One of the most admirable of cryptocurrency’s many high promises is the possibility of bringing financial inclusion to disadvantaged people.
The Nairobi-based Kotani Pay cryptocurrency payments firm wants to make it simpler for the sizable unbanked communities in Africa to send money across borders.
A use case that affects the lives of hundreds of millions of people, including those in Kenya, Ghana, Zambia, and South Africa, is the focus of the two-year-old firm. The firm intends to further expand to Rwanda, Senegal, Ivory Coast, Tanzania, and Nigeria after closing a $2 million pre-seed investment round headed by P1 Ventures with participation from a variety of investors, including DCG/Luno and Flori Ventures.
The Sub-Saharan area will reportedly receive remittances of $55 billion this year, according to the World Bank. According to statistics from the UN, remittances can make up as much as 20% of the GDP in some African nations.
Remittances face a formidable obstacle: exorbitant transfer fees. This is despite the fact that they play a crucial role in the African economy. The cut can reach 20% of the transmitted amount in some nations. The excessive charges are the result of a combination of problems, including a poorly developed financial system, knowledge asymmetry, and currency fluctuations. Families at home frequently lack bank accounts and even the proper identification to obtain one.
Kotani suggests using blockchain to ease remittances to Africa in light of these difficulties with the conventional way of money transfer. In particular, it uses stablecoins, which are cryptocurrencies tied to fiat currencies like the USD, to send money abroad at a fraction of the price of the traditional method.
Then, Kotani has developed a middleware connecting blockchains to local payment networks, many of which allow users to send money on feature phones without the internet using a communication protocol called Unstructured Supplementary Service Data (USSD), so that they can actually cash out the stablecoins they hold in their mobile wallets and pay for things in local currencies, as this demo shows:
By linking the mobile money APIs and the smart contracts of cryptocurrency platforms, Kotani is providing its technology as a B2B solution. Yellowcard, DCG, Fonbank, Celo’s Valora, Mercy Corps, UNICEF Crypto Innovation Fund, and Stellar are a few of its principal cryptocurrency partners.
In addition, Kotani customers can “on-ramp,” or change their local currencies into US dollars. This feature is now targeted more at enterprises but, according to the founder, it might be made available to retail consumers in the future with the right licensing. The co-founder claims that a “network of liquidity providers through partnerships with local forex services and money transmitter operators, from whom we source local USD,” makes the process possible.
The majority of transfers made on Kotani—$23 million in total—are inward payments. The platform’s average transaction size is $150,000 due to its enterprise focus. According to Macharia, Kotani, like other suppliers of payment infrastructure, makes money through an interchange fee, which amounts to about 1% of gross transaction volumes on average.
After purchasing Nigerian firm Fuhlstack, the startup plans to launch further products, such as Reconset, a Reconciliation-as-a-Service offering, and Money Ledger, a Ledger-as-a-Service solution. Lemuel Okoli, the creator of Fuhlstack, joins Macharia and Samuel Kariuki as co-founders of Kotani Pay.
Kotani is probably already on the radar of authorities because of his business, which has the potential to skew the balance of foreign exchange reserves. The central banks of the nations in which the company conducts business, according to Macharia, “monitor these transactions as they oversee all termination points to banking and mobile money services.”
He added that “the central banks are actually getting excited about some of these use cases and are getting involved as they develop Central Bank Digital Currencies.” “We either work directly with the local mobile money operators or ride on the charter of regulated partners to ensure that our operations are compliant,” he said.
Rapid changes in the legal environment for cryptocurrencies are eroding investor trust in some countries, like the U.S., while fostering it in others, like Asia. Overall, Macharia is “positive” about the changes in regulation taking place on the continent.
With Botswana, Mauritius, and South Africa all announcing Virtual Asset Service Provider Licenses that regulate Digital Asset Fintechs, we are seeing great advances in the southern region of Africa. Another encouraging step is the passage of MiCa by the European Union parliament, which regulates stablecoin issuers, on- and off-ramps, and exchanges.
Based on our interactions with Kenyan authorities like the Capital Markets Authority, we think additional markets like Kenya, Ghana, and Nigeria will eventually follow up.