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What Blockchain-based Decentralized Marketplaces Can Do For Africa, Part One

The concept of a decentralized marketplace is one that is largely unexplored. Decentralized marketplaces have the potential to launch Africa into an unprecedented level of economic and shared prosperity. They’re coming and it’s inevitable. This topic happens to be in the center of discussion at the Week Three of the African Blockchain Developers Virtual Weekend Series.

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Decentralized Africa
Decentralized Africa

Many shoppers think of using a shopping center that provides a variety of goods and services all in one place. Buyers want to shop conveniently, buying anything and everything ranging from T-Shirts to books, without stressing. One valid way to explore and subscribe to all of these services is via a marketplace. 

A marketplace is a virtual shopping platform that works as an intermediary between buyers and sellers. It’s usually a go-to location for many merchants and buyers, as thousands of customers can shop online from a variety of merchants in one place. Some of the most popular centralized marketplaces happen to be e-commerce platforms such as Ebay, Amazon, Alibaba, and Uber for transport.

Trust is a fundamental component in creating the presence of a marketplace, hence the need for middlemen. However, the presence of intermediates come along with an extra cost as marketplace platforms tend to charge commission for each product sold.  Depending on the marketplace, commission could range from 5-20% on each product. 

In light of this, a decentralized marketplace is an intriguing proposition.

What Is A Decentralized Marketplace

A decentralized marketplace is a permissionless and self-executing platform, operated on a blockchain network. The platform facilitates the matching of buyers and sellers of goods and services. The platform makes interactions and transactions possible between buyers and sellers without needing to trust a middleman. With the absence of an intermediary, fees become less. 

With a decentralized marketplace, most of the essential market functions like execution of trades and the release of funds are conducted by a program (smart contract), rather than a person. A transaction can take place easily, as soon as a buyer and seller agree to terms and when those terms are met. Again, the matching of buyers and sellers is done in a more transparent way which gives a buyer more options to choose from, thereby, ultimately heightening the chance of finding a good match. 

The business model for these decentralized marketplaces is built around tokens. The payment process uses cryptocurrencies. Buyers will have to pay fees with the marketplace token while sellers earn tokens in return. This eliminates the third party payment providers and brings about the advantage of a global 24/7 payment system. 

Daniel Kimotho, Ecosystem Lead, Celo Kenya, gave a simple explanation on this during the African Blockchain Developers Call virtual weekend series 

“With all the costs involved in moving money around different countries in the continent, it becomes a better option to make use of a marketplace powered by cryptocurrency as the cost of service becomes very small”. He said.

Centralized vs Decentralized Marketplace

The major factor which differentiates a centralized marketplace from a decentralized one, is the need for intermediaries. In a centralized marketplace, the issue of trust is resolved by depending on a trusted third party who takes responsibility for the adequate operation of the marketplace. 

Centralized marketplace has the ability to provide an amount of dependability and service that users have come to expect, but they also lack transparency, charge high fees and impose standards that users may not be in agreement with. Debating on the point, Ciaran McGowan, CEO, we.trade, notes the presence of an intermediary comes with a lot of drawbacks.

“In centralized markets, it is easy to get access and there are lots of choices. However, there are drawbacks. They are solely dependent on the intermediaries, they have the penchant to block merchants at their own whim, they could charge quite high fees, and there can be concerns over lack of privacy.” — Ciaran McGowan, CEO at we.trade.

On the other hand, a decentralized marketplace possesses many of the advantages of traditional marketplaces and more; they are transparent,  permissionless, resistant to censorship, and trustless. The marketplace is decentralized and as a result, responsibilities for the proper operation of the market, guarantees for accountability and privacy comes from the platform. 

The marketplace members consent to a set of business rules that will regulate the transactions and they are each responsible for taking part in running the marketplace infrastructure, cutting out the middleman. The rules and infrastructure provide a framework that makes it possible to set up agreements which have been made automatic. 

There is an enormous prospect in the integration of blockchain technology with marketplaces through revolutionary new business models, smart contracts, and cryptocurrencies, to make international trade more efficient. The speed and reliability of blockchain can reduce the friction of international commerce, trade, and finance. 

“I certainly see that while it’s still in its early days, I think decentralized marketplace is very much the future.” — Ciaran McGowan concluded.

Decentralized marketplace is still nowhere near the magnitude and usage of its centralized equivalents. However, blockchain-based decentralized markets could be the engine that helps African businesses grow and could as well leapfrog the continent in the area of trade and finance.

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Opinion

The Digital Tender: A Game Changer?

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Game changer
Image Credit: Kabiru Yusuf

2 billion people still lack access to formal financial institutions according to data released by the World Bank. This implies that a wide gamut of individuals across the globe are constantly stripped of their financial rights and left in the shadows. This is true of the sophisticated systems of traditional paper transactions that are rarely encouraging and laden with obscurity. 

