In December 2017, Papa-Wassa Chiefy Nduom wrote a post on why African central banks should get into bitcoin; mainly, to protect their reserves and mitigate the weakening dollar. He also outlined how the digital asset can be used to tackle the severe infrastructure issue plaguing the continent. BTCManager reached out to Nduom to find out more.
Papa-Wassa Chiefy Nduom is a lawyer, Director and Vice President of Groupe Nduom, a family business group which consists of many business and social enterprises focusing on growth opportunities within West African countries and their plan is to influence the African Diaspora in the future. Bitcoin has also captured his imagination, as a way to propel developing countries.
Dedollarization using Bitcoin
Over the years African countries have accumulated a considerable amount of US dollars to effectively control their exchange rate, inflation and to reduce adjustment costs accompanying fluctuations in global expenditure. African countries generally maintain reserves mostly from higher commodity exports and humanitarian assistance. Moreover, while holding international reserves not only allows countries to purchase goods, it is a prominent tool used to maintain international competitiveness by sustaining favorable exchange rates.
The holdings of dollar reserves is significant to African countries, so the value of a dollar has a bearing on the performance of their economies. Many analysts predict the likely drop of the dollar over the next year against the Euro and other major currencies. One forecast predicts the likely drop of the dollar is expected to reach up to ten percent.
Nduom proposes that, due to the projected loss of value of the dollar, it is not unreasonable to risk ten percent of the central bank reserves on an emerging asset such as bitcoin as there are such high gains to be made. He believes that the African central banks have much to lose if this opportunity is used to rebalance their reserves as, ultimately, the outcome could lead to the prolonging of human poverty and suffering on the continent.
A Boon for Economic Development?
Bitcoin nodes reach far and wide covering all continents all over the world. However, Nduom comments that African countries and their diasporas seem to be left behind with regard to emerging developments, resulting from the legacy of economic migration and the slave trade.
He does not like the situation at all and explains how his family business group invests in firms that consider social, environmental and financial aspects to leave their mark and try to correct the shortcomings. Their impact is merely limited by their lack of ability to generate income to invest in “frontier markets” to make real progression.
Nduom states that if the central banks of Africa miss this opportunity they will be underrepresented in the bitcoin space:
“Politically, I feel like if the economic scales are not balanced soon when the sun goes out, people with a high portion of melanin in their skin will be grossly underrepresented on the spaceship… Our current implementation of the international order clearly does not prioritize optimizing this potential. You could argue that our systems are set up in direct opposition to this concept.”
During Ghana’s independence, the president at the time proposed that a ‘United States of Africa,’ which would be able to prioritize economic integration and aid poverty alleviation. Unfortunately, in reality, Africa has tighter trade connections with developed countries than those in close proximity. The lack of infrastructure is also holding the continent back; more than half of roads are unpaved, there is limited maintenance of the limited railways that do exist and poor connectivity of ports to roads and railways.
Nduom expresses his idea that bitcoin adoption could lead to agreement across the African continent and encourage ways to work toward a development fund to improve infrastructure. It could be the grassroots movement that is held up as a practical solution to poverty and economic development by some experts – the polar opposite of the top-down approach pursued by the IMF, the World Bank, and others.
Analysts Indicate Huge Potential Gains for Early Adopters
BTCManager has reported on various analysts’ estimates for the price of bitcoin. For instance, one projection of the price of bitcoin sees it reaching as high as $50,000 in 2018, according to Thomas Glucksmann, the Head of Marketing at Gatecoin.
Furthermore, John McAfee reckons the price of bitcoin has a bright future, and he forecasted that the price will climb as high $1 million by 2020 as covered by BTCManager. If such predictions turn out to be true, African economies will be missing out on such gains – and stand to gain the most if they adopt now. Now it is time to think about what potential implications they may face if the right precautionary measures are not put in place capture profits of the digital asset. Also, given that bitcoin is uncorrelated with other asset classes, accumulation of the digital asset will help to hedge against fluctuations in the wider market.
Nduom has calculated the potential gains that a handful of African economies may face, assuming all the reserves held in US dollars, if ten percent is allocated to bitcoin. The diagram below shows in the scenario that if bitcoin is priced at $20,000, their potential risk is $11 billion. Similarly, if projections for bitcoin to hit the $100,000 mark are realized, then the opportunity cost is a whopping $55 billion. Alternatively, these economies could lose a similar amount if they do not manage their reserves properly.
His ambition for 2018 is to get the first African central bank to start hedging out of fiat currency and take a step toward the new digital asset. To find out more about Nduom’s proposal, BTCManager reached out via email for a feature interview.
How Close are African Central Banks to Adopting Bitcoin?
It is tough to say. On one hand, there is a lot of skepticism towards bitcoin, particularly amongst conservative, classically trained banking regulators. On the other, the Bloomberg Dollar Index is down 2.6 percent year to date. Unfortunately, the trading strategy I described in my article was correct. Countries with central banks that held USD, in cash, as reserves without appropriate hedges have been hurt, because the dollar has lost value against a basket of major global currencies.
“Central banks like the Swiss National Bank are allowing Swiss banks to work with digital assets like bitcoin. I find it highly likely that individuals that work in central banks in Africa hold bitcoin in their personal portfolios. Lots of finance nerds find their way to bitcoin because they keep up with the international financial news. And I would not be surprised if one or two were conducting small private experiments.”
