New BTC Wallet Targets Unbanked Africa: What Are the Nuances?
The Machankura Bitcoin wallet enables users in Africa to store, send, and receive Bitcoin using a basic phone. However, mass implementation of this service may come with some drawbacks.
by Mona Hamdy, CSO, and Thomas Tang, senior investment associate, and Juan Aranovich, research analyst
Summary
The Machankura Bitcoin wallet is a new digital asset storage and transfer service that allows users to store, send, and receive BTC using phones that only have basic features such as sending and receiving calls and text messages.
Analog and digital primitive access to Bitcoin and other digital assets is not new, and this is not the first attempt at making Bitcoin accessible through other alternatives to smartphones and laptops. Developers have sent a Bitcoin lightning payment over radio waves, and there have even been attempts at creating physical currency of digital assets to allow for the same ease of use that fiat provides as lifeblood for many of the world’s cash-based emerging markets.
Advantages
One of the main benefits of the Machankura wallet is that it provides easy access to the world of Bitcoin and digital assets. This is particularly important in markets with high barriers to entry into crypto markets due to economic limitations or inadequate technological infrastructure. By enabling people to use Bitcoin through a simple-feature phone, the Machankura wallet helps to bridge the digital divide and provides greater financial inclusion.
Despite the fact that some of the earliest digital access and innovative crypto payment use cases originated in Africa, such as BitPesa, it still has some of the lowest internet penetration rates in the world, with most African countries falling below 29.5%. This is in stark contrast to the rest of the world, where internet penetration is enjoyed by approximately 65% of the population, according to the World Bank.
This highlights why Machankura's service could be valuable for African nations - the ability to access censorship-resistant money transmission over the GSM network alone is a game-changer.
The wallet could also help to stimulate economic activity and promote growth in the region by providing an alternative way to buy and sell goods and services.
According to Pew Research, 8 out of the top 10 countries with the fastest growing emigration are located in sub-Saharan Africa. Cross-border remittances, which involve sending money from one country to another, make up a significant portion of the GDP in these countries. However, these remittances often come with high fees, with an average of nearly 9% compared to the average of 7% in other countries.
Using blockchain technology to transfer funds across borders could potentially reduce these fees and provide a more efficient and cost-effective way to move funds.
Bitcoin also offers a censorship-resistant type of money, which could prove to be valuable in developing countries with inflated currencies and dysfunctional governments.
In many cases, traditional forms of money are subject to governmental control and can be easily censored or seized by authorities. This can make it difficult for people in developing countries to securely store and transfer wealth, leaving them vulnerable to financial repression and instability.
Disadvantages
There are also a number of drawbacks to consider when it comes to these kinds of custodial wallets. One issue is that the service only addresses interim infrastructural needs and doesn’t offer a viable, long-term solution. As the technological infrastructure of Africa grows stronger as many African nations eye broadband and terrestrial fiber optic network upgrades and explore cross-border infrastructure, some as early as 2025, this service may become less important.
We are not very far away from the day when every person on the planet will be connected to a smartphone and internet service. The International Telecommunication Union (ITU) estimates that approximately 5.3 billion people – or 66 percent of the world's population – are using the internet in 2022, up from only 16% in 2005. This suggests that internet adoption has been growing rapidly over the past few years, and it is likely that this trend will continue in the future.
Source: International Telecommunication Union
Fees
The fees charged by Machankura – 1 % – are higher than those charged by similar services in developed countries, which could be a problem for some users because it may make the service less affordable. In general, fees play a significant role in the cost of using a financial service. This is especially important for people in sub-Saharan Africa, where 41% of the population lives on less than $1.90 a day.
The higher fees of the Machankura wallet could be attributed to the service being one-dimensional and having less volume compared to similar services in developed countries. In this case, it makes sense for the company to charge a premium for its services, as it may not have the same economies of scale or resources as larger and more established companies.
However, as noted before, these fees are much lower than what’s being paid for remittances. It is also worth considering the possibility that if the Machankura wallet finds success in the African market, it could potentially attract competition from other companies looking to enter the space. This competition would drive down fees over time, as companies vie for market share and seek to offer the most competitive pricing to attract and retain customers.
Centralization Concerns
Another potential issue with the Machankura wallet is that it is custodial, so users do not own their private keys. This means that it has control over the assets and could potentially be vulnerable to hacks or other security breaches. In the event of such an incident, users may be at risk of losing their assets.
However, it is worth noting that custodians can also have their own security measures in place to protect user assets. For example, they may use advanced encryption and secure servers to store assets and have procedures in place to recover them in the event of a security breach.
While these measures may not offer the same level of security as self-custody, they can still provide some level of protection and an enhanced experience for users as they don’t have to worry about the complexities of managing their own keys.
Using custodial wallets in countries with authoritarian governments may incentivize the entities holding the keys to comply with the government to keep the service available in the country.
This could undermine one of the main benefits of Bitcoin, which is decentralized ownership of the tokens. In this scenario, the custodial wallet provider could be pressured to turn over user information or block certain transactions to comply with government regulations or sanctions. This would effectively centralize control over the tokens and undermine their censorship-resistant nature.
Regulation
The current state of crypto regulation in African countries varies widely.
According to the International Monetary Fund, 25% of African countries have regulations in place for crypto, while 50% have issued warnings or statements about the risks associated with crypto, and 25% have outright banned it.
As the crypto market in Africa grows, it is important for countries to establish clear regulations to ensure the safety and security of users, as well as to prevent money laundering and other illegal activities.
The lack of a regulatory framework could harm users significantly, especially when using a centralized financial service like Machankura.
One possible issue is the risk of fund mismanagement, as there may be fewer protections in place to ensure funds are being handled properly and in accordance with relevant laws and regulations.
Another potential pitfall is the risk of corruption, as a lack of regulation may create opportunities for individuals or organizations to engage in illegal or unethical activities using crypto. This could potentially undermine the integrity of the financial system and harm the overall economy.
As the use of Bitcoin and other digital assets becomes easier and more widespread in Africa, it is likely that regulators will begin to pay closer attention to the sector and may consider implementing new rules and regulations to govern it. The real impact of dumbphone wallets on the African market might not be ubiquitous adoption but rather the potential for increased regulation of crypto in the region.
Regulation could provide a sense of legitimacy and stability to the market, which could make it more attractive to investors and users. Nevertheless, it could also create additional barriers to entry and compliance costs for companies operating in the space, which could impact their ability to compete.
Machankura’s wallet operates via the USSD (Unstructured Supplementary Service Data) protocol, which is the primary communication mechanism between customers and mobile payment platforms in many large-scale mobile financial service deployments in developing countries. However, USSD is vulnerable to various types of threats, such as man-in-the-middle attacks using fake base stations, and signaling attacks using spoof requests.
Conclusion
The Machankura wallet can be seen as a step towards bringing stronger financial infrastructure to Africa by providing a way for people in the region to access Bitcoin. The service could encourage competition and further the development of crypto in the region.
It may not be a long-term solution due to its reliance on older technology and higher fees compared to similar services in other parts of the world. While it may provide an improved service in the short term, it is possible that better products will be available in the long run.
While the service isn’t necessarily ideal, it may be a convenient option for those who do not have access to the internet or a smartphone.
Related links
Broadman Commission (2019)
EIB (2022),
Ngari et al (2019)