Forty-seven percent of Nigerians reportedly use cryptocurrencies, one of the highest rates in the world. Nigeria ranks second out of 155 countries covered in the 2023 Chainalysis Global Crypto Adoption Index, followed by Kenya (21st place), Tanzania (24th place), Ghana (29th place), and South Africa (31st place). However, belying these high adoption rates among the general population, many African governments have enacted a “crypto backlash” in recent years, significantly tightening regulations (where they exist) or outright banning digital assets out of concern for financial stability and consumer protection. By 2022, according to the International Monetary Fund, of the one-quarter of countries in sub-Saharan Africa that formally regulated crypto, two-thirds of these had implemented restrictions and six countries had outright banned it. As a result, many investors and entrepreneurs interested in this sector in Africa are holding back due to the excessive regulatory uncertainty and regulatory swings in different countries.
What comes next? How can African nations tap into the tremendous potential presented by digital assets, while striking the right regulatory balance and protecting investors and consumers?
On April 16, 2024, in Washington, DC, the Milken Institute hosted a private roundtable bringing African policymakers and regulators together with the digital asset industry for a candid, roll-up-your-sleeves conversation to help unpack the state of play of digital asset regulations in Africa. The session gathered a wide range of industry stakeholders, including:
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industry associations and think tanks specializing in regulatory innovation and financial transformation (Global Blockchain Business Council, Alliance for Innovative Regulation, Bank of International Settlements London Innovation Hub, Women’s World Banking);
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corporates and foundations in the digital asset space (Circle, Coinbase, Coin Metrics, Stellar Development Foundation);
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investors, investment advisors, and development partners (International Finance Corporation, Lion's Head Global Partners, MiDA Advisors, Tofino Capital);
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Pan-African institutions and think tanks (the African Union’s African Institute for Remittances, The Africa Dialogues, the African Center for Economic Transformation);
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African government representatives (Madagascar, Kenya, Zambia, Nigeria); and
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US former regulators and policymakers as well as academia (Gattaca Horizons, New York Department for Financial Services, Georgetown University, WorldQuant University).
The session kicked off with a discussion of possible applications of digital assets and blockchain on the continent, including to address the challenge of low capital market liquidity in Africa; facilitate cross-border flows and regional integration of financial markets; help create more responsible supply chains through tokenization; enhance financial inclusion, notably of small and medium-sized enterprises and of women; and, more generally, generate employment and attract forward-looking investment.
Participants then provided an overview of the state of play of digital asset regulation in Africa, drawing on insights from individual countries as well as from the Global Blockchain Business Council’s Global Standards Mapping Initiative. Overall, the adoption of blockchain technology and digital assets is gaining momentum in Africa, with evidence of growing acceptance and adoption of digital assets (notably driven by the openness of a young population to innovation); increased number of use cases focused on financial access, economic empowerment, and social impact; emerging blockchain hubs across the continent; increased international and regional collaboration and partnerships; and increased government and regulatory support (indeed, many African jurisdictions are reversing prior digital asset bans and beginning to establish regulatory frameworks instead; and in some cases—such as in the West African Economic and Monetary Union and the Economic and Monetary Community of Central Africa—bans persist mostly due to the restrictive stance of monetary unions and regional economic communities).
The African countries present shared several common concerns while acknowledging that they were all situated at different points of the regulatory journey in terms of digital assets. Some countries (particularly where digital asset adoption among the general population is still very low) are currently not regulating the sector at all, adopting a “wait and see” attitude and focusing on market monitoring and research. Others are beginning to explore different regulatory tools to better grasp the regulatory implications of digital asset applications and are assessing specifically which regulatory bodies should be involved (in some cases, looking beyond just the Central Bank and the financial services regulator and involving technology regulators as well). Yet others are considering lifting or walking back specific aspects of prior bans but are uncertain about the most appropriate regulatory next steps. As put by one regulator, “no one wants to be the first mover” when it comes to regulation—African regulators are watching other jurisdictions without wanting to take the first step themselves.
Overall, there was a shared understanding among governments in the room that this innovation “is not going away” and that it was imperative for regulators to keep up, rather than ban or ignore, this new development and push it into the unregulated space. Participants accordingly discussed examples of regulatory tools and approaches that had been implemented elsewhere that could potentially be replicated and adapted in Africa. In general, it was agreed that regulatory sandboxes (stood up over the past decade in over a dozen African countries) are a very onerous approach to regulating a new sector and may not be the most effective tool when it comes to digital assets (although some African countries noted that they were seeing some digital asset applications and tokenization initiatives entering their sandboxes in recent cohorts). Possible lower-cost alternatives to the sandbox approach were suggested, such as tech sprints or hackathons (whereby regulators have much more ownership over the experimentation process than they would in a sandbox setup); regulatory partnerships across countries as well as stronger dialogue between regulators and industry within countries; creating internal labs—such as the US Lab Commodity Futures Trading Commission—for agencies to better understand the technology they are regulating; and leveraging common public goods developed for regulators, such as open source application programming interfaces (API), which includes APIs for retail central bank digital currencies for central banks to try out.
Beyond expanding the regulatory toolkit, the regulatory approach and philosophy were also an area of focus. Participants recommended taking a “tech-first” approach to regulation, by working to modernize regulators’ own internal technology and procedures to help speed up processes and avoid overly conservative outcomes. As one of the participating regulators said, “It is impossible to regulate something that we can't get hands-on experience with ourselves.” Other suggestions included avoiding "balkanization," or having too many disparate rules that create regulatory opacity for market participants; being selective (rather than trying to regulate every asset, starting with only those that are essential to regulate); prioritizing data quality and transparency; and, when it comes to stablecoins, prioritizing prudential over market-based regulation (with adequate attention to reserve standards, redemption time frames, full disclosures, and compliance with financial crime rules to mitigate operational and liquidity risks). Finally, multiple participants highlighted the benefits of strong leadership at the top of the regulatory bodies, with a willingness to “get your hands dirty” to engage and understand the space and, if needed, take first-mover risks.
Overall, the roundtable discussion provided a unique opportunity for African delegates to ask direct questions of industry (and of each other) in view of crafting effective and inclusive regulations that can support investment and innovation in the sector while advancing national development priorities and transforming the future of finance for African citizens. In turn, industry and investors gained a better sense of policy priorities, perspectives, and needs in these countries to help inform corporate strategy and responsible business practices when expanding to Africa.
Learn more about the work of the Milken Institute in Africa and, specifically, our efforts to build future leaders in financial policy on the continent and beyond.