- The Lightning Network virtually eliminates the cost of Bitcoin transactions and enables near-instantaneous cash payments anywhere in the world.
- This so-called “Layer Two” technology builds on the main chain of Bitcoin.
- CNBC spoke to entrepreneurs in Nigeria and South Africa who have integrated the Lightning Network with mobile money.
ACCRA, GHANA – Block CEO Jack Dorsey and his top executives descended on Accra in December for the inaugural Africa Bitcoin Conference to discuss one of the potentially most disruptive and transformative alternatives to the continent’s existing financial system: Bitcoin.
Since its inception in 2008, this unfamiliar form of money has been alternatively spurned as an absurdly complex toy for libertarian techies, a legalized form of gambling, a speculative get-rich-quick bet, and a vehicle for criminals and scammers to trace its origins disguise their ill-conceived gains.
But this parallel financial system can also serve a tangible social good by providing an entry point into the financial system for people who would otherwise be excluded. In countries where the vast majority of the population is unbanked, national currencies are no longer a safe store of value, remittances account for a sizeable portion of GDP and international sanctions are making ties with the global economy difficult, a virtual currency that does not require an intermediary to approve Transactions can be a vital lifeline for survival.
As cryptocurrency continues to gain traction and become a growing focus for regulators, Dorsey and his proxies provide a key counter-narrative: Bitcoin brings financial power to people who otherwise would not have.
“I don’t care if the price goes down or up because I can still use Bitcoin as a vehicle to move money around the world instantly,” said Mike Brock, CEO of TBD at Block, a Bitcoin-focused entity focuses cryptocurrency and decentralized finance.
“I can exchange dollars for bitcoin and then bitcoin for Brazilian rial. There is a market for Bitcoin in every corner of the world today,” Brock continued.
Moving money in Africa is an expensive and complicated process.
Access to commercial bank branches is restricted, particularly for people living in remote and rural areas. The possibilities of digital banking are also limited. When you tackle rampant hyperinflation, rampant government corruption, and capital controls that lock domestic cash in banks, money can make no sense at all.
“Typically, if someone wants to send money to a neighboring country, you would have to fill a suitcase full of cash and haul it across the border,” said Ray Youssef, CEO of Paxful.
Part of the problem stems from the continent’s quasi-colonial payments framework, where about 80% of cross-border payments are processed by African banks abroad, mostly in the US or Europe. That means higher costs and processing times, sometimes measured in weeks.
Then there’s mobile money, which has been around since the early 2000s. Think of it like an e-wallet tied to a phone number and doesn’t require a smartphone or data to operate. Users can pay bills and shop using their phone via text messaging instead of having to rely on traditional banking options.
According to data from the GSM Association, a non-profit organization representing mobile network operators worldwide, mobile money transactions in Africa grew by 39% in 2021 to over US$700 billion. World Bank data shows that having an account with a financial institution — or through a mobile money service provider — has more than doubled in the past decade, rising to 55% of adults in sub-Saharan Africa.
An employee uses a Nokia 1200 mobile phone at an M-Pesa store in Nairobi, Kenya on Sunday April 14, 2013.
Trevor Snap | Bloomberg | Getty Images
But even as adoption increases, mobile money users are not getting the benefits of legacy banking, including earning interest on bank balances and building a credit score based on a spending history. Interoperability on the continent remains an important issue even with this alternative type of banking.
“The entire banking system in Africa is completely broken, even among the mobile money providers, the telecom companies,” said Youssef of Paxful, a peer-to-peer crypto marketplace that allows users to buy and sell tokens directly to each other.
“Two thousand payment networks and only 2% of them communicate with each other. This number keeps growing. It’s not getting better, it’s actually getting worse,” Youssef continued.
Companies like Western Union and MoneyGram offer an extensive physical network of storefronts around the world designed to move money for those who are unbanked. This cash network was extremely difficult and expensive to build, which is why there aren’t many direct competitors. Because of this, these cash transfers often incur significant fees.
