Bitcoin is poised to blow up Africa's $86 billion banking system

ACCRA, GHANA — Block CEO Jack Dorsey and his top brass descended on Accra for the inaugural Africa Bitcoin Conference in December to talk about one of the most potentially disruptive and transformative alternatives to the continent's existing financial system: bitcoin.

Since its inception in 2008, this unfamiliar form of money has alternatively been disdained as an absurdly complex toy for libertarian techies, a legalized form of gambling, a speculative bet to get rich quick, and a vehicle for criminals and fraudsters to obscure the origins of their ill-begotten gains. 

But this parallel financial system can also serve a tangible social good, offering an onramp to the financial system for people who would otherwise be left out. In countries where the vast majority of the population is unbanked, national currencies are no longer a safe store of value, remittances comprise a hefty portion of GDP, and international sanctions complicate connections to the global economy, a virtual currency that doesn't require an intermediary to approve transactions can be a vital lifeline for survival. 

As cryptocurrency continues to rise in prominence and becomes a growing flashpoint for regulators, Dorsey and his deputies are providing an essential counternarrative: Bitcoin brings financial power to people who would otherwise have none. 

"It doesn't matter to me if the price goes down or up, because I can still use bitcoin as a vehicle to move money around the world instantaneously," said Mike Brock, the CEO of TBD at Block, a unit which focuses on cryptocurrency and decentralized finance.

"I can exchange dollars for bitcoin and then bitcoin for Brazilian rial. There is a market for bitcoin in every corner of the world today," continued Brock.

Moving money in Africa is an expensive and complicated process.

Commercial bank branch access is limited, especially for people living in remote and rural areas. Digital banking options are also limited. Tack on rampant hyperinflation, widespread government corruption, and capital controls trapping domestic cash in banks, and money can stop making sense altogether.

"If someone wants to move money to the country next door, normally, you'd have to fill up a suitcase full of cash and move it over the border," explains Ray Youssef, CEO of Paxful.

Part of the problem stems from the continent's quasi-colonial payment framework, in which roughly 80% of cross-border payments originating from African banks are processed offshore, mostly in the U.S. or Europe. That translates to higher costs and processing times that are sometimes measured in weeks.

Then there's mobile money, which has been around since the early 2000s. Think of it like an electronic wallet tied to a phone number that does not require a smartphone or data to operate. Users can pay bills and shop with their phone through SMS texting, instead of having to rely on traditional banking options.

Africa's mobile money transactions rose 39% to more than $700 billion in 2021, according to data from the GSM Association, a non-profit representing mobile network operators worldwide. World Bank data shows that account ownership at a financial institution — or via a mobile money service provider — has more than doubled in the last decade, rising to 55% of adults in Sub-Saharan Africa.

But even as adoption proliferates, mobile money users don't get the perks of legacy banking, including earning interest on banked savings and building up a credit score based on a history of spending. Interoperability on the continent also remains a major issue with this alternative way of banking.

"The entire banking system in Africa is completely and utterly broken, even amongst the mobile money providers, the telcos," said Youssef from Paxful, a peer-to-peer crypto marketplace where users can directly buy and sell tokens with one another.

"Two thousand payment networks and only 2% of them talk to each other. That number continues to grow. It's not getting better, it's actually getting worse," continued Youssef.

Companies like Western Union and MoneyGram offer an expansive physical network of storefronts around the world designed to move money for those who are unbanked. That cash network was extraordinarily difficult and expensive to build, which is why there aren't a lot of direct competitors. It is also why those cash transfers often incur substantial fees.

Bitcoin could eliminate all these intermediaries, allowing citizens to send digital payments directly to one another, without relying on credit and without incurring multiple settlement fees along the way.

"We're going to move to a model where we can make payments without IOUs, or credit, or promises, or fiat," said Alex Gladstein, chief strategy officer for the Human Rights Foundation, an organization that works with activists from authoritarian regimes around the world. "It's literally like sending a piece of gold or a $20 bill instantly somewhere else."

"If you can get access to the internet, you can settle bitcoin payments," said Brock. "And the government can't do anything about it."

Dorsey points to the example of what happened in Nigeria during the protests against the brutality of the country's Special Anti-Robbery Squad — a movement referred to as #EndSARS.

"The Nigerian government went to various bank corps to stop protesters from receiving money — which bitcoin made up for," Dorsey said in Accra. "So our whole reason for being as a company is solving the same problem that bitcoin will ultimately solve for everyone in the world."

Moving money on the bitcoin blockchain at its base layer has its own challenges. At times of peak demand, fees will often spike higher, and if a user is unwilling to pay a premium for the transaction, they may have to wait for more blocks of transactions to get confirmed before their transfer goes through.

Bitcoin's Lightning Network helps alleviate both of those problems by slashing the cost of transactions to virtually zero and enabling nearly instantaneous cash payments around the planet – making bitcoin a more effective payment rail. This so-called "layer two" technology is built on top of bitcoin's main chain, in part because bitcoiners are conservative about introducing changes to the base layer, for fear of opening it up to hacks or other mischief.

Yellow Card — Africa's largest centralized cryptocurrency exchange run by CEO Chris Maurice — is also looking to embed this layer two technology into the platform, in order to drive down the price of transactions to virtually zero. Currently, the exchange doesn't charge a commission for transactions, but network fees can be pretty steep when a lot of trades are happening at once.

"It'll have a pretty big impact to our customers, because a lot of them are very price sensitive," says Justin Poiroux, the co-founder and CTO of Yellow Card.

Yellow Card's plan is still in its infancy, but Poiroux tells CNBC that he thinks the Lightning Network could ultimately provide a lot of value for its retail customers.