In terms of widespread adoption – a lot of work will need to be done for that to become a reality both for the general global public and for banking technocrats.
Can You Explain In More Detail How These Reserves will be Used to Fund and Build Infrastructure/Alleviate Poverty?
Due to the public, distributed ledger, I believe that bitcoin is fantastic collateral. It’s like a global title registry for this revolutionary digital asset akin to gold. So my argument is that if central banks in Africa invested, once made public, other institutions, public and private, would probably follow suit. This could lead to a substantial increase in the price of bitcoin. These countries would then use their reserves of bitcoin as collateral to raise funding for badly needed infrastructure.
It is just a creative way of encouraging global savings in a new asset with many of the positive attributes of sound money. Given those attributes, as more people adopt it as a robust form of reserves, the price rises. Once we are at this stage, developing countries take advantage of that price appreciation and mobilize funds for development by using bitcoin as collateral.
It is a long road with many prerequisites for success, but in my view, it is a worthy goal to work towards.
What Do You Think are the Biggest Obstacles to Convincing Central Banks About Bitcoin?
The biggest obstacle is that these institutions need to come to this conclusion on their own. Central banks need to study these assets and decide how they will approach them. For example, Mark Carney gave a speech in which bitcoin and other digital assets were discussed at length recently.
Most people latched on to the bearish sound bites. I saw it differently. The Bank of England (BoE) assigned scarce resources to study bitcoin and draw conclusions. Not all of these findings were negative. This is actually the right approach – central banks taking time to discuss and understand bitcoin. That said, there are some rhetorical issues with the Bank of England’s views, partially due to, in my view, a misunderstanding about what the current iteration of bitcoin is for in terms of the preeminent use case (which is digital gold in my view).
This misunderstanding is one reason why I don’t like the word “cryptocurrency.” The BoE put forth this idea that bitcoin has failed as a currency – it’s not a currency; it is an innovative digital asset.
“So to summarise the biggest challenge has two parts 1) central banks need to understand Bitcoin on their own and 2) this will be difficult until there is a concise global consensus about what Bitcoin is and at this stage, there is not even a standard nomenclature – what are we supposed to call it? A “crypto”/”cryptoasset”/”cryptocurrency” or a “digital asset”?“
It cannot be all of these things at once if we want to have deep, disciplined discussions that lead to practical adoption by highly regulated entities.
When Do You Think We Will See the First Central Bank Adopt Bitcoin into Their Reserves?
I think it has already happened indirectly. I am not familiar with the extent to which the Swiss National Bank has the ability to take control of local banks, however, if it allows banks to hold bitcoin, which I believe it has, it is indirectly exposed to the asset.
Also, What is the Likelihood of Adoption of Other Cryptocurrencies that May Benefit African Economies?
I spend a lot of time learning about Bitcoin to back up my argument for African central banks. So I don’t know enough about any other digital asset to make a similar argument.
How Exactly will the Population Benefit from the Allocation of Bitcoin to Reserves?
For the general population, the benefit would come in the form of accelerated social and economic development. The progression of the infrastructure development story can be summarized like this:
1) Developing countries invest in bitcoin and associated technology,
2) Public knowledge of their investments leads to a run-up in the price bitcoin to a level equivalent to the market capitalization of gold,
3) The windfall these countries receive leads to more fair allocation of global capital for badly needed infrastructure; energy, water, schools, computing power & walkable cities.
What Would You Say to Critics Who Suggest that Bitcoin is Not Ready for Such Adoption by Central Banks Yet or That It Is Too Volatile?
Given the small portfolio allocation we are recommending, and with appropriate hedging strategies, the volatility is a plus. It provides opportunities for trading gains.
Furthermore, recent volatility with regard to global traditional assets and USD make this less of a concern. There’s more volatility in the system now, so my argument that “everything is risky” given that no one can predict the future is getting a little more traction these days.
Lastly, there are a number of academic papers that have back-tested a small portfolio allocation to bitcoin for institutional investors and have found this to be a prudent course of action. There’s enough data out there now for central banks to get exposed. The problem is simply motivating staff in these institutions to read these papers, discuss them and engage in a long-term dialogue that informs their decision making.
How Will Central Banks Store Bitcoin Reserves?
Wait are you trying to steal their bitcoins? Can’t tell you.
Seriously though, these institutions would have to weigh all their options and make their own decision. When I call for African central banks to invest in bitcoin, part of that investment should be allocated to coding, mining, understanding the Bitcoin technology stack. So if they make these investments, they should be able to come up with innovative ways to keep their bitcoin safe.
We’ve Seen Various Hints About OpenDime and Mining on Twitter; Is This Part of Your Plan for Bitcoin Adoption in Africa?
Absolutely. I find the concept of OpenDimes incredibly creative. I call it the “meatspace lightning network.” Real-world off-chain transactions. All I can say now is that we are studying the technology and find it fascinating.
Everyone who is into bitcoin should check them out, play around with them and think through the possibilities.
Do You Want to Add Any Thoughts or Comments About the Potential of Bitcoin to Help Developing Economies over the Next 12 Months?
Bitcoin and the technologies it has inspired are all extremely young. The most exciting thing about Bitcoin and developing economies in the near term is the possibility that innovation may come from these economies if they get involved now.
That’s probably the main reason why I do this. Given the open nature of the technology, the depth of the story grows exponentially as more brilliant people from around the world get involved.