With this in mind, it is only right that we outsource innovative channels that will provide the vast majority of people with affordable means to manage their financial lives and grow. This must be acted upon in a bid to maximize opportunities for people to express their financial freedom using a secure, affordable, and qualitative approach. 

Presently, the financial space is abuzz with a ‘fresh’ type of currency. One that is fast gaining momentum and seeks to achieve a satisfactory ambition. Digital currencies in today’s economy have been observed to hold the potential to completely revolutionise how money is perceived in society. The influx of cryptocurrencies such as Bitcoin, Ethereum and a host of others has, over the years, topped off several conversations on the role that these electronic currencies might play and how their seeming prospects could be utilized to foster growth and financial inclusivity. Regardless of the nature of the transition that a country may adopt, it is needless to say that a legally issued digital currency will be a welcome initiative. It will further provide businesses with the avenue to flourish through a safe and timely financial instrument as the digital currency. 

Moreover, with the countless challenges that plague paper currency transactions, digital currency offers a decent consolation. It satisfies the people where they are and augments their monetary options. The inflation rates across Africa are largely dismal. In Nigeria, it stands at a sorry state of 18.2% — and shows no signs of slowing down. A digital currency will surely serve as insurance against uncertain waves. It is simple, seamless and guarantees a decent store of value. Sounds like a smart choice, right? 

Also, a recent report by the Bank of America admits the intrinsic value that digital currencies have in emerging economies if fully embraced. The President of El Salvador, already leading the charge, announced this year on June 5th that he has commenced plans to make digital currencies a legal tender in the country. The acceptance of digital currency by a nation’s central bank will also ensure that transactions are conducted credibly. It will inevitably block leakages and occasions of fraud in the financial landscape. Not only that but there will also be a huge reduction in administrative and operational costs which is incurred by the government. 

On the flip-side, however, several obstacles ranging from volatility, regulatory problems, issues of privacy and trust may hinder widespread acceptance of a decentralised tech–currency. Yet, having a global consensus to fashion a regulatory framework on the digital currency mantra will by far assuage some of these challenges. It is only a matter of time. “There are of course barriers to mainstream adoption, but they are far from insurmountable,” says Iqbal Gandham, the UK Managing Director of eToro.

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Cryptocurrencies and the Problem of Regulation

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There has been a gradual rise in the adoption of cryptocurrencies, and rightfully so. Cryptocurrencies have the potential to become huge disruptors to global financial systems in that they intend to perform the same functions as the traditional fiat currencies, but more efficiently. Cryptocurrencies are known to be digital assets, native primarily to a chosen network of interconnected devices. They can either be transacted basically as a utility (i.e native to a particular sector) or on a broader scale where they are bought and sold for a price determined by market conditions. They are traded on exchanges similar to the stock market, where investors buy and sell cryptocurrencies just like they would buy and sell shares on the stock exchange.

Cryptocurrency is extremely unpredictable and volatile, especially since it has no intrinsic value. This volatility is a main feature of cryptocurrencies, and the main reason the UK’s financial regulatory authority, the FCA, has described cryptocurrencies as high-risk, speculative investments that could potentially lead to a total loss in investment due to manipulations that can occur as a result of individual or institutional factors. Despite this, crypto has massive support from the financial industry. Institutional investors and companies like Tesla, and investment banks and financial services firms like JP Morgan, include Bitcoin in their portfolios.

Despite the growing popularity, there are few consumer protections and regulations for cryptocurrency, and in the wake of this many fraudulent activities are on the rise based on the supposed feature of anonymity that cryptocurrencies operate upon.

Legal Concerns Around Cryptocurrency Use

The U.S. Attorney General’s cyber-digital task force 2020 report identified three areas of concern with cryptocurrency use:

  • Direct use of cryptocurrency to commit crimes and finance terrorism
  • Using cryptocurrency to launder money and evade taxes
  • Cryptocurrency theft and investment fraud.

In general, a common legal concern about cryptocurrency is the level of anonymity  that cryptocurrency can offer. This creates a perfect environment for criminal activities. Cryptocurrency developers are now offering anonymity enhanced cryptocoins (AECs) like Monero, Zcash, and Dash, specifically to make tracking transactions more difficult.

With all of these in view, the regulations and policies around cryptocurrencies and their adoption in different countries of the world literally differ from each other. While a nation such as Nigeria would ban financial institutions from performing any form of transactions using crypto currencies, owing to the basic ideology that it fosters more harm than good in the nation, countries like the United States would adopt the use of cryptocurrency for the enhancement of financial transactions.

