bank, in 2021, remittances to the sub-Saharan region increased by 6.2% to $45 billion. However, Africa has the highest remittance costs in the world, averaging around 9% for a $200 transaction. Questions like this have sparked debates about the lifespan of banks on the continent. Despite their strong post-covid growthbanks are faced the task of following the new waves fintech and cryptocurrencies.

But even on the technology side, there are still challenges that fintech has not solved. As Africa’s young population globally embraces in-demand digital skills, they still face bottlenecks in getting paid for their work. Several global payment gateways do not support African users. They are either too expensive for Africans or completely excluded from the African market. Cryptocurrencies, however, are non-discriminatory.

In an interview with Ventures Africa, Gituku Ngene, Senior Advisor for Youth Employment and Innovation at body of mercy, explained that cryptocurrencies can solve the problem of cross-border payments and reduce unemployment in Africa. “I think there’s a huge opportunity here, to say the least,” Ngene said. “For example, unemployment levels are high, especially among young people. So we can’t limit them to local opportunities. They must be able to earn money anywhere in the world. But they also need viable payment channels. It makes no sense for people to pay up to 20-30% fees to get paid for their work. That’s why we built a platform like Microwork, where people can get paid in cryptocurrency to do micro jobs online. Fees are much lower with cryptocurrency.

Gituku Ngene

Meanwhile, crypto adoption in Africa still faces several challenges. In 2021, despite the rapid adoption rate of crypto in Africa. the continent still had the lowest transaction volumes in the world, contributing around 2%. According to Ngene, several factors contribute to this shortfall. “When you start looking at the numbers globally, Africa is just as behind as many other sectors. But this is not a crypto-specific issue,” he said. “It’s the same way that internet penetration is growing, but we’re still lagging behind other regions. A few countries contribute the most to our numbers, such as Nigeria, South Africa, Kenya, etc. At the same time, central banks across the continent do not have a unified stance on cryptocurrencies. Some forbid them, others seem indifferent. SoThe rapid adoption we are seeing is very organic and not government driven. It is not the same with regions where crypto is discussed at the policy-making level.

Moreover, crypto adoption is always at the mercy of finding utility. A investigation showed that contrary to the narrative that cryptocurrencies are sought after as an alternative to fiat currencies or regulated finance, most adoptions are for speculation. Since they are highly volatile, most users are primarily concerned with getting rich from them. It’s the same with NFTs. As they showed great promise for african creatorsthere is more speculative activity than driving utility for all. “I think the understanding of cryptocurrencies is limited, even among people who use them,” Ngene said. “That’s why there’s so much emphasis on speculation. Most people don’t even see the use cases in web3 in its entirety. There is not enough education on these use cases. That’s what Mercy Corps is trying to solve. We explore different ways to get people to embrace cryptos. Allowing people to get paid in crypto is just one of them. We are also testing ways to use cryptos to provide insurance to smallholder farmers.”

About two decades ago, ECOWAS proposed the Eco, a single currency for its members. However, its numerous launch attempts failed. And due to the rapid emergence of technology on the continent, the The feasibility of Eco is questioned. One of the threats from the eco is the emergence of CBDCs in key markets such as Nigeria and Ghana. Other African countries, such as Kenya and Tanzania, are also exploring this option, staging a race to see who will win and dominate the digital currency space. But according to Ngene, cryptocurrencies still have the upper hand. “CBDCs are built on blockchain technology, just like cryptocurrencies. So no matter how much governments avoid it, launching a CBDC is practically a rubber stamp on cryptocurrencies. Additionally, CBDCs still have a long way to go in terms of adoption as they are even younger than cryptocurrencies. It will take at least another decade for CBDCs to become mainstream – if they do, and the crypto space would have evolved a lot more by then.