Text by Shogo Ishida and Yosuke Yoshida
Compiled by: TaxDAO
Ethiopia, with a population of 123 million, is the second most populous country in Africa and has been having an evolving relationship with cryptocurrencies. The country initially took a cautious stance, but later moved from an outright ban to cautiously exploring the potential benefits of cryptocurrencies and blockchain technology. The shift reflects a global trend of governments grappling with the disruptive force of cryptocurrencies.
Key points:
Ethiopia has moved from banning cryptocurrencies to regulating them
Bitcoin mining is on the rise, with miners flocking to Addis Ababa
Blockchain is helping Ethiopia curb fraud in education
Ethiopia’s mobile payments sector continues to grow thanks to a favourable fintech environment
Strategic Shift: Regulating Cryptocurrencies
In June 2022, the National Bank of Ethiopia (NBE), the central bank of Ethiopia, issued a statement declaring cryptocurrency trading illegal. The central bank said it would take "legal measures" against anyone found to be using cryptocurrencies for transactions in the country. "The birr is the only legal tender in Ethiopia and all financial transactions should be conducted through it," the central bank warned in a statement.
The central bank cited concerns about financial instability, money laundering and a lack of regulation of crypto assets, a stance that echoes anxieties among many central banks in Africa that cryptocurrencies could undermine national currencies and centralized financial controls.
However, the Ethiopian government made a surprising decision in August 2022, signaling a change of course. The Information Network Security Agency (INSA) issued a directive requiring all cryptocurrency operators to register with it. INSA said: "Individuals and entities interested in providing crypto services, including mining and transfers," and warned that "unregistered cryptocurrency participants will be prosecuted." Ethiopia aims to regulate the cryptocurrency industry as well as protect citizens from potential risks, marking a shift from an outright cryptocurrency ban to a more nuanced regulatory approach.
The reason behind this shift can be attributed to the continued growth of the global cryptocurrency market and suggests that it is here to stay. The Ethiopian government also recognizes the potential benefits of cryptocurrencies, such as facilitating cross-border payments and revolutionizing digital identity. Currently, INSA and other entities are developing guidelines that are intended to provide comprehensive oversight of the operations, economic impact, and environmental impact of the crypto industry.
Although Ethiopia has not yet enacted laws allowing the use of cryptocurrencies, the adoption of cryptocurrencies has increased significantly as individuals engaged in cryptocurrency activities are actively expanding their businesses in the country. There are more than 1.8 million cryptocurrency users in Ethiopia. Both the private sector and the government are rapidly growing in their interest in initiatives aimed at developing a regulatory framework to ensure stability and consumer protection. Developers, entrepreneurs, and government officials are increasingly curious about the underlying technology behind Bitcoin and its potential applications in various fields beyond finance.
Ethiopia’s shift from banning cryptocurrencies to cautiously exploring their potential use cases illustrates its journey in navigating the complexities of rapidly evolving technology. It highlights the need for a nuanced approach that balances innovation with the responsibility to protect citizens and maintain financial stability.
Ethiopia recognizes the potential of blockchain, an underlying technology that offers a secure, transparent way to record transactions with the potential to revolutionize industries such as supply chain management and land registries. This recognition has spurred interest in exploring blockchain applications, without necessarily embracing cryptocurrencies themselves.
Student Digital Identity Project: Best Blockchain Use Case in Africa
Education fraud has long been a widespread problem in Ethiopia, undermining the integrity of academic qualifications and eroding trust in the education system. Fake diplomas, forged transcripts, and fraudulent certifications affect the country's education landscape, posing huge challenges to employers, academic institutions, and students. In an effort to curb this trend, the government signed a partnership agreement in 2021 with research and engineering company Input Output Global (IOG) to implement a student digital identity program for more than 3,000 schools powered by the Cardano blockchain.
The goal of IOG's agreement with the Ethiopian government is to create a national database of student and teacher certificates using a decentralized digital identity solution. "Based on the Prime Minister's comments on these issues, it is very appropriate to deploy this technology in the education sector," said John O'Connor, IOG's director of Africa operations. The project targets a large number of primary and secondary school students. By digitizing and storing educational records on a blockchain-based platform, Ethiopia can eliminate the risk of tampering or forgery and ensure the authenticity of academic qualifications. This not only helps to protect the value of legitimate certificates, but also provides employers and academic institutions with a reliable means of verifying an individual's educational background.
One of the key components of Ethiopia’s digital project is the development of a blockchain-based certification system that allows educational institutions to issue digital certificates directly to students. These digital credentials are cryptographically signed by the issuing institution, making them tamper-proof and easily verifiable.
In addition, the use of blockchain technology ensures that educational records are securely stored and only accessible to authorized parties, thereby protecting the privacy of student data. This solves the data breach and identity theft issues common in traditional paper-based systems.
