Ethiopia, with a population of 123 million, is the second most populous country in Africa, and its relationship with cryptocurrency has been continuously evolving.

Written by: Shogo Ishida, Yosuke Yoshida

Translated by: TaxDAO

Ethiopia, with a population of 123 million, is the second most populous country in Africa, and its relationship with cryptocurrency has been continuously evolving. The country initially took a cautious stance, but later shifted from a complete ban to cautiously exploring the potential benefits of cryptocurrency and blockchain technology. This shift reflects the global trend of governments striving to address the disruptive force of cryptocurrency.

Key points:

• Ethiopia has shifted from banning cryptocurrency to regulating it

• Bitcoin mining is becoming increasingly active, with miners flocking to Addis Ababa

• Blockchain is helping Ethiopia combat fraud in the education sector

• Due to a favorable fintech environment, Ethiopia's mobile payment industry continues to grow and expand

Strategic Shift: Regulating Cryptocurrency

In June 2022, the National Bank of Ethiopia (NBE) issued a statement declaring cryptocurrency transactions illegal. The central bank stated that "legal measures" would be taken against anyone found using cryptocurrency for transactions in the country. The bank warned in a statement, "The birr is the only legal tender in Ethiopia, and all financial transactions should be conducted through it."

The central bank cited concerns about financial instability, money laundering, and the lack of regulation of crypto assets. This position aligns with the anxieties of many central banks in Africa, all of which are concerned that cryptocurrency may disrupt their national currencies and centralized financial control.

However, in a surprising move in August 2022, the Ethiopian government issued a signal of policy change. The Information Network Security Agency (INSA) issued an order requiring all cryptocurrency operators to register with them. INSA stated, "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 and protect citizens from potential risks, marking a shift from a complete ban on cryptocurrency to a more nuanced regulatory approach.

The reasons behind this shift can be attributed to the continued growth of the global cryptocurrency market, indicating that it will persist. The Ethiopian government also recognizes the potential benefits of cryptocurrency, such as facilitating cross-border payments and fundamentally changing digital identity. Currently, INSA and other entities are developing guidelines aimed at comprehensive supervision of the operational, economic, and environmental impacts of the crypto industry.

Although Ethiopia has not yet enacted laws allowing the use of cryptocurrency, the adoption of cryptocurrency is increasing significantly as individuals engaged in cryptocurrency activities actively expand their domestic businesses. Ethiopia has over 1.8 million cryptocurrency users. Interest in developing regulatory frameworks to ensure stability and consumer protection measures is rapidly growing in both the private and government sectors. Developers, entrepreneurs, and government officials are becoming increasingly curious about the underlying technology behind Bitcoin and its potential applications beyond finance.

Ethiopia's shift from banning cryptocurrency to cautiously exploring its potential use cases demonstrates its journey in addressing the complexity of rapid technological development. It highlights the need for a nuanced approach to strike a balance between innovation and protecting citizens and maintaining financial stability.

Ethiopia recognizes the potential of blockchain as a foundational technology. Blockchain provides a secure, transparent way of recording transactions, with the potential to fundamentally change industries such as supply chain management and land registration. This recognition has sparked interest in exploring blockchain applications without necessarily embracing cryptocurrency itself.

Student Digital Identity Project: Africa's Best Blockchain Use Case

Education fraud has long been a widespread problem in Ethiopia, undermining the integrity of qualifications and eroding trust in the education system. Fake diplomas, forged transcripts, and fraudulent certifications have affected the country's education environment, posing significant challenges to employers, academic institutions, and students. To address this trend, the government signed a cooperation agreement with the research and engineering company Input Output Global (IOG) in 2021 to implement a student digital identity program for over 3,000 schools with the support of the Cardano blockchain.

The goal of the agreement between IOG and the Ethiopian government is to create a national database of student and teacher certificates using a decentralized digital identity solution. "Deploying this technology in the education sector is very appropriate, as per the Prime Minister's comments on these issues," said John O'Connor, IOG's Africa business director. The project targets a large number of primary and secondary school students. By digitizing education records and storing them on a blockchain-based platform, Ethiopia can eliminate the risk of tampering or forgery, ensuring the authenticity of qualifications. This not only helps protect the value of legitimate certificates but also provides a reliable means for employers and academic institutions to verify individuals' educational backgrounds.

One key component 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 encrypted and signed by the issuing institution, making them tamper-proof and easy to verify.

Furthermore, the use of blockchain technology ensures secure storage of education records and restricts access to authorized parties, protecting the privacy of student data. This addresses common issues of data leaks and identity theft in traditional paper-based systems.

