Why it is imperative that Africa looks into cryptocurrencies and Blockchain

The Bitcoin craze came and made millionaires while, unfortunately, making many more lose their hard earned cash. A lot of people are still debating if cryptocurrencies are here to stay and whether they will replace cash. Billionaires like Bill Gates and the eccentric Elon Musk think that it is a given that eventually they will. Considering that we moved from barter trade, to the gold standard, to fiat, to digital currency and considering the fact that everything is bound to grow and to change, they are probably correct.

On the other end, there are people like Warren Buffet who see cryptos like Bitcoin as a house of cards.

As with most new things, people are afraid and suspicious of what they don’t know. Some African countries like Morocco, Algeria, Libya, Zambia and Namibia have already banned cryptocurrencies altogether. While Senegalese-American hip-hop artist Akon is setting his sights on Africa with his own cryptocurrency.

Akon is getting advice from Bancor co-founder Galia Benartzi, to issue a pan-African currency and establish Akon City, a sustainable and eco-tourism smart city in Senegal. Akoin, his cryptocurrency, will be the primary digital payment solution and currency within the city.

Whether Bitcon, Akoin or the other cryptocurrencies out there will eventually replace paper money, no one really knows. But even if they don’t, beyond the Bitcoin and crypto bubble, the underlying technology — the Blockchain — is probably the technology likely to have the biggest impact on the next decade or two.

So let’s start at the beginning. What are the problems with the financial system and paper money, especially in Africa, and how can Bitcoin and Blockchain address these problems?

The Problem With The Current Financial System

The current financial system is centralised. This makes it, with the increase and advancement of tech tools, less secure and easier to hack. J P Morgan Chase, one of the largest banks in the US and the US Federal Government websites have been hacked before.

The current financial system excludes billions of people from the global economy. A 2015 World Bank research reported that sub-Saharan Africa is home to 350 million unbanked individuals, which accounts for 17% of the global total. Some of these are getting relief from the rapid uptake of mobile money technologies taking over Africa.

The current financial system is slow. A transfer usually takes between one and two working days to clear and reflect, and slightly longer over weekends and public holidays.

A Brief History On Money

When paper money started to circulate, developed economies pegged their currencies to gold. The actual money was the gold, paper money wasn’t money at all. It was for ease of use and could be used to redeem the gold.

During World War One most economies abandoned the gold standard and paid military expenses in paper money but the USA carried on using the gold standard. By World War Two the US sold weapons in gold, which gave their currency an advantage and a jump over other currencies. And by 1947 the US had accumulated 70% of the world’s gold reserves. To remedy this, in 1944, 44 allied countries met in Bretton Woods, New Hampshire and pegged world currencies to the US dollar which was still pegged to gold. This in turn meant that these currencies could be redeemed for gold. The cascading effect of this move resulted in depleted US gold reserves. This prompted the then president of the United States, Richard Nixon, to delink the US dollar from gold in 1971.

This ushered in Fiat money. Fiat money has no intrinsic value, it is solely based on trust. That trust is guarded by the reserve bank and backed by the respective currencies governments.

Alongside Fiat paper money came electronic money. Electronic money is created by commercial banks when they give out loans and is not offset by any paper money at all. It is said that the amount of paper money in circulation is a mere 5% as opposed to 95% electronic. Considering that all loans are given to people who, in a sense, already have money (collateral), you can see how the wealth inequality is created and sustained.

A Brief History Of Blockchain

By 2040, it is estimated that 95% of commerce transactions will happen online. With a huge chunk of Africa unbanked and failing economies that are seeing countries like Zimbabwe without their own currency, cryptocurrencies and the Blockchain may be the way to go.

Bitcoin simplified is merely a digital platform for conducting transactions without a middleman such as a bank. This seemingly simple act has created a global frenzy, making some people excited and others terrified. Bitcoin is the trailblazer for cryptocurrencies, it might not be the future, or maybe, not in its current form. But I reference Bitcoin a lot because it introduced us to Blockchain technology.

As with many great ideas, the concept that powers Blockchain — timestamping — is not new. Infect, the idea of timestamping information is centuries old. Timestamping is the process of securely keeping track of the creation and modification time of a document. This means that no one — not even the owner of the document — should be able to change it once it has been recorded.

In 1991, research scientists Stuart Haber and W. Scott Stornetta came up with a computationally practical solution for cryptographically timestamping digital documents in a chain of blocks so that they may not be backdated. This technology went unused and the patent lapsed in 2004, four years before the creation of Bitcoin.

So Blockchain, again in a simplified way, is a technology that maintains public digital files of records, called blocks, that are linked together using cryptography. Each file, called a ledger or a block, is decentralized and distributed across millions of computer networks. It is linked to preceding and successive blocks to form a chain. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.

To hack a block you have to hack not only that block but also all the previous blocks within that chain down to the first block, across multiple networks, at the same time. This is next to impossible. Therefore, by design, a blockchain is resistant to modification of its data.

So how does Blockchain help? Well, Blockchain is not just used for cryptocurrencies only. Bitcoin is just one chain, Akoin for example, another. You can create countless chains on this technology. One chain can keep track of intellectual property like music, for example. When you record a song you can maybe upload it to a music copyright chain and the chain can keep track of everywhere it’s used online and automatically deduct a small amount from the user to the creator’s account. Or it can help manage your personal data, keep track of where and how it’s used and even monetise it.

The point is, Blockchain is a powerful, new and emerging technology that has many possible applications, which with a bit of creativity, can alleviate most of Africa’s problems. Jumping on to the bandwagon late might mean we will keep being largely a developing economy and at the mercy of the US and developed economies.

Looking for alternatives and rightly applying them to our challenges, means we may have a fighting chance. Henry Ford is credited with having said, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Cryptocurrencies and Blockchain might as well be the revolution that Africa needs.

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