Sub-Saharan Africa's blockchain adoption rate in 2022 is the highest globally, dominated by the decentralized finance (DeFi) start-up segment.

Blockchain technology is still at an early stage and will only be widely adopted when user interfaces become more easily accessible, a challenge in the SSA region. Regulatory frameworks for blockchain also are still underdeveloped in SSA, encouraging the review of existing data protection legislation.

Blockchain technology has the potential to address many core challenges for the region. These extend from governance issues such as how to conduct elections, fiscal collection and disbursement of state funds, registering and transfer of land ownership through to commercial activities such as energy trading.

Environment, Social and Governance (ESG) compliance is also a potential driver for blockchain technology adoption in the region. Its use could be particularly helpful for SSA supply chains to clarify the origins of goods.

Blockchain in SSA

Available data show that SSA technology startups raised USD2.7 billion in total funding in the first three quarters of the year, an impressive increase of 30% versus 2021. SSA blockchain venture funding growth was 11 times faster than that of general venture funding.

According to a report by Standard Bank published in 2022, blockchain funding grew 1,668% year on year during the first quarter of 2022.

Expansion and development extends beyond DeFi

The Ethiopian government has been working on developing blockchain applications for coffee shipments and other areas of agriculture.

Ethiopia is also currently the largest adopter of blockchain technology globally in the education sector. Blockchain technology company Input Output of the Cardano group is working with Ethiopia's Ministry of Education to create a blockchain-based digital identity platform that would enable better monitoring of school performance, aiming to boost the national education system's efficiency. Its contract involves providing IDs for 5 million students across 3,500 schools. It is the largest blockchain deal ever signed by an SSA government.

Another area where blockchain technology can assist SSA countries to improve administrative arrangements is land registration. Land administration in the region is often ineffective and prone to fraud because administration and transactions tend to be informal and undocumented. Blockchain technology's use could potentially reduce scope for manipulation of existing land titles through its transparency principle, while its resilience principle has potential to restrict scope for fraud and corruption.

The technology is also gaining a growing presence in trade finance as working with paper bills of lading, payments, and physical deliveries can be accelerated through digitalization and blockchain at a lower cost. Reducing transaction costs in the energy sector is also another way to apply blockchain solutions in SSA.

Blockchain and sovereign ESG in SSA

With a growing proportion of institutional investors following ESG objectives and banks also tightening their ESG focus, SSA faces potential difficulties in attracting international investment unless it can improve its ESG transparency and governance, where it scores poorly on several governance indicators such as corruption perceptions indices.

The capacity to shed light on the origins of consumer goods is a promising attribute of blockchain technology, potentially offering scope for stakeholders to view the entire transaction history in a company's supply chain, seeing whether materials were sourced from ethical and environmentally friendly sources or otherwise.

Tanzania uses blockchain technology to track tantalum from the pit to refineries to boost investor confidence that its minerals come from conflict-free sources. The Tanzanian government also continues to apply blockchain technology to audit the public-sector payroll, seeking to eliminate ghost workers from the public sector.

Widening financial access through blockchain remains sensitive regarding its environmental impact. Older DeFi applications run on early forms of blockchain that use energy-intensive proof-of-work protocols. However, new evolving application platforms are gradually moving to alternative large-scale blockchain projects that use the more sustainable alternative protocol of proof-of-stake.

Outlook

Within Africa's digitalization transformation, we expect more SSA countries to expand their interest in adopting blockchain technology, providing an investment opportunity in SSA's technology sectors during the next 10 years, as part of the Africa 2030 agenda.

With its fast adoption rates and still currently low transaction volumes, there appears to be significant growth potential for investors, although regulatory regimes are widely inadequate and thus are likely to be modernized, particularly regarding the security of financial instruments.

For SSA, physical challenges remain because of infrastructural obstacles. SSA policy-makers are therefore likely to work towards a broader blockchain technology strategy aligned with the AU digital strategy. This would aim to enhance digital literacy and work further towards closing the infrastructure gap and improving internet penetration.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.