Comparative Summary of Regulations

One of the most common actions identified across the jurisdictions of different nations is government-issued notices about the pitfalls of investing in the cryptocurrency markets.  Such warnings, mostly issued by central banks, are largely designed to educate the citizenry about the difference between actual currencies, which are issued and guaranteed by the state, and cryptocurrencies which are not.  Most government warnings note the added risk resulting from the high volatility associated with cryptocurrencies and the fact that many of the organizations that facilitate such transactions are unregulated.  Most also note that citizens who invest in cryptocurrencies do so at their own personal risk and that no legal recourse is available to them in the event of loss.

Many of the warnings issued by various countries also note the opportunities that cryptocurrencies create for illegal activities, such as money laundering and terrorism.  Some of the countries surveyed go beyond simply warning the public and have expanded their laws on money laundering, counterterrorism, and organized crimes to include cryptocurrency markets, and require banks and other financial institutions that facilitate such markets to conduct all the due diligence requirements imposed under such laws.  For instance, Australia, Canada, and the Isle of Man recently enacted laws to bring cryptocurrency transactions and institutions that facilitate them under the ambit of money laundering and counter-terrorist financing laws.

Some jurisdictions have gone even further to impose restrictions on investments in cryptocurrencies, the extent of which varies from one jurisdiction to another.  Some (Algeria, Bolivia, Morocco, Vietnam) ban all activities involving cryptocurrencies.  Qatar and Bahrain have a slightly different approach in that they bar their citizens from engaging in any kind of activity involving cryptocurrencies locally, but allow citizens to do so outside their borders.  There are also countries that, while not banning their citizens from investing in cryptocurrencies, impose indirect restrictions by barring financial institutions within their borders from facilitating transactions involving cryptocurrencies (Bangladesh, Iran, Nigeria, China, and Colombia).

While Bitcoin and other cryptocurrencies have generated dizzying returns for investors, there are significant risks and regulatory issues to consider. There are very few consumer and investor protections that address cryptocurrency, and the exchanges that deal in it.

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How the Prospect Of A Central Bank Digital Currency Will Redefine The Banking System In Nigeria

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Central Bank Digital Currency
Image Credit: Forbes_CBDC



The advancement of digital technology has transformed how payments and other financial services are conducted. Cash, which used to be king, is now giving way to digital forms of currencies. Central Bank Digital Currencies (CBDCs) are one of the digital alternatives to cash with a very promising potential for disrupting existing financial systems. CBDCs are blockchain-inspired virtual forms of a nation’s fiat currency. Although CBDCs are similar in design to cryptocurrencies, they are centralized, unlike cryptocurrencies, and are issued by the central bank of a nation.

An interesting feature of a CBDC system is its capability to facilitate payments directly between multiple parties without requiring intermediaries such as payment settlement institutions, payment systems operators, or clearing houses. This could be a potential problem for intermediaries in the financial system because this kind of system will eliminate the need for intermediaries that exist in the present traditional payment system, hence, threatening their survival due to significant revenue drop that would follow.

The choice of storage and exchange design of CBDC would affect how much impact its usage will have on banks and other intermediary financial institutions. If third-party providers of financial services, like fintechs, are allowed to keep CBDCs and also provide payment services that are related to traditional fiat currency, banks will be significantly impacted from the introduction of CBDCs because customers will be able to keep the CBDC on wallets they have with non-bank third-party providers, thereby, reducing the need for banks. Also, if the exchange of CBDC to fiat currency is restricted to the central bank only, banks will be hindered from making profits associated with the fees for the exchange between CBDC and fiat currency.

When CBDCs become alternative payment systems, a decline in the volume of card transactions would be inevitable, as more transactions would be done with CBDCs. This, in turn, will cut down the revenue that financial institutions generate from interchange fees associated with card transactions.

Although the issuance of CBDCs could stiffen the growth of the traditional banking system in a country like Nigeria, it could also positively transform how financial services are offered. A CBDC in Nigeria will provide better security for customer’s funds because, by its nature, each digital naira will possess a unique identity, which allows it to be tracked continuously by the central bank. Since CBDCs may also leverage blockchain technology, there is a lower chance that a CBDC would be counterfeited or illegally modified.

For a country like Nigeria with a high number of underbanked citizens, a CBDC could strengthen financial inclusion by providing underbanked citizens access to a wide pool of financial services that they would not have had access to with today’s traditional banking system. This would also reduce the need for bank branches to be present in rural communities in order to facilitate the distribution of cash to members of those communities.

The integration of CBDCs into Nigeria’s financial system is expected to lower the cost of monetary transactions, accelerate economic growth and stabilize the country’s financial sector. The severe effects of the drastic devaluation of the naira could also be mitigated with the issuance of a CBDC. While the issuance of a CBDC comes with its pros and cons, there is no doubt that the issuance of a CBDC would have tremendous positive impact on the Nigerian economy, as well as on how financial services are offered in the country.

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