Abstract

Blockchain technology offers the potential to transform economic activity and improve living standards in Africa by overcoming information asymmetry problems, property rights and governance barriers. Blockchain innovations have the ability to boost levels of productivity and unlock capital flows to underserved sectors, in addition to leveraging the increasing returns of information as an input to production in order to spur economic growth. This background paper discusses the recent advances in blockchain technology within Africa, and investigates the underlying economic principles of blockchain networks, both universally and in an African context. It reviews the enabling infrastructure and supporting technology, including digital identity. Finally, it gives policy recommendations to increase the uptake of blockchain technology on the continent.Keywords: blockchain, data governance, Africaa

8.1 Introduction

The advent of blockchain technology offers massive potential for revolutionary innovations that address fundamental constraints and market failures across a wide span of sectors in Africa. Blockchain applications have the potential to overcome information asymmetry problems as well as property rights and governance barriers, and applications within the continent have already enjoyed a measure of success in doing so. In turn, these innovations have the ability to boost levels of productivity and unlock capital flows to underserved sectors, in addition to leveraging the increasing returns of information as an input to production in order to spur economic growth.

Blockchain adoption in Africa is supported by high rates of mobile phone adoption, but hindered by low rates of data access, low quality of Internet connections, and high data access costs. Access to data is therefore inequitable, with higher levels of access amongst better-off households (World Bank, 2021). The COVID-19 pandemic has contributed to an acceleration of digitization across the continent with the movement of more social interactions and commercial transactions online. This in turn has increased the need for solutions that allow secure and transparent economic activity. The closure of critical institutions, particularly education facilities, in addition to the need for continued economic activity, has exposed gaps in the quality of Internet infrastructure.

Blockchains enable transparency within decentralized networks by eliminating the need for a centralized intermediary. Within an African context, the use of blockchains can potentially be very impactful within informal labor markets by providing a mechanism to increase transparency and secure property rights, thereby increasing allocational efficiency and overcoming credit rationing constraints. The utilization of smart contacts can further underpin the scope of impact. However, the use of blockchains is not without cost. The implementation of decentralized networks introduces the need for artificial costs of verification, which create new constraints.

Policy implications of blockchains, particularly within an African context, touch on some critical dimensions. An enabling and conducive policy and regulatory framework is critical to realize the untapped potential of blockchains. These frameworks must be incentive-compatible and therefore internalize the incentives of agents within the networks. This is particularly important within the public sector, where a failure to implement applications with potentially massive positive externalities may otherwise occur. Additionally, regulatory frameworks should account for the individual data privacy preferences of agents, where the assignment of rights and obligations over data is a key determinant of growth and equity. A Pareto-efficient outcome may be possible through the assignment of rights to consumers, complemented with the development of markets for the sale of data.

The economics of blockchain is still very much a nascent field. This paper gives a background of recent advances in blockchain within Africa, as well as the key underlying economic principles within blockchain networks, both universally and within an African context. It also discusses policies that would be impactful in increasing the use of blockchain to improve governance and transparency. The document is structured as follows: Section 8.2 gives a background of blockchain innovations in Africa, and Sect. 8.3 gives a review of the existing literature on the economics of blockchain. Section 8.4 discusses the economic theory of blockchains, and Sect. 8.5 discusses economic aspects particularly relevant within an African context. Section 8.6 discusses policy implications of blockchain networks, and Sect. 8.7 concludes.

8.2 Blockchain Innovations in Africa

Blockchain is a relatively new technology that has seen rapid global growth since its first commercial implementation in 2008. A blockchain is a digital ledger of transactions that is duplicated and distributed across an entire network of computer nodes. Each entry in the ledger is known as a block, and the addition of new entries is done by appending a new block to the existing set of blocks, resulting in a chain of blocks. Each block in the chain contains a number of transactions, and every time a new transaction occurs, a record of that transaction is added to every participant’s ledger. The nodes within a blockchain network may be anonymous and therefore untrusted across the participants. Therefore, mechanisms such as proof of work or proof of stake are implemented to establish trust amongst the network’s participants so that there is no need for a central trusted authority or clearinghouse within the network. These mechanisms work by introducing costs that discourage malicious behavior amongst network nodes.

Blockchain innovations in Africa have been most successful in the financial sector. The most widespread application of blockchain within the financial sector is in cryptocurrency trading, as well as in payments and cross-border transactions. Blockchain offers alternative payment solutions to existing payments systems and also allows cross-border remittances. With 63 percent of Africa’s population unbanked,Footnote1 there is enormous untapped potential for the further adoption of blockchain-based solutions as an alternative to traditional payment options. In addition, the adoption of mobile money payments has lowered the costs and cultural barriers to entry for digital payments solutions. Countries with high currency depreciation risk and capital controls have tended to be the first adopters of cryptocurrencies in order to protect against inflation.Footnote2 This combination of factors has contributed to rapid blockchain technology adoption within the financial sector.