The implementation of digital projects in Ethiopia has already yielded impressive results in curbing education fraud. By digitizing education records and making them easily verifiable, the country has significantly limited the proliferation of fake diplomas and forged transcripts. This strengthens the credibility of Ethiopia’s education system and increases the value of academic qualifications earned in the country.
Additionally, Ethiopia’s digital projects enable employers to make more informed hiring decisions by providing them with up-to-date and accurate information about job applicants’ educational backgrounds. This helps improve the overall quality of the workforce and boost the country’s economic growth.
It was these efforts that prompted the World Bank to approve a $350 million financing package in December to support Ethiopia’s digital identity efforts for 90 million Ethiopians.
Bitcoin miners flock to Addis Ababa
With an ample supply of cheap electricity and relatively low operating costs, Ethiopia’s capital, Addis Ababa, has become an attractive destination for bitcoin miners seeking to take advantage of the city’s favorable conditions.
Ethiopia has about 5,200 MW of installed power generation capacity, mostly from hydropower (about 90% of total generation). The remaining 10% comes from wind and thermal. In addition, Ethiopia is in the final stages of building the Grand Ethiopian Renaissance Dam (GERD), which is expected to have an installed capacity of 5,150 MW. The abundance of renewable energy makes electricity cheap and plentiful, making it an ideal environment for energy-intensive activities such as Bitcoin mining.
The appeal of bitcoin mining lies in its potentially lucrative rewards. Miners who successfully solve complex mathematical puzzles and validate transactions are rewarded with new bitcoins, providing them with a lucrative source of income.
Such economic incentives have attracted a wide range of players, from individual hobbyists to large-scale mining operations. Bitcoin mining requires a lot of electricity, so access to cheap power is a crucial competitive advantage. The trend has surged in the past two years, with established mining companies setting up factories in Addis Ababa and some individual miners looking to Ethiopia as a more profitable alternative to traditional mining centers such as China, Kazakhstan, Canada and Russia.
Addis Ababa has seen a surge in the number of Bitcoin miners, especially from China, influenced by China’s ban on cryptocurrency trading and mining in 2021 to control financial risks and reduce energy consumption. Bloomberg reported that the Ethiopian Energy Authority has reached power agreements with 21 Bitcoin mining companies, 19 of which are Chinese companies.
Since 2022, Ethiopia has allowed Bitcoin mining, mainly because these companies pay for the electricity they consume in foreign currency. Over the past decade, the country has strengthened its relations with China. Notably, many Chinese companies were involved in the construction of the $4.8 billion dam, from which Bitcoin miners obtain electricity.
In February, Ethiopian Investment Holding (EIH), the investment arm of the Ethiopian government, signed a $250 million deal with Center Service PLC, a unit of Hong Kong-based West Data Group, to start a bitcoin mining operation. The deal also involves building a large data center to manage cryptocurrency mining and artificial intelligence training activities.
M-Pesa sees significant growth in Ethiopia
For decades, Ethiopia has struggled with limited financial inclusion, a problem that has hampered economic progress and stifled opportunities for millions of people. The country’s banking infrastructure, characterized by physical branches concentrated primarily in urban areas, fails to reach the majority of the population, especially those living in rural and remote areas. However, the advent of mobile payments is reshaping the landscape, narrowing the gap between traditional banking services and the unbanked population.
Last August, thanks to a favorable fintech environment and a regulatory framework established by the Ethiopian government to promote innovation and technological advancement, Kenyan mobile money platform M-Pesa successfully entered the Ethiopian market and obtained a license issued by the National Bank of Ethiopia.
Eager to capitalize on Ethiopia's untapped market potential, M-Pesa continues to expand its reach. Its network now covers 33% of the population, with 3.1 million active M-PESA customers, 26,000 M-PESA cash withdrawal points, and 43,000 merchants. As of December 2023, M-Pesa has added 9 million new customers and 4.3 million 90-day active customers, in addition to integrating its services with 9 banks.
While local telecom company Ethio Telecom operates its own mobile payment service Telebirr, which has over 34 million users, innovations from M-Pesa will further boost cryptocurrency adoption in the country. M-Pesa already allows online merchants to buy and sell cryptocurrencies and stablecoins on major cryptocurrency exchanges Binance and Paxful.
Ethiopians who are familiar with using M-Pesa for daily transactions can easily adapt to using a similar platform to buy and sell cryptocurrencies. This reduces the learning curve and increases comfort for those considering cryptocurrencies. M-Pesa enables fast and easy mobile remittances. Integrating cryptocurrency buying and selling into the Ethiopian M-Pesa platform creates a seamless and convenient user experience for Ethiopians entering the cryptocurrency space.
