In 2018, the African Continental Free Trade Area (AfCFTA), an Africa-wide free trade area, was established to commence on 1 January 2021. It was formed by 54 of the 55 African Union nations. Arkebe Oqubay and Fiona Tregenna from the University of Johannesburg have recently been appointed to the AfCFTA Trade and Industrial Development Advisory Council, which consists of prominent figures from across Africa. This council has been endorsed by the Summit of Heads of State and Government. The council advises on trade integration and industrialisation across Africa and the implementation of the AfCFTA.

It is an important step towards establishing the African market as a single market. However, as we have learnt from the European Union and the North American Free Trade Agreement, a free trade agreement is all well and good, but if it is not accompanied by frictionless transactions enabled by a common currency and political will, it is bound to fail. Last week our minister of international relations, Dr Naledi Pandor, expressed her support for a single currency to facilitate trade that has been enabled by AfCFTA.

Given this need for a single currency, in what form should it be? Should it be fiat money, meaning the coins and paper money we currently use, or should it be cryptocurrency, which is digital and more secure? If we go for cryptocurrency, do we have the necessary digital infrastructure to make this a reality? The world of cryptocurrency naturally leads us to the world of Bitcoin. What will the adoption of cryptocurrency, which is based on distributed trust, mean for the financial industry and reserve banks, which are based on concentrated trust? What implications will these have for vital issues such as economic growth and inflation?

In their book, Beyond Bitcoin, Steven Boykey Sidley and Simon Dingle write: “Decentralised Finance is coming. Quietly at first. Tentatively at first. Softly at first. And then not.” We are in an age of disruption — that much is a given. Long has there been debate over whether we are on the cusp of the Fourth Industrial Revolution (4IR), in the middle of it or whether it is a farfetched futuristic concept only aligned to the content of science fiction novels from the 1980s.

The pandemic has certainly confirmed that we are in the middle of it. It stands to reason that if entire systems as we know them are undergoing disruption, the financial system certainly cannot be an outlier. In 1995, Clayton M Christensen introduced the concept of disruption to denote innovation that displaces systems that are already established. Those with a historical bent know that disruption has accompanied every revolution. Whether it is the French Revolution that overthrew the nobility and clergy, the American Revolution that overthrew British rule, or the Russian Revolution that overthrew the tsarist monarchy, the outcome has been the same, ie, the abrupt end of an era to be replaced by another era.

Sidley and Dingle argue that we are fundamentally seeing the redefining and refurbishment of the global financial system. As we reflect on the AfCFTA, we should bear this disruption in mind.

As they assert, “There is much afoot now, small explosions of startling economic innovation, burgeoning revolutions happening in myriad matters of technology and commerce, and sharp-toothed dogs snapping at the heels of the world’s global financial institutions.”

The adoption of cryptocurrency will naturally lead to the establishment of new forms of financial systems in the form of decentralised finance, or DeFi. DeFi is financial technology based on secure ledgers that are the backbone of cryptocurrency. This essentially removes the role banks play in controlling money and financial services.

As Sidley and Dingle state, institutions have to undergo a reinvention. Bitcoin is but the tip of an iceberg, as entire industries and as a result, careers and skills will be disrupted and, in some cases, displaced, resulting in greater equity as it is projected to create a more level playing field. This is because the centralisation of the global financial system has meant that wealth is collected by the wealthy who have access to financial systems, leaving many people out.

As Ciaran Ryan wrote for Moneyweb last year, “The traditional financial system is inefficient and has inherent risks that produce catastrophes like Lehman Brothers (which collapsed in 2008 after gambling in high-risk financial markets). This is because it relies on an antiquated system for managing information together with settling and clearing trades.”

While naturally there is trepidation around disruption of any sort, we cannot ignore the impact of DeFi against a context of financial exclusion, particularly in our own context. According to the World Bank, in South Africa the proportion of the population who have used the banking sector or have access to transactional financial services and saving facilities stood at just 63% five years ago. Worldwide, 1.7 billion people are “unbanked,” or operating entirely outside the banking system. DeFi stands to challenge this.

DeFi eliminates fees, which is considered one of the biggest hurdles to financial inclusion in the country; anyone with an internet connection can use it without needing approval, and funds can be transferred quite quickly. DeFi is based on blockchain. Blockchain is a decentralised and encrypted technology that secures stored information. It is essentially a ledger or list of objects that are shared on a peer-to-peer network. Encryption on this ledger, nevertheless, inhibits users from making revisions unless the majority of the users agree on the change. All the information or transactions are stored in many computers at once across the internet, making it difficult for anyone to break into a single computer or steal the data.

There are several benefits to blockchain technology. For example, no third party can monitor or violate your data. This timestamp simplifies tracing the time and corresponding reference of a particular transaction. The blockchain network saves the data across many computers, safeguarding the chain against collapse because a prospective hacker attacks the entire system, across many computers. Blockchain is essential to cryptocurrencies because the money generated using this technology cannot be easily faked.

The caveat, of course, is while this has the potential to address financial inclusion — and a host of other sustainable development goals, according to the United Nations (UN) — we need to make sure that people have access to the internet. This still requires interventions on the continent and in South Africa.

While this may indeed be the future, we must be cognisant of the broader interventions we still require to make this a reality, including addressing the digital divide and highlighting financial and digital literacy. Data, WiFi and access to devices such as smartphones and tablets, at the least, are essentials for this shift.

There are some interesting statistics in this regard. According to a paper by Peterson Ozili from the University of Essex, Africa recorded the lowest interest in DeFi since its inception. This is demonstrated by the low web traffic to DeFi protocols between 2019 and 2021, indicating that there is low interest in decentralised finance in African countries. Additionally, among the 54 countries in Africa, only one country (Togo) is listed in the top 20 global DeFi adopters in the 2021 ranking. Togo is the only African country. This shows that African countries are among the lowest adopters of DeFi globally.

Yet, as Ozili argues, “In Africa, decentralised finance is a much-needed disruption that can make finance become more accessible to citizens and small businesses that cannot access financial services conveniently from traditional financial institutions.”

So as we move towards the implementation of AfCFTA, we need to include cryptocurrency and DeFi in our arsenal towards more significant trade, economic development and financial inclusion. Sure, there are steps to be taken to make this a reality, but we cannot ignore the detrimental impact of not moving with the times. DM