The implementation of Ethiopia's digital project has made significant strides in combating education fraud. By digitizing education records and making them easy to verify, the country has significantly curbed the proliferation of fake diplomas and forged transcripts. This has enhanced the credibility of Ethiopia's education system and increased the value of obtaining qualifications in the country.

Additionally, Ethiopia's digital project enables employers to access the latest accurate information about job seekers' educational backgrounds, allowing them to make more informed hiring decisions. This helps improve the overall quality of the workforce and promotes the country's economic growth.

These efforts led the World Bank to approve a $350 million comprehensive financing package in December to support Ethiopia's digital identity authentication work for 90 million Ethiopians.

Large Number of Bitcoin Miners Flocking to Addis Ababa

Addis Ababa, the capital of Ethiopia, has abundant cheap electricity supply and relatively low operating costs, making it an attractive destination for Bitcoin miners seeking to leverage these favorable conditions.

Ethiopia has a generating capacity of approximately 5,200 megawatts, primarily from hydroelectric power (accounting for about 90% of total generation). The remaining 10% comes from wind and thermal energy. Additionally, Ethiopia is in the final stages of constructing the Grand Ethiopian Renaissance Dam (GERD), with an expected capacity of 5,150 megawatts. The abundant renewable energy makes electricity cheap and plentiful, creating an ideal environment for energy-intensive activities like Bitcoin mining.

The allure of Bitcoin mining lies in its potential for substantial returns. Miners who successfully solve complex mathematical problems and validate transactions receive new Bitcoin rewards, providing them with lucrative income sources.

This economic incentive has attracted a diverse range of participants, from individual enthusiasts to large-scale mining companies. Bitcoin mining requires significant electricity consumption, making access to cheap electricity a crucial competitive advantage. This trend has seen a sharp increase over the past two years, with established mining companies setting up factories in Addis Ababa, and individual miners viewing Ethiopia as a more profitable alternative to traditional mining centers such as China, Kazakhstan, Canada, and Russia.

The number of Bitcoin miners in Addis Ababa, especially those from China, has surged, 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 Electric Power Corporation has reached power agreements with 21 Bitcoin mining companies, 19 of which are Chinese companies.

Since 2022, Ethiopia has allowed Bitcoin mining, primarily because these companies pay for their electricity consumption in foreign currency. Over the past decade, the country has strengthened its relationship with China. Notably, many Chinese companies have been involved in the construction of the $4.8 billion dam, and Bitcoin miners are accessing power from the dam.

In February of this year, the Ethiopian government's investment arm, the Ethiopian Investment Holding (EIH), signed a $250 million agreement with Center Service PLC, a subsidiary of the Hong Kong-based West Data Group, to conduct Bitcoin mining operations. The agreement also involves the construction of a large data center to manage cryptocurrency mining and artificial intelligence training activities.

M-Pesa Achieves Significant Growth in Ethiopia

For decades, Ethiopia has been working to address limited financial inclusion, which has hindered economic progress and stifled opportunities for millions of people. The country's banking infrastructure, with physical branches primarily concentrated in urban areas, has failed to reach the majority of the population, especially those residing in rural and remote areas. However, the emergence of mobile payments is reshaping this landscape, narrowing the gap between traditional banking services and the unbanked population.

In August of last year, benefiting from a favorable fintech environment, the Ethiopian government, through a regulatory framework aimed at promoting innovation and technological advancement, granted a license to the Kenyan mobile money platform M-Pesa to enter the Ethiopian market.

M-Pesa is eager to leverage the untapped market potential in Ethiopia and continues to expand its reach. Its network currently 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 customers and 4.3 million 90-day active customers, and has integrated services with 9 banks.

While the local telecom company Ethio Telecom operates its own mobile payment service, Telebirr, with over 34 million users, M-Pesa's innovation will further promote the adoption of cryptocurrency in the country. M-Pesa has allowed online merchants to buy and sell cryptocurrencies and stablecoins on major cryptocurrency exchanges Binance and Paxful.

Ethiopians familiar with using M-Pesa for daily transactions can easily adapt to buying and selling cryptocurrencies on similar platforms. This reduces the learning curve and increases the comfort level of those considering cryptocurrency. M-Pesa enables fast and easy mobile remittances. Integrating cryptocurrency buying and selling into the Ethiopian M-Pesa platform can create a seamless and convenient user experience for Ethiopians entering the cryptocurrency space.

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