Bitcoin could eliminate all of these intermediaries and allow citizens to send digital payments directly to one another without relying on credit and without paying multiple processing fees in the process.
“We will move to a model where we can make payments without promissory notes, loans, promises or fiat,” said Alex Gladstein, chief strategy officer of the Human Rights Foundation, an organization that works with activists from authoritarian regimes around the world. “It’s literally like sending a piece of gold or a $20 bill somewhere else immediately.”
“If you have internet access, you can process bitcoin payments,” Brock said. “And the government can’t do anything about it.”
Dorsey points to the example of what happened in Nigeria during protests against the brutality of the country’s Special Anti-Robbery Squad – a movement dubbed #EndSARS.
“The Nigerian government went to various bank corps to block protesters from receiving money – which bitcoin made up for,” Dorsey said in Accra. “So our only reason for being a company is to solve the same problem that Bitcoin will eventually solve for everyone in the world.”
Moving money on the Bitcoin blockchain on its base layer comes with its own set of challenges. At times of high demand, fees often increase, and if a user is unwilling to pay a premium for the transaction, they may have to wait for more blocks of transactions to be confirmed before their transfer goes through.
Bitcoin’s Lightning Network helps alleviate both of these problems by reducing transaction costs to virtually zero and enabling near-instant cash payments around the world – making Bitcoin a more effective payment rail. This so-called “Layer Two” technology builds on top of Bitcoin’s main chain, in part because bitcoiners are conservative in rolling out changes to the base layer for fear of opening it up to hacks or other inconveniences.
Yellow Card – Africa’s largest centralized cryptocurrency exchange, run by CEO Chris Maurice – also intends to embed this layer-two technology into the platform to bring the transaction price down to virtually zero. Currently, the exchange does not charge commission on transactions, but network fees can be quite high when many trades are happening at once.
“It’s going to have a pretty big impact on our customers as a lot of them are very price conscious,” says Justin Poiroux, co-founder and CTO of Yellow Card.
Yellow Card’s plan is still in its infancy, but Poiroux tells CNBC he believes the Lightning Network could ultimately bring great value to its retail customers.
Bitnob CEO Bernard Parah and Cash App crypto product lead Miles Suter at the Africa Bitcoin Conference in Accra, Ghana.
Bernhard Parah
Because Lightning provides a universal money language, money can travel around the world between any Lightning-enabled bitcoin wallet. Someone using a platform like Block’s Cash App – a regulated American financial product with 51 million monthly users integrated with the Lightning Network February 2022 — can instantly pay any Lightning bill anywhere in the world.
“It’s a new way of doing business. It’s a completely different paradigm,” said Gladstein.
Crypto product lead at Cash App, Miles Suter, believes that a big part of Bitcoin’s usefulness is how it handles broken and convoluted payment systems that don’t communicate with each other.
“At Cash App in particular, we’ve always been keen on taking bitcoin beyond just viewing it as an investment and giving it an everyday utility,” Suter told CNBC on the sidelines of the Africa-Bitcoin conference.
“People on the African continent are already doing this in many ways with the means they have,” Suter continued.
Bernard Parah is a 30-year-old entrepreneur living in Jos, Nigeria, about a five-hour drive from the capital, Abuja. He is the CEO of Bitnob, an app that allows users across Africa to buy, save and invest in bitcoin. Bitnob is SMS-based and piggybacks on the mobile money system, making it easier for people to send money directly to bank accounts and mobile wallets in African countries.
Parah recently partnered with Strike, a Lightning Network payments platform, to launch a feature called Send Globally, which allows Americans to send money to people living in Nigeria, Ghana and Kenya.
It uses local fiat cash on both sides of the transaction, but Bitcoin is used under the hood as a pipeline to jump funds across the border. The end user never touches the cryptocurrency themselves.
“We’re able to settle bank accounts or mobile money accounts without the recipients having to interact with Bitcoin themselves,” Parah told CNBC.
“Over time we have seen that there are still people who really don’t understand how to use Bitcoin; who don’t care about bitcoin. What matters to them is that their problems get resolved,” continued Parah.
