There is no question that the collapse of the trading platform FTX has shaken up the world of cryptocurrencies. Yet strangely, the International Monetary Fund (IMF) has called for tighter regulation of tokens like Bitcoin not in the USA, but in Africa. What’s behind the IMF’s demand?
Capital News Africa: From the trading floor – Week 49-2022
Following the collapse of FTX, an online trading platform for cryptocurrencies, this market segment has plunged into crisis. Since early November, when FTX imploded, leading cryptocurrencies like Bitcoin and Ethereum have lost 20% and 22% of their value, respectively.
A few weeks after the FTX fiasco, the International Monetary Fund (IMF) published a blog post on cryptocurrencies that, quite honestly, has got us stumped. For the three authors call for tighter regulation of cryptos not in the USA – where many FTX clients and investors have lost huge sums of money – but in Africa. Yes, you heard right. We also have no idea how more regulation of cryptocurrencies in Africa can make the market segment in the USA safer.
But let’s take a step back and consider the situation. As FTX was one of the leading trading platforms for cryptocurrencies, its collapse sent shockwaves throughout this entire market. Indeed, the “cryptocrisis” is far from over, as is reflected by an expectation from JP Morgan in mid-November that Bitcoin could lose another 25% of its value in the short term.
In its blog post, entitled, “Africa’s Growing Crypto Market Needs Better Regulations,” the IMF first discusses FTX’s downfall and its consequences for the currencies. But then the authors shift their attention to Africa and point out that only one-quarter of countries in sub-Saharan Africa are regulating crypto.
Most of the countries in the sub-Saharan region do permit cryptocurrencies with some restrictions. And as we reported, crypto is now legal tender in the Central African Republic (CAR). All this makes Africa one of the fastest-growing crypto markets in the world. But it is also one of the smallest, with transactions having reached USD 20 billion per month in mid-2021. Cryptocurrencies are also most prevalent in Kenya, Nigeria and South Africa.
These facts are well-known. But they don’t suggest that cryptos in Africa should be better regulated. For if Africa is such a small crypto market, how would such regulation make the currencies safer overall? The IMF authors justify their call by pointing out that not only could cryptocurrencies be used to transfer money illegally out of Africa, their widespread use could also undermine the effectiveness of monetary policy.
We have, however, heard such arguments from the IMF even before FTX’s collapse. So, the question of how cryptos could be made safer in the US and beyond by more regulation in Africa remains unanswered.
Logically speaking, we would expect the IMF to call for more regulation of cryptos in the US in the wake of FTX’s collapse. We also would submit that the IMF should not overlook the fact that cryptos have largely played a positive role in Africa’s economic development.
Why? Well, cryptos are being used by millions of people who lack bank accounts but, with them, gain access to electronic payment services and e-commerce. In other words, cryptocurrencies are not seen by most Africans as speculation, but as an improvement in their standard of living.
Unfortunately, the IMF’s authors ignored this crucial fact in their blog post. We hope this means that the IMF does not want to impede access to digital money in Africa. If that were the case, that would be a huge step back for the continent.
We are in any case of the opinion that more must be done to establish digital currencies in Africa. One part of this is regulation that makes cryptocurrencies safer for its users in Africa. Just banning them, as the IMF suggests, is not the answer. But the IMF authors will probably agree that more could be done to promote digital currencies issued by central banks. Nigeria’s “e-naira” and Kenya’s possible digital currency are two examples that point in the right direction.