Power Of Digital Assets And Distributed Ledger Technology (DLT) In Transforming Africa’s Capital Markets

Hari Chaitanya, Head of Investor Services Product Management at Standard Bank Group

Rapid advances in digital assets system innovation are set to play a leading role in helping Africa’s capital markets become more inclusive, mature and liquid. 

Although most countries have made significant progress in upgrading capital market infrastructure by setting up electronic trading systems, payment systems and central securities depository, most African financial markets are small and fragmented. The state of capital markets risks creating a disconnect in the way that African liquidity is generated and managed. On the one hand retail investors are digitising savings (using digital wallets to buy and hold crypto assets etc) and on the other, , the state of capital markets is impeding the mobilisation of domestic savings and limiting their ability to address the financing needs of Africa’s development agenda. 

However, rapid advances in technology like distributed ledger technology (DLT) for trading assets in tokenised form has the power to change this in a similar way to how mobile banking has driven banking inclusivity. Africa has emerged as the global leader in mobile money, after all, which has become a key component of developing and accelerating growth in Africa’s financial services eco-system. 

 Growing Faster

In the last ten years, the banking and financial markets have experienced disruptive changes as technology’s exponential adoption led to the creation of different payment solutions, digital assets, and virtual currencies (commonly called cryptocurrencies).

Africa has been an early adopter. According to a policy brief released recently by UNCTAD, a United Nations agency, significant proportions of Kenya’s (8.5%), South Africa’s (7.1%) and Nigeria’s (6.3%) populations are using digital currencies. In the last four years, 8 African countries have launched initiatives to establish CBDC (Central Bank Digital Currency) in their markets. South Africa has set up the Intergovernmental Fintech Working Group (IFWG) comprising regulators and market players to promote DLT-driven innovation in financial markets. 

The potential of Asset Tokenisation  

Tokenisation refers to creating a token or representation on a blockchain or DLT platform representing an asset. These tokens can represent financial assets (fiat currency, equities, bonds), traditional tangible economy assets (such as real estate, agricultural or commodities etc), or nontangible assets such as digital art and other intellectual property.

The last 12 months have been very turbulent for the digital assets industry, with multiple bankruptcies, fraud, and regulatory enforcement actions. However, financial services players are shifting their focus to using Blockchain technology for asset tokenisation rather than Crypto as the real value comes from representing real-economy and financial assets in a tokenised form using smart contract technology.

Global and Regional Trends

Asset tokenisation can unlock liquidity to support economic growth and democratise access to and broaden investment options. Analysts have forecast that $4 trillion to $5 trillion of tokenised digital securities could be issued by 2030.

A report from Boston Consulting Group and ADDX predicts that some USD 16 trillion worth of assets, most of which are illiquid, would be tokenised by 2030.  

Globally, a number of countries like Singapore, Hong Kong, Switzerland, and Canada are working on appropriate regulatory and market infrastructure standards to support tokenisation. 

How can Tokenisation address challenges in African capital markets?

Tokenisation can potentially have a “leapfrog” effect on African capital markets, much like mobile technology did for banking. Just as mobile technology allowed many countries to bypass traditional banking infrastructure and directly adopt digital financial services, tokenisation can bring benefits to similar capital markets, rapidly enhancing access, democratisation, liquidity, innovation, cost efficiency, reach, transparency, trust and compliance.

Building Blocks are in place in Africa

1. Success in mobile banking has created a user base of more than 700 million familiar with the concept of peer-to-peer transactions, mobile wallets, and comfortable in using technology.

2. Being early adopters of Bitcoin, millions of African users are already familiar with blockchain technology, digital wallet and potential use in cross-border payment and investment. According to Chainalysis, Africa is one of the fastest-growing crypto markets in the world but remains the smallest. 

3. Growing Fintech eco-system working on Blockchain projects – Figures from the African Blockchain report for 2021 by CV VC show that African blockchain companies raised $91 million in Q1 of 2022, a 1,668% year-on-year increase from Q1 of the previous year. While Africa is the fastest-adopting crypto continent globally, it has only a 0.5% share of total global blockchain venture funding, which stands at $25.2 billion, reflecting huge upside.

4. Demand for new asset classes and simpler investment processes from domestic and global investors – Growing domestic pension funds require more investment opportunities within countries and across the region. The tokenisation of real-world assets can open new investment opportunities for domestic funds and attract larger global investment into African infrastructure finance and other sectors.

5. Demand Larger intra-Africa trade and investment and retail participation in financial markets – There is a number of initiatives like establishing regional exchanges, crowdfunding platform in public and private sectors aiming to achieve the above objectives. More than 60 crowdfunding platforms are operating in Africa, with clusters in South Africa, Nigeria, and Kenya. They have included both private and public-led initiatives (the latter, for example, includes M-Akiba in Kenya).

What are the key requirements to drive this change?

1. Clear Regulatory Framework and Policy Alignment – Establishing clear and comprehensive regulations that govern tokenised asset issuance, trading, and custody is essential for investor protection, market integrity, and driving innovation. Policy alignment with broader economic development goals can foster a favourable environment. 

2. Legal framework for smart contracts: Developing legal frameworks that recognise and enforce the terms of smart contracts can provide legal clarity and certainty. 

3. Investor Education: Educating investors about the benefits and risks of tokenised assets is crucial. 

4. Interoperability and standards: Collaboration among different market participants, such as exchanges, custodians, and regulators, is essential for interoperability. Standardising protocols, interfaces, and data formats can streamline processes.

Africa’s reputation as a disruptor was cemented during the mobile banking revolution. African capital markets are on the cusp of an opportunity to “leapfrog” archaic, cumbersome modes of transacting and creating a robust network of DLT-based open, interoperable market infrastructure serving national and regional objectives in mobilising domestic savings and global investments in Africa. These advances will also help the continent fully realise the as-yet untapped potential of the Africa Continental Free Trade Area (AfCFTA). The question now is whether the continent will be disruptive enough and brave enough to drive digital asset growth.