The growth of technology adoption in Nigeria and Africa has presented more opportunities for the region to partake in the 4th Industrial revolution. Since the COVID-19 pandemic, institutions have accelerated the acceptance of digital technologies and platforms. Although we cannot singlehandedly credit the growth of digitalization to the pandemic, it did spotlight the need for an urgent shift to digital payment solutions, bringing its complexity to the forefront of conversations.
At the core of the conversations is the need for better understanding of decentralised finance (DeFi) and its future in the African financial ecosystem. So, what is DeFi and how does it play in the future of online financial transactions? Basically, decentralised financial systems are best understood as parallel banking systems and has many terms like blockchain, decentralization, and cryptography that can frighten people. However, they are really nothing more than online financial transactions. They take place through a browser, are cross-border, non-jurisdictional, and involve almost no human involvement.
In other words. DeFi is nothing more than financial activity that takes place outside of the established banking system. If you see it from that angle, it truly is the future. The monthly volume of transactions in decentralised finance is about $50 billion. In addition, the lack of a single source entity holding the transaction outside of countries and giving access to many of the unbanked and underbanked makes it the financial industry’s next wave of the future.
However, the rise of decentralised financing faces a key barrier – regulation. How do we regulate decentralised finance? That dilemma is one that many countries are currently wrestling with. “How can you actually regulate something that is practically impossible to regulate“, is the question at hand. There are no middlemen. Transactions frequently take place in environments with no national identity, no tax monitoring, no national legislation, and peer-to-peer transactions. The main dilemma for all the various regulators is how to solve this problem. Peer-to-peer transactions are constant, and they are hard to regulate.
Opponents of DeFi may also cite the current bear market in the crypto space as the beginning of the end of decentralised financing without taking into cognisance the opportunity the bear market provides. I do believe that the bear market has led to a decline in overall value, but at the same time, we are also observing a surge of new capital into the decentralised finance sector.
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Although a working regulatory environment for this is not yet popular, there is little that can hinder decentralised banking. Moreso, the field of decentralised finance is expanding. After the 2020 market corrections, there was still a 50% rise in transactions. The US market is now providing regulatory oversight, and most crucially, we are beginning to see critical mass adoption of these kinds of transactions. It is an exciting time because the fact that transactions are increasing clearly demonstrates that the future of decentralised money has begun!
We will realise that DeFi is basically just scratching the surface when we consider the coming iteration of the World Wide Web – Web3. Much is talked about this iteration that incorporates concepts such as decentralization, blockchain technologies, and token-based economics. If we look at pieces around these concepts, we will see a lot of interoperability between the chains which I think is one of the key aspects.
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There was a 2021 report in the World Economic Forum where they were talking about how the international governments are going to regulate Web 3.0 and how they are going to regulate decentralised finance. The reason I think about the law is that once it is in place, it validates a lot of things that were previously just hypotheses. So, we will start seeing governments trying to regulate, and validate the structure, usability, use-cases, interoperability, etc. I believe that with regulation coming in, it will help with Web 3.0 and all those various layers scale and become more ubiquitous as well.
But how would the DeFi revolution impact Africa’s financial space and what is the perspective on the development of Web3 in Africa? First, we can establish that there is a lot of opportunity in the space in Africa just by looking at the numbers. Nigeria, for example, has about 220 million people. That is about 220 million opportunities, but there are only 168 thousand automated teller machines. However, the transition and pathways to innovation in the continent has been tremendous. There has been a significant amount of investment into fintech which is heavily concentrated on embedded finance.
Africa has been a great proving ground for advanced technology that’s been localized in a very challenging market and then scaled. QR codes are being adopted in Africa. QR codes are embedded with NFC and are used for completely different user journeys. Whether it is around mitigating forward or around tokenized payments, having static QR codes would be the right way to mitigate any of the challenges of connectivity. It is strongly believed that Africa is the next frontier. This is why it is one of the most important regions for NowNow to be able to focus on as a financial technology company.
For an emerging market like Nigeria and Africa, it is not just about the scale and the size. It is the opportunity that people see as well. The people, the opportunity, and the talent are what make the region special. There are a lot of parallels with other emerging markets, but the scale, opportunity, passion, excitement, and willingness to adopt new technologies are different.
Leigh Flounders is the Chief Commercial Officer of NowNow Digital Systems, a leading African digital banking platforms whose mission is to deliver best in class financial services in the continent.