Natural resources are one of the main sources of revenue for African countries. The main problem that has been plaguing African businesses and enterprises has been limited access to capital. Tokenisation can be a step in the right direction to improve access to capital. Asset tokenisation is a process where digital tokens are created to represent physical assets. Tokenisation has already been adopted widely in African mining projects, and it seems to be working.
The continent is rich in natural resources like minerals and fossil fuels, most of which remain unexplored. African countries such as Mozambique raise capital which has been vital in the country’s graphite mining industry. By converting the mining project into security tokens, the Ambato Arana mine has raised capital to ensure the smooth running of the mining project. About 60 percent of all African countries export mineral resources vital to their economic development.
Too bad that the greatest illness plaguing the continent, corruption, and political instability, has led to the exploitation of vast resources with minimal economic gains to the people. Technological advancements such as the making of Electric Vehicles, smartphones, and digital devices, and the need for renewable energy have also escalated the demand for mineral resources. Mining rare earth metals such as graphite, cobalt, and lithium are expected to rise by 500% by 2050 as the world seeks to switch to clean energy. Africa is believed to hold great deposits of rare earth minerals, especially in southern and eastern Africa. Investing in these resources could help the continent alleviate poverty by boosting its economic growth.
How Will Tokenisation Help?
The digital tokens are created and stored on the digital ledger, blockchain, the technology behind cryptocurrencies like Bitcoin, Ethereum, Litecoin etc.
- Blockchain ensures that there is traceability. Any transaction recorded on the digital ledger can be verified and cannot be changed or influenced by any party. This helps alleviate any fears of loss of data or finances. Funds can be used for the intended purpose. The digital ledger cannot be changed; once transactions have been made, they can be tracked and verified. This alleviates fears of corrupt or unscrupulous individuals taking advantage and misusing the finances.
- Tokenisation of assets can reduce the high management costs involved in transferring assets. Traditionally, the transfer of ownership requires an intermediary, such as a lawyer, to handle the paperwork. This increases the cost as you have to pay the lawyers. Transfer of assets using digital tokens is done on blockchain technology, and the transaction is recorded. Therefore, there is no need for intermediaries as the digital ledger ensures trust.
- By creating digital tokens representing an underlying resource or an asset, you create liquidity, and that asset can now be traded.
One way African countries can securely and effectively fund projects and businesses is through tokenisation. Startup companies can use Initial Coin Offerings (ICOs) to raise money. ICOs (digital tokens) are like IPOs, where investors buy shares. Tokens are not limited to mining, and small and medium enterprises can also use them to raise capital for their businesses. Investors can choose to use fiat currency or cryptocurrency to buy tokens. For example, if a business needs $100,000 in the capital, it could convert the amount into 100,000 digital tokens and offer it to investors.
When someone buys a token, they essentially buy a percentage of the business. There has always been a risk involved in making investments in Africa, mainly due to political instability and high levels of corruption that keep investors away. When many countries worldwide are trying to recover from the economic effects of the Covid-19 pandemic, tokenisation can help businesses reach a wider base of potential investors and get funding for their businesses to thrive.
The main function of tokenisation
- Facilitate access to capital – By creating digital tokens, you can raise funds from a wider audience that you would otherwise not have access to in the local market. Anyone around the world can invest in your business by purchasing the tokens.
- Facilitate access to investments – Tokenisation also helps investors expand their portfolios. An asset such as real estate can be offered as tokens making it possible for many people to invest and own a portion of the entire investment.
- Enable fractionalisation of assets – Fractionalisation allows investors to own smaller bits of an asset. For example, a gold mine can be divided by being converted into tokens allowing investors to own a percentage of the project.
Tokenisation opens unlimited possibilities for investors and asset owners. All financial elements, such as shares, licensing rights, and physical goods, can be digital tokens. The greatest gain has been in the democratisation of the market. That means that tokenisation has enabled private companies to tokenise their shares and sell them to investors directly.
Drawbacks Facing Tokenisation
There is a lack of proper regulations in Africa to allow the region to benefit from using digital tokens. Existing laws could hinder how the technology is used in the established systems. Inadequate regulations could also open up investors and businesses to possible exploitation by evil people. Although the potential for tokenisation is great and can improve businesses and local economies, there is not enough evidence on how effective it can be on the ground.
Conclusion
The continent has been making huge steps in adopting technology to push limits and improve business and their way of life, as is the case of mobile money and smartphone adoption. If Africa does the same with tokenisation, it can make huge strides towards a more inclusive economy.
We already use digital money, such as mobile money transfers, in our daily lives, but some sections of the economy remain unexplored, as is the case of illiquid assets such as the arts. By tokenisation, we can trade these assets as digital tokens and allow investors to own a fraction of the asset. For the region to fully realise the benefits of tokenisation, the existing laws and regulations must be ratified to ease the use of digital tokens. This will, of course, not happen in a day. Still, the benefits greatly outweigh the costs. Governments around the continent should lay down the structures and infrastructure necessary to use digital tokens to boost the economy.