Because Lightning offers a universal monetary language, money can travel around the world between any Lightning-enabled bitcoin wallet. Someone who uses a platform like Block's Cash App — a regulated, American financial product with 51 million monthly transacting users which integrated with the Lightning Network in Feb. 2022 — can pay any Lightning invoice in the world instantly.

"It's a new way of doing business. It's a different paradigm entirely," said Gladstein.

The crypto product lead at Cash App, Miles Suter, believes that a big part of bitcoin's utility is how it gets around broken and convoluted payment systems that don't talk to each other.

"At Cash App in particular, we've always been really interested in taking bitcoin beyond just being seen an investment and bringing day-to-day utility to it," Suter told CNBC on the sidelines of the Africa Bitcoin Conference.

"In many ways, the people on the African continent are already doing that with the tools they have," continued Suter.

Bernard Parah is a 30-year-old entrepreneur living in Jos, Nigeria, about a five hour drive from the capital city of Abuja. He's the CEO of Bitnob, an app that lets users across Africa buy, save, and invest in bitcoin. Bitnob is SMS-based and piggybacks on the mobile money system, making it easier for people to send money directly into bank accounts and mobile money wallets in African countries.

Parah recently teamed up with Strike, a Lightning Network payments platform, to launch a feature called "Send Globally" that allows Americans to transfer money to people living in Nigeria, Ghana, and Kenya.

It uses local fiat cash on either side of the transaction, but bitcoin is used under the hood as the pipeline to jump money over the border. The end user never touches the cryptocurrency themselves.

"We're able to settle into bank accounts or mobile money accounts, without the recipients having to interact with bitcoin themselves," Parah tells CNBC.

"Over time, we've seen that there are still people who really don't understand how to use bitcoin; who don't care about bitcoin. What they do care about is their problems getting solved," continued Parah.

It feels like a wire transfer or a Venmo payment, according to Strike CEO Jack Mallers.

"It's instant. There's no debt. There's no credit. There's no delays," explains Mallers.

The model works because Parah and Mallers are willing to take on the liability associated with the transfer by holding cash in escrow on either end of the exchange. 

Once the money is received in Nigeria, Bitnob — which is a regulated entity with connections to the local banks — will take that bitcoin and turn it into their local currency.

"It's just two regulated entities communicating over the language of bitcoin and cutting out excess fees," said Suter. "I think that's revolutionary."

Mallers says that they offer more competitive foreign exchange rates by using bitcoin as a price-setting intermediary, a sort of new world reserve currency.

"The rate that we got was actually 60% better than the traditional forex market rate," said Mallers. "The way to actually think about how we're achieving forex if we clear through bitcoin is, 'I have dollars. How many bitcoin can I get for my dollars? And then how many naira can I get for my bitcoin?'" said Mallers.

"It's acting as the most liquid, accessible, global instrument for us to clear and settle value amongst each other," he said.

The arrangement also offers a few big ancillary benefits, including interoperability with payment apps around the world that have tens of millions of users.

Block's Suter explained that Cash App could theoretically interoperate with Bitnob.

"We're only live in the U.S. right now, but that doesn't mean we can't speak to Bitnob in Nigeria and transfer value instantly and for free across these borders," Suter said of Cash App.

South African developer Kgothatso Ngako, who goes by KG, has integrated the Lightning Network into the GSM network, combining the best of a few worlds, in a larger effort to meet customers where they are.

"My focus is giving people without an internet connection the ability to send or receive bitcoin," Ngako said.

KG calls his custodial Lightning wallet "Machankura" — South African slang for money. Whereas most Lightning transactions today require a smartphone and data, Ngako's service integrates lightning via Unstructured Supplementary Service Data, or USSD, which is the protocol that mobile money runs on. (It is similar to HTTP, or HyperText Transport Protocol, the protocol on which the web was built.)

Ngako tells CNBC that he currently has around 3,000 users spread across eight countries, with a concentration in South Africa, Uganda, Kenya, and Nigeria. In his home market of South Africa, there are strict rules around currency exchange, which make his product even more appealing to some users looking to move their money abroad.

"The South African Reserve Bank regulates the cross-border flow of capital — including the exchange of currency — to and from South Africa. You need some form of approval to convert ZAR into foreign currency," said Ernest Marais, partner at Johannesburg law firm, Tabacks.

KG's Machankura is compatible with any Lightning wallet on the planet. In practice, this means that someone with the Cash App in San Francisco, for example, could instantly send bitcoin via Lightning to the phone number of someone with a data-less, basic phone living in a remote part of Uganda.

Ngako's project does face some risks, including regulatory blowback.

Marais tells CNBC that because the South African Reserve Bank cannot regulate the cross-border flow of cryptocurrency, it is considered to be illegal and a criminal offense — though crypto regulation largely remains nebulous across most of the continent.

"All African central banks, except for Central African Republic, have made notices stating that they don't issue bitcoin and hence they don't regulate it," counters Ngako, adding that a bitcoin transaction cannot be considered a cross-border exchange as bitcoin transactions aren't regulated within the central bank's institution.

But the rules are confusing for everyone involved.

"The actual location of crypto assets is an anomaly. At what point does it leave the country?" continued Marais.

Ultimately, Ngako believes that once Machankura begins to scale, it will be a major driver of bitcoin adoption across the continent. To that end, Ngako is raising money and building — a common refrain among the entrepreneurs on the ground in Accra.

As Dorsey said in Africa, "More and more mass adoption will, in my belief, take away all the oxygen" from governments attempting to control behavior through financial oppression.

"So what do we do? We build, we build, we build, we build, we build, they can't stop us. And that's what's important."