Foreign Exchange is the intersection of different currencies, the evolution of barter and in many places on earth taken completely for granted. Currencies are easily convertible into any other currency, crypto or product you choose. Companies like Revolut make holding and paying in multiple currencies easy and cheap (my daughter told me this). Sadly, for several reasons, this is not the case in most African countries. Many African nations have trade deficits, have borrowed heavily in USD, are heavily dependent on commodities, and have high inflation and low foreign currency reserves. The weakness and non-convertibility of these African currencies are the result of a complex interplay of economic vulnerabilities, political instability, structural deficiencies, and external pressures. Addressing these issues requires comprehensive policy reforms, improved governance, economic diversification, and enhanced financial sector development. The latter is something that can be addressed by the βmarketβ rather than the incumbent governments and there are numerous initiatives and new products. Stable coins and cryptocurrencies are already widely used for remittances and currency repatriation and individuals are using them to hold value as local currencies often weaken and savings dwindle. These products solve real problems in Africa. Corporations would probably use these products more if Central Banks could make up their mind on how to regulate and license them. DeFi is built on blockchain technology, which is relatively new and complex. Many regulators may lack the technical expertise to understand its mechanisms and implications fully. The DeFi space evolves rapidly, with new products and services constantly emerging. This makes it difficult for regulators to keep up with the latest developments and craft appropriate regulations. Governments are keen to promote technological innovation and financial inclusion, both of which DeFi promises. However, they must balance this with the need to protect consumers and maintain financial stability. DeFi comes with risks such as fraud, money laundering, and cyber threats. Regulators need to carefully consider these risks and develop frameworks to mitigate them without stifling innovation. But donβt be fooled, the future of FX looks very different. Banks have seen fees halve in the last 10 years on most FX transactions as they become more efficient and commoditised. There is competition from digital wallets, digital payment platforms and DeFi products, all looking to bring the cost down and speed up settlement and thatβs even before we get to AIβ¦
Banks are losing market share in most of their traditional areas as alternatives to the traditional model spring up all around us. At base, all a bank does is hold value for us and then lend against that value. Crypto firms have been doing this for many years, some more responsibly than others. By the way, why should we be shocked about the FTX, Genesis and Voyager failures when the likes of Lehman Bros imploded and governments have had to bail out some of the worldβs biggest and best credit banks, the likes of Citigroup, Deutsche Bank, Barclays, UBS and Credit Suisse. As with all new areas, the market is weeding out the poorly run and separating the wheat from the chaff. DeFi products are here to stay and will revolutionise financial markets, including FX, in 10 years blockchain rails will be taken entirely for granted.
FX issues also slow economic growth both nationally and regionally. One of the major barriers to intra-African trade is a lack of uniformity of regulation between countries and consequent difficulties in converting one African currency to another. The African Union is working on issuing tokens to solve this problem. Tokens will in many cases be backed by commodities and specifically aimed at encouraging more activity in The African Continental Free Trade Area (AfCFTA). The simplest ideas are often the best and asset or commodity-backed tokens are simply a more transparent and sophisticated form of barter.
DeFi versions of all currently traded and broked TradFi products will soon be available, ignore these developments at your peril. Numerous companies such as African FX Partners, ETM Capital and Forus Digital Payments are at the forefront of these developments, designing and developing efficient and cost-effective financial solutions for the next generation. These new products will be hugely impactful in Africa as well as commercially valuable, allowing individuals access to asset classes currently beyond their reach and allowing businesses and SMEs in particular access to a much wider potential investor base. Β Decentralising financial services at scale is not just possible, it is happeningβ¦get involved!