85% of central banks are considering digital currencies. The tedious process, overhead costs, and other costs associated with paper currency prohibit financial inclusion and explosive innovation in the financial market and economy at large. Digital currencies unlock broader possibilities for the unbanked and those excluded from the financial market. An area worth looking into is the capital markets. Lack of funds stifles innovation.
There are a plethora of opportunities in the financial markets that have only been easily accessible by the “informed” and rich. For example, unlocking opportunities in futures contracts and commodity exchange can boost the economy of agriculture in Africa. Digital currencies can help the capital market in Africa.
Early fundraising was mostly executed by initial public offering (IPOs) for businesses and bonds for the government, to mention a few. The process, time, and cost associated with an IPO exclude a lot of business. Digital currencies increase the potential of financial inclusion for companies that cannot participate in an IPO. Trust is one key factor for investors. Interestingly the transparency and immutability of a public ledger help take care of trust to a large extent.
Early banknotes circulated like IOUs as described in Debt: The Face Behind The Currency (IOU illustration I). For the Chinese merchants, each merchant added a signature to guarantee the debt’s legitimacy, and this presented difficulty in the chartalist.
Chartalist derived its name from the Latin word “Charta”, or token. It established why people would trust a piece of paper. The cumbersome nature of paper made transactions slow and verifying claims even slower. Digital currencies are commonly called tokens also as they have trust powered by the blockchain protocol in which they operate.
The process of converting something of value into a digital token that is usable on a blockchain application is called tokenization. Tokenization offers transparency, cost-efficiency, enhanced security, and also the potential for overlooked sources of value to fuel new possibilities for civilization.
“The global tokenization market size is expected to grow from USD 1.9 billion in 2020 to USD 4.8 billion by 2025, at a compound annual growth rate of 19.5% during the forecast period”, according to a MarketsAndMarkets report.
Token Offering
Companies can raise funds for their projects via security token offerings. We have heard of initial coin offerings (ICOs). A company can sell 15% equity for NGN 100 million via token offerings in a network like Ethereum using smart contracts. The next tokenized utility ecosystem will make businesses less marginalized. This takes inclusive funding to another level. A major concern remains regulation and governance of the locality of the company raising the funds.
With this technology, citizens can fund infrastructural development in remote countries. A village in Africa can get electricity, water supply, schools, and farms funded by remote citizens. Tokens could be the next-generation capital.
Investors and fundraisers will be attracted to the jurisdiction that has a regulatory environment that complies with all regulatory standards. For Africa, regulation, and understanding is a major step that needs to be addressed. Thankfully, governments are building a regulatory framework for digital currencies.
Lack of knowledge remains a major bottleneck. Tax collection, auditability, non-counterfeitability, control, price stability, interoperability, and monetary policy remain major areas that make this transformation lucrative for governments.
We are hopeful and encourage entrepreneurs to prepare to tap into this next-generation capital and the opportunities it brings.