[Column] Tomi Fajolu: The future of blockchain in African investments

Emerging markets particularly in Africa are faced with the crisis of a population outburst and lack the necessary infrastructure to accommodate their citizens. The dire need in the region creates an opportunity for foreign investments in Africa. Regardless of these opportunities investors have been wary due to inherent risks over the years, with the most notable ones being currency devaluation, corrupt government regimes, and a mismanagement of government resources that have led to years of consistent high inflation.

Risk averse investors and development finance institutions have found a way around these issues, primarily because of an abundance in natural resources. However, these investments declined when the prices of oil, copper, cocoa, minerals and all other major commodities dropped. The ratings from credit rating agencies raised red flags, inadvertently making sovereign guarantees undependable. Derivative contracts have sometimes been used to hedge risks, but not all emerging markets have a well-developed derivative regulatory framework, neither can derivatives counter the risk of political turmoil, war and outright expropriation.

In the last decade blockchain technology has witnessed a meteoric rise and has been disruptive with a push to changing the old way of doing things in what has been dubbed the fourth industrial revolution. It has evolved the way financial transactions are done with a system of digital currencies on blockchain platforms not altered by central banks, inflation or political instability. For this reason digital currencies could be the game changer for investments in Africa if utilized as the primary currency to hedge the risks of a local currency devaluation. At the moment blockchain technology seems to be well received in Africa; the South African Reserve Bank (SARB) announced a partnership with ConsenSys, a startup responsible for developing the digital Ethereum cryptocurrency. This partnership would also involve JP Morgan and Ethlab’s blockchain platform Quorum.

The SARB also indicated it would start looking into a regulatory framework for cryptocurrency. The development and rise of many cryptocurrency markets has also been seen across Africa, some of which include kobocoin in Nigeria, abra in Malawi, bitmari in Zimbabwe and the most notable being South Africa’s luno exchange. These cryptocurrency markets clearly indicate that Africa, particularly the younger generation, is in support of all that blockchain technology has to offer, and there couldn’t be a better time than now with banking systems and regulations that have done more harm than good.

Blockchain technology has been touted with a lot skepticism, and like any disruptive technology it is designed to change the norm of how things were done. Blockchain stores transactions in a chronologically linked chain, in a way that cannot be altered due to a connection of one unique block after another. Market platforms that trade bitcoins, ethereum and other cryptocurrencies are conducted on public blockchain networks, large institutions and projects can deploy private blockchain networks to facilitate investments and financial transactions with automated smart contracts.

Smart contracts function in a similar way to escrow accounts, but in this regard they are encoded with conditions on the blockchain network with a prompt to move digital assets when encoded conditions are met. However, smart contracts as a utility to execute contracts for large projects and investments has not yet been fully tested, as it evolves the viability would be put to the test. Uncertainties like adjudication in the event of a dispute, or how to enforce obligations if there is an error with the coding would be decided. Facebook has recently announced it would embark on its own digital currency “Libra”; this announcement has raised a lot of questions on regulatory framework. Who decides what is ethical and what is not? Attorneys, finance professionals and policy-makers who do not understand encoded blockchain technology or the programmers who do?

A plausible solution would be a concerted effort of all parties in protecting investors and consumers. In the meantime, we cannot deny the potential numerous merits that would come with a smart contract when investing in Africa, simply because an automated programmed computer system that executes and enforces payment from one party’s assets to another would curb foreign investment risks that could arise with regulatory change, political instability, traditional banking failure, inflation, war and expropriation.

Besides the advantages of smart contracts, blockchain technology is also on the verge of disrupting the ways capital is raised for small and large projects. In 2013 omni layer pioneered the first initial coin offering (ICO), ICOs are used to raise capital on blockchain technology platforms and have gained a momentum over the years with billions of dollars raised in capital. They are decentralized and unregulated, as a result flexible. This flexibility has led to a recent reputational damage, as it has been used to perpetuate scams. This has led to increased opposition from critics of blockchain technology, but we must take into consideration that computers are programmed to do what they do, and they do not on their own volition perpetuate scams, human beings do. The volatility of ICOs being unregulated and prone to being used for scam operations have made initial exchange offerings (IEO) and security token offerings (STO) the focal point for investors and businesses that want a more secured and regulated method for raising capital. IEOs have the credence of being vetted by the exchange, and STOs are fully regulated with a legal framework in place.

These methods have not been put to the test with foreign investments in Africa, but as this digital transformation evolves it could potentially be the key to unlocking how capital is raised for investments in Africa. Not only can capital be raised in the desired digital currency, but it also serves as an alternative stock exchange market for raising capital or offloading distressed assets in a way that an underdeveloped exchange market would not have been able to achieve.

Tomi Fajolu is a Georgetown law graduate and consultant on African businesses.