Bitnob CEO Bernard Parah and Strike CEO Jack Mallers announce the launch of Send Globally on stage at the Africa Bitcoin Conference in Accra, Ghana.
Bernhard Parah
According to Strike CEO Jack Mallers, it feels like a wire transfer or Venmo payment.
“It’s immediate. There is no debt. There is no credit. There are no delays,” explains Mallers.
The model works because Parah and Mallers are willing to assume the liability associated with the transfer by holding cash in escrow at both ends of the exchange.
Once the money is received in Nigeria, Bitnob – a regulated entity with ties to the local banks – will take that bitcoin and convert it into their local currency.
“It’s just two regulated entities communicating using the language of bitcoin and scrapping excessive fees,” Suter said. “I think that’s revolutionary.”
Mallers says they offer more competitive exchange rates by using bitcoin as the price-determining agent, a kind of new world reserve currency.
“The rate we got was actually 60% better than the traditional forex market rate,” Mallers said. “The way to actually think about how we achieve forex when we settle through bitcoin is, ‘I have dollars. How many bitcoins can I get for my dollars? And then how many naira can I get for my bitcoin?’” Maller said.
“It’s the most liquid, accessible global tool for us to clarify and settle values among ourselves,” he said.
The agreement also offers some great side benefits, including interoperability with payment apps around the world that have tens of millions of users.
Block’s Suter explained that Cash App could theoretically work with Bitnob.
“We currently only live in the US, but that doesn’t mean we can’t speak to Bitnob in Nigeria and transfer value across those borders instantly and for free,” Suter said of Cash App.
South African developer Kgothatso Ngako has created a Lightning wallet called Machankura.
Kgothatso Ngako
South African developer Kgothatso Ngako, calling itself KG, has integrated the Lightning Network into the GSM network, combining the best of several worlds to meet customers where they are.
“My focus is on enabling people without an internet connection to send or receive bitcoin,” Ngako said.
KG calls its Lightning Wallet “Machankura” – South African slang for money. While most Lightning transactions today require a smartphone and data, Ngako’s service integrates Lightning over Unstructured Supplementary Service Data, or USSD, the protocol that mobile money runs on. (It’s similar to HTTP, or HyperText Transport Protocol, the protocol on which the web was built.)
Ngako tells CNBC that he currently has around 3,000 users in eight countries, with a concentration in South Africa, Uganda, Kenya and Nigeria. Its home market of South Africa has strict rules on currency exchange, making its product even more attractive to some users looking to transfer their money abroad.
“The South African Reserve Bank regulates the cross-border flow of capital – including currency exchanges – to and from South Africa. You need some form of authorization to convert ZAR into foreign currency,” Ernest Marais, a partner at the Johannesburg law firm, told Tabacks.
KG’s Machankura is compatible with every Lightning wallet on the planet. In practice, this means that someone with the Cash App in San Francisco, for example, could instantly send Bitcoin via Lightning to the phone number of someone with a dataless, basic phone who lives in a remote part of Uganda.
Ngako’s project faces some risks, including regulatory backlash.
Marais tells CNBC that the Reserve Bank of South Africa views the cross-border flow of cryptocurrency as illegal and criminal, though crypto regulation remains largely nebulous across most of the continent.
“All African central banks except Central African Republic have announced that they do not issue bitcoins and therefore do not regulate them,” counters Ngako, adding that a bitcoin transaction cannot be considered a cross-border exchange as bitcoin transactions are not performed within the institution regulated by the central bank.
But the rules are confusing for everyone involved.
“The actual location of crypto assets is an anomaly. At what point are they leaving the country?” Marais continued.
Ultimately, Ngako believes that once Machankura begins to scale, it will be a major driver of Bitcoin adoption across the continent. To this end, Ngako collects money and builds – a common saying among local entrepreneurs in Accra.
As Dorsey said in Africa, “Increasing mass adoption will, I believe, deprive governments of all oxygen from trying to control behavior through financial repression.”
“So what do we do? We build, we build, we build, we build, we build, they can’t stop us. And that’s important.”