African Economies and the Rise of Crypt-Currencies

Abstract

New cryptocurrencies are emerging daily, providing alternatives to traditional forms of payments and enabling new mediums of exchange such as cash. These currencies span Bitcoin, Litecoin and Etherium. In less than a decade, bitcoin has gone from being an obscure curiosity to a household name. In recent times, bitcoin has risen – with ups and downs – from a few cents per coin to over $4,000. In the meantime, hundreds of other cryptocurrencies – equalling bitcoin in market value – have emerged (Graph 1, left-hand panel). While it seems unlikely that bitcoin or its sisters will displace sovereign currencies, they have demonstrated the viability of the underlying blockchain or distributed ledger technology (DLT).

Venture capitalists and financial institutions are investing heavily in DLT projects that seek to provide new financial services and deliver old ones more efficiently. Bloggers, central bankers, and academics predict transformative or disruptive implications for payments, banks, and the financial system at large.

Findings from Andolfatto (2015, 2016), Broadbent (2016), Raskin and Yermack (2016) and Skingsley (2016) attest to this sea-change in mediums of exchange as consumers. Transformative implications for economies, financial systems and consumer investment behaviour is already changing, reflecting a macroeconomic backdrop characterised by ultra-accommodative interest rates, low economic growth and a dearth of investment opportunities with over 20% of global debt yielding negative returns.

The transformative changes likely embedded in the increased use and &adoption of cryptocurrencies across economies suggest a need to understand the nature of cryptocurrencies better.