Former FNB chief executive officer (CEO) Michael Jordaan knows a thing or two about financial services, so his angel investments in the fintech space are worth paying attention to. Among other things, he backs South African crypto startups, and says he sees increasing value in the space.
“As in the rest of the world, previously most of the local crypto scene was focused on rapid price appreciation and the resultant speculation. Since the bubble has burst there is now appreciation for the real work of finding use cases for blockchain beyond mere payments,” he told Disrupt Africa.
“The opportunity is to find any business model based on decentralised processing principles that is significantly better than the status quo – which relies on trusted intermediaries but costs a lot. It’s still early days.”
Early says indeed, but Jordaan feels the startups operating in this space right now are more serious than their predecessors.
“The cost of setting up a properly functioning trading platform can be significant and my sense is that the fly-by-night operators have largely withdrawn,” he said.
Jordaan has invested in South African crypto exchanges DCX and VALR, early movers in a nascent but promising scene. These are just two such businesses to have raised funding in South Africa recently, with the likes of OVEX, Coindirect and Revix also securing investment. Such developments speak to the vitality of a local space that also includes more global player Luno.
VALR allows customers to buy, sell, store and transfer cryptocurrencies seamlessly and securely, offering a wide selection of digital assets. Jordaan contributed to its recent US$1.5 million funding round, and CEO Farzam Ehsani told Disrupt Africa he was optimistic over the prospects of South Africa-based crypto exchanges and other startups in the space.
“The crypto scene is still nascent around the world, but South Africa has been punching above its weight in the global arena for several years now. We are home to some of the leading public blockchain developers in the world and have world-class crypto companies here,” he said.
It is the right time to set about building platforms such as VALR’s, he said.
“Just over a year ago, there were a large amount of people and companies – from startups to established businesses – that had announced plans to enter the crypto space to become the go-to trading platform,” said Ehsani. “Since then, cryptocurrency prices have declined and we’ve seen many of these plans disappear. However, I believe that this is the time to be building as interest in this asset class will no doubt resurge soon. The asset class and technology is too powerful to wither away.”
As Jordaan says, what those platforms are used for exactly may prove key, however. Nicholas Haralambous is chief operating officer (COO) and co-founder of Coindirect, which is focused on utility.
“If you can answer the question “how is cryptocurrency or blockchain technology useful day-to-day?”, then I think you have an opportunity,” he said.
For Haralambous, South Africa is a good test market for crypto businesses due to the availability and low cost of talent, as well as South Africans’ hunger for new, innovative technologies and the prevalence of mobile devices and high-speed mobile internet. Sean Sanders, co-founder of recently-launched and recently-funded exchange Revix, shares this view, but says it goes further.
“What really differentiates South Africa is the relatively low-cost requirements to build online platforms and its supportive regulatory approach to cryptocurrency service providers. There are very few other places on earth where you can sandbox a cryptocurrency project in a diverse market for a global audience for less than US$200,000,” he told Disrupt Africa.
Yet it is still not where the real profits are to be made in the crypto space, according to Haralambous, who said though the local sector has a “land grab feeling” he was not sure it was a race anyone was necessarily going to win.
“There are already at least five exchange platforms vying for a small market of local traders with very little to differentiate themselves from one another. I believe South Africa is a small and interesting test market but not one that is going to scale to make any exchange a fortune of money,” he said.
Why? Stakeholders note a handful of challenges. Though Sanders noted a supportive regulatory approach, others are not so sure.
“South Africa is a difficult place to run a crypto business at the moment as the regulatory framework, specifically exchange control regulations, is restrictive,” Ehsani said.
Earle Loxton, founder and CEO of DCX, pinpointed cost as a barrier to significant uptake.
“I think South African exchanges are still quite expensive compared to the rest of the world. Some South African exchanges charge one per cent or more, when a typical Euro exchange will charge 0.2 per cent or less,” he said. “The challenge is the liquidity – it doesn’t matter if you charge zero per cent if you don’t have liquidity on your bourse.”
Sanders thinks South African exchanges must go to greater lengths to differentiate themselves from global players.
“While we are seeing lots of new companies rushing to establish themselves as the go-to platform, they are also battling to compete with the larger incumbents – think Binance or Coinbase – who have a steady hold on this market,” he said.
“Remember crypto doesn’t have borders, so the biggest and most ubiquitous exchange in one country or region may still be a minnow on the global stage. I believe network affects will play out and the smaller entrants who can’t successfully differentiate themselves will fail or be acquired.”
So major opportunities, but big pitfalls as well. The “land grab” being witnessed in the South African crypto space is attracting heavyweight attention, but the future prospects are far from clear.