Worldbox: How tokenisation can help Africa finally realise its huge economic potential (Part 2)

The SME Finance Forum and IDB Lab jointly hosted an event in Brisbane on the 23 July that analysed the potentially transformative impact of tokenisation on small and medium-sized enterprises (SMEs). In the second of a two-part series, Adrian Ashurst examines the potentially transformative impact of tokenisation on businesses in AFRICA.

The SME Finance Forum, managed by the International Finance Corporation, and IDB Lab, the innovation and venture-capital arm of the Inter-American Development Bank Group, hosted the Brisbane event to introduce financial service providers, regulators, development banks, and other financial ecosystem players to the fundamentals of tokenisation, the necessary digital infrastructure, and real-world examples from Latin America, Africa, and Asia.

With the help of expert speakers, the conference explored the transformative potential of tokenisation for both financial assets and real-world assets, highlighting how SMEs can benefit.

Tokenisation could have a dramatic impact on Africa’s fortunes

Smart phones have turbocharged Africa’s economic development. By allowing Africans in even remote areas to access mobile finance sites and bypass cumbersome traditional banks, many small businesses have been able to raise finance and launch into the market. Today, Africa is home to more than half of the world’s mobile money users, with over 600 million registered accounts in 2023. And according to the World Bank, nearly 57% of adults in sub-Saharan Africa now have access to financial services, up from just 23% in 2011.

The are strong reasons now to believe that advances in tokenisation and blockchain technology could prove equally transformative for the African economy. A report published last year by PwC, for example, predicts that tokenisation market in Africa could reach US$100 billion by 2025.1

That view is shared by Fluent Finance, the developer of a cryptocurrency-based payment platform that facilitates cross-border trade.2

The company argues that by tokenising assets in the form of bonds denominated in local currency, African nations can create a borderless system for international trade. Tokenisation will allow Africa to streamline foreign direct investment and bypass the inefficiencies that necessitate a default settlement asset and related reserves.

Indeed, according to Fluent Finance:
“Tokenized bonds denominated in local currency will open up a breadth of new possibilities for African economies. As central banks and their trade partners develop confidence in tokenized international trade, they will be able to liquidate capital previously reserved for settlement purposes and allocate proceeds to tokenized bonds, thereby facilitating a seamless and efficient flow of capital. Such a borderless on-chain solution not only reduces transaction costs, but also mitigates the risks associated with currency devaluation and inflation in foreign currencies.”

That would provide a tremendous boost for trade and investment in Africa. The Continent is already set to be the second-fastest-growing region after Asia in 2024 and that rate of expansion is set to accelerate with some projections that Africa could surpass the combined GDP of the US and Eurozone by 2050. The advent of tokenisation makes those projections ever more likely.

A lifeline for small businesses

Tokenisation can empower unbanked and underbanked African populations that often face significant barriers to traditional banking services. This should facilitate entrepreneurial activity, allowing startups and SMEs, as well as the wider population, to more readily raise the funds they need to finance expansion.

SMEs are vital to the future of the African economy. In Nigeria, for example, SMEs account for around 50% of GDP and 76% of employment. In Kenya, the figures are 40% and 93% respectively. Many of these companies are very small businesses that find it particularly difficult to raise finance from banks, the traditional source of funding: around 98% of SMEs in Kenya, and 99% of SMEs in Nigeria, are micro-enterprises.3

In addition, many of these companies are involved in developing Africa’s rich natural resources and its burgeoning real-estate sectors, making the continent particularly suitable for the development of tokenisation. According to John Lombela of the fintech company Axalio, the potential of tokenisation to revolutionise Africa’s assets is immense, offering unprecedented opportunities, especially in underutilised sectors such as artisanal mining.4

That’s because tokenisation can turn traditionally illiquid assets like real estate or certain commodities into easily tradable tokens. Sectors such as artisanal and small-scale mining (ASM) make a major contribution to Africa’s economic output, yet they face numerous challenges, including lack of access to capital, technology and markets, along with environmental and social concerns.

Tokenisation can open up new funding avenues for artisanal miners and projects, bridging the gap between local operations and global investors. Blockchain technology ensures the ethical sourcing of minerals, addressing a key concern among consumers and manufacturers. Moreover, tokenised assets can be traded on global platforms, offering greater liquidity and market access for the sector, according to Mr Lombela.

Figure 1: Artisanal and small-scale mining is a huge source of employment in Africa

Source: Financial Times, https://www.linkedin.com/pulse/africa-heart-global-tokenization-unlocking-continents-john-lombela-wodtc/

Regulation the key

The impact of tokenisation can already be seen in Africa:

Nearly 50% of Nigerians already use cryptocurrencies, one of the highest rates in the world.
Businesses are already using tokens to develop projects. In July 2024, for example, DAMREV, Africa’s leading Real World Asset (RWA) tokenization company, signed a landmark US$330 million agreement to tokenize a copper mine in Namibia. The project marks a significant milestone for both the mining and blockchain industries.
The Nigerian government is using tokenisation to transition high value stakes in mining assets into more fractionalized assets so a much larger group of people will be able to invest in them.

Tokenisation is not a silver bullet for Africa, but it can help unlock the value of Africa’s assets and empower businesses and people by opening up new, easily accessible and relatively cheap forms of finance.

To find out more about the SME Finance Forum and IDB Lab event “World of Tokenization: Transformative Potential for SMEs”, click on this link.

Sources

1 https://www.linkedin.com/pulse/how-tokenization-data-notarization-could-unlock-sme-potential-watson-uodmf/

2 https://www.rolandberger.com/en/Insights/Publications/Tokenization-of-real-world-assets-unlocking-a-new-era-of-ownership-trading.html

3 https://asia.nikkei.com/Opinion/Asia-is-leading-the-way-with-embrace-of-tokenized-securities#:~:text=Tokenization%20is%20being%20embraced%20by,as%20immediate%20payment%20and%20settlement

4 https://www.theedgesingapore.com/digitaledge/focus/why-asia-stands-lead-tokenisation-race

Source: Worldbox Press Release

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