Among the many lofty promises of cryptocurrencies, one of the most laudable is its ability to bring financial inclusion to underserved users. Based in Nairobi Kotani Pay is a cryptocurrency payments startup with a vision to make cross-border money transfers easier for Africa’s large, underbanked population.
The two-year-old startup is targeting a use case related to the livelihoods of hundreds of millions of people including Kenya, Ghana, Zambia and South Africa. The startup, which has closed a $2 million pre-seed funding round led by P1 Ventures, with participation from a number of investors including DCG/Luno and Flori Ventures, plans to expand into Rwanda, Senegal, Ivory Coast, Tanzania and Nigeria.
According to the World BankSub-Saharan Africa is expected to receive an estimated $55 billion in remittances this year. In some African countries, remittances represent up to 20% of GDP, according to statistics from the Organization for Economic Cooperation and Development. United nations.
Despite their key role in the African economy, remittances face an insurmountable challenge: high transfer fees. In some countries, the discount can be up to 20% of the transferred amount. A number of factors have led to the high costs, including an underdeveloped banking system, information asymmetry, and currency volatility. In many cases, families at home do not have bank accounts or even official IDs to open.
Recognizing these drawbacks in the traditional money transfer method, Kotani proposes using blockchain technology to facilitate money transfers to Africa. Specifically, it exploits stablecoins, which are cryptocurrencies pegged to fiat currencies such as the US dollar, Transfer money internationally At a fraction of the costs of the old method.
Then, in order to cash out the stablecoins a person holds in their mobile wallets and pay for things in local currencies, Kotani built a middleware that connects the blockchain to local payment networks, many of which allow users to send money on feature phones without the need for the Internet using a connection. Protocol called Unstructured Supplemental Service Data (USSD), as shown in this demo:
Kotani offers its technology as a B2B solution, connecting smart contracts to cryptocurrency platforms on the one hand and mobile money APIs on the other. Its major cryptocurrency partners include Yellowcard, DCG, Fonbank, Celo’s Valora, Mercy Corps, UNICEF Cryptocurrency Innovation Fund, and Stellar.
Kotani also allows users to “convert” or convert their local currencies into US dollars, a solution designed specifically for businesses for now but could be open to retail users in the future with the required licenses, the founder said. This process is enabled by “a network of liquidity providers through partnerships with local forex services and money transfer operators from whom we source local US dollars,” according to the co-founder.
Most of the transfers made on Kotani — $23 million worth so far — are inbound payments. Due to its enterprise focus, the platform has an average transaction size of $150,000. Like other payment infrastructure providers, Kotani monetizes through interchange fees, which average about 1% of total transaction volume, according to Macharia.
The startup is set to offer other products including Reconset, a reconciliation-as-a-service offering, and Money Ledger, a Ledger-as-a-service solution, after acquiring Fuhlstack, a Nigerian startup. Fuhlstack founder Lemuel Okoli joins Macharia and Samuel Kariuki as co-founders of Kotani Pay.
Encryption regulation
And with the business potentially tipping the balance of foreign exchange reserves, Kotani is likely already on the radar of regulators. Macharia acknowledged that central banks in the countries where the company already operates “monitor these transactions because they supervise all banking and mobile money termination points.”
“We either work directly with local mobile money operators or rely on charter regulated partners to ensure the compliance of our operations,” he continued, adding that “central banks are already excited about some of these use cases and are starting to acquire them.” They participate in the development of central bank digital currencies.”
The regulatory landscape for cryptocurrencies is changing rapidly, weakening investor confidence in some regions such as the United States and creating positive sentiment in others, such as Asia. Overall, Macharia feels “positive” about regulatory developments on the continent.
“We are seeing positive developments in the southern part of Africa where Botswana, Mauritius and South Africa have launched Virtual Asset Service Provider licenses that regulate digital asset fintechs,” he said. MiCa passed by the European Union Parliament is another positive development as it regulates stablecoin issuers, on-ramps. And stock exchanges.
“Based on our engagement with regulatory bodies in Kenya such as the Capital Markets Authority, we believe it is only a matter of time before other markets such as Kenya, Ghana and Nigeria catch up.”