In particular, there has been a rapid rise of cryptocurrency trade on the continent, which is now well developed in Africa. Peer-to-peer payments with digital currencies have started to become an alternative to local currencies, with a number of growing blockchain African-run startups.Footnote3 Global cryptocurrency market capitalization reached nearly US$2 trillion in the first quarter of 2021. Despite a large number of currency exchanges, the cryptocurrency market is highly segmented, with the largest ten cryptocurrencies globally accounting for roughly 82 percent of the market by volume. Bitcoin is the largest exchange by market capitalization. Due to market volatility in cryptocurrency markets, market capitalization can change significantly. As of June 1, 2013, Bitcoin’s market capitalization was $522bn, relative to $224bn for Ethereum. Additionally, central banks in Africa and around the world have begun to explore the possibility of introducing central bank digital currencies (CBDCs). A CBDC is a form of virtual currency that is issued and backed by the Central Bank. Globally, 76 countries are exploring the introduction of a CBDC with 5 of the countries—Grenada, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and the Bahamas—having already launched digital currencies. Fourteen other countries are in the pilot stage while three countries within Africa (Nigeria, South Africa, and Mauritius) have their CBDCs in the development stage.Footnote5

Other sectors that have seen a significant number of blockchain innovations within the continent are insurance, telecommunication, and agriculture, as well as in the securing of identity and property rights. The traceability aspect of blockchain has eased the complexity and opacity of processes within agricultural supply and value chains and has facilitated proof of asset ownership as a means to enabling access to resources and unblocking credit rationing, as well as allowing better exercising of property rights. The capacity to track the origins of consumer goods has also increased the visibility of local producers along supply chains and improved logistical efficiencies.

Blockchain traceability and digital identity has gained momentum in Africa as seen from a number of large blockchain innovations within Africa. For example, a scheme launched in 2018 by the Democratic Republic of Congo uses blockchain technology to monitor cobalt mining in the country. This process involves organizations throughout the supply chain, from on-the-ground monitors checking that sites are not using child labor, through the refining process to end users. An additional innovation utilizing artificial intelligence and blockchain to trace coffee from Uganda to Colorado and from Ethiopia to Amsterdam while cutting intermediaries out of the coffee supply chain. The blockchain platform also ensures instantaneous payments to producers. Additionally, De Beers of South Africa imprints a digital fingerprint into its diamonds that is then tracked by blockchain as gems are sold, giving a forgery-proof record of the movement from the mine to cutter and polisher, then through to a jeweler.

Leading innovators in blockchain technology are Nigeria, South Africa, and Kenya. These countries account for over 80 percent of blockchain innovations. Within these countries, the major innovations are in finance and insurance, the Internet and telecommunications, and the health sector.

A map of Africa with marked locations for the blockchain innovations with their respective numbers. the highest innovations are in Nigeria, 40.

Blockchain innovations in Africa by sector. Source: Positive blockchain.io and Internet searches

Africa’s blockchain footprint is small and accounts for a small portion of the global blockchain network. For example, if the Bitcoin network is considered, there are 12,867 nodes globally, of which only 16 nodes are in Africa, representing less than 1 percent of the total. The distribution of nodes is across South Africa, which accounts for 14 nodes, and Nigeria and Egypt, which each account for one node.Footnote6 The largest share of Bitcoin nodes is found in Europe, which has a total of 4258 nodes.

While there has been significant growth in blockchain adoption, there is great latent potential in a number of areas related to governance and transparency. While the benefits of deploying blockchain technology are clear, the implementation of solutions has been slow and fragmented. In the area of public spending and governance, blockchain-based workflow tools allow for efficient project implementation by enabling expenditure tracking in a collaborative and transparent way. The deployment of blockchain technology has also increased the transparency of property rights and transfers of asset ownership, particularly related to land registration. This addresses challenges in many developing countries, where a large share of land owners lack accurate documentation of property ownership. Additionally, in order to increase trust in educational certificates, blockchain-based systems are being deployed for the verification of digital documents. This helps to establish trust in labor markets.

Digital Identity is a key innovation on which the success of some critical blockchain innovations rests. Of digital technologies, biometrics technology is the most common means of identity authentication. In the public sector, governments in almost 50 African nations have issued e-passports.Footnote7 However, some countries are looking into deploying the technology to other sectors including health and security. The African biometrics industry is estimated at US$1.6Footnote8 while globally it’s estimated at US$24.1 billion with Africa and Middle East biometrics market forecasted to grow at an annual rate of 21 percent.Footnote9 Digital identity innovations have been implemented to provide trusted identities for economically excluded individuals and small businesses, as well as to enhance the security of transactions through digital authentication.

The World Bank estimates that one billion people worldwide lack the means to prove their identity, and approximately 51 percent of this population live in Africa (GSMA).Footnote10 Within the African continent, 33 percent of the population lack legal proof of identity with more than half of the population in nine African countries being unregistered.Footnote11 Therefore, leveraging mobile technology, especially in developing countries, is seen as an enabler of digital identity and associated services, given that a large percentage of countries around the world require mandatory prepaid SIM card registration.

Enabling infrastructure is also critical for the implementation and utilization of blockchain innovations. At the end of 2019, 651 million people were connected to mobile services in Africa, comprised of 477 million people in sub-Saharan Africa (45 percent of the population) and 176 million people in North Africa (70 percent of the population).Footnote12 Half of the total connections are through smartphones, as cheaper devices have become available, with the number of smartphone connections projected to reach 67 percent of Africa’s population by the end of 2025 (65 percent of the population in sub-Saharan Africa and 75 percent of the population in North Africa respectively).