Inside Kotani Pay’s plan to bridge Africa’s financial divide through cryptocurrency

Kotani Pay, a Kenyan crypto payments startup, recently raised $2 million in a combination of a pre-seed round and an extension led by P1 ventures, Flori VC, Digital Currency Group, Peer VC and Adaverse. 

The startup aims to bring financial inclusion to African users by offering both on-ramp and off-ramp services, making cross-border remittances easier for the large, underbanked population. 

 Driving the news  

• Felix Macharia, co-founder of Kotani Pay, told Mariblock that some funds were used to acquire Fuhlstack, a Nigerian blockchain back-end provider. 
• The company also plans to use the funds to expand into other African countries, including Tanzania, Rwanda, South Africa and Francophone Africa. It also wants to obtain licensing in South Africa, Ghana and Zambia.  
• The startup has had at least ten funding rounds since its launch in 2020, including a $100,000 Stellar Community Fund (SCF) grant. 

What was said  

Wuri Ventures, a participant in this round of funding, in a statement, said:  

“This fundraising will help to continue their aggressive expansion, consolidating their lead as the only USSD-based blockchain wallet with cash in and out in the largest number of African countries.” 

The big picture  

A significant issue in the African financial sector is the high cost of sending money across borders. In 2022, the average fee for international money transfers within Africa was a staggering 8.01%, the highest in the world. This places a significant financial burden on those who need to send or receive money internationally. 

Furthermore, many parts of Africa face limited internet access. In Kenya, for example, only 32.7% of the adult population has access to the internet. This lack of connectivity hinders people’s access to essential online financial services and participation in the digital economy. 

 To address this, Kotani Pay employs familiar interfaces like USSD, making interactions with blockchain wallets as straightforward as everyday tasks such as buying airtime or accessing Telco services.  

The company utilizes blockchain protocols for secure and swift fund storage and transfer in its strategy to enable cross-border transactions in Africa.

Macharia said: “We leverage Blockchain protocols for storage and transfer of funds. Today’s blockchain protocols are the fastest and safest ways to send money across the world for a fraction of the cost; we leverage them for our back end. Stablecoins add a layer of reliability and convenience because they are pegged to real-world assets, e.g., the dollar.” 

Despite Kenya being recognized as a global leader in cryptocurrency adoption, the Central Bank of Kenya (CBK) has raised concerns, contending that crypto assets pose a threat to the country’s financial stability. Consequently, this stance has led to a series of regulatory measures aimed at curtailing the cryptocurrency industry in the nation. 

One significant development in this regulatory landscape is the imposition of a 3% tax on the transfer or exchange of digital assets, which was enacted into law on September 1 under the Finance Amendment Act 2023. This digital asset tax has created additional financial burdens for participants in the cryptocurrency space. 

In light of these challenges, Co-founder Felix Macharia, in an interview with TechCrunch, acknowledged that the evolving regulatory environment has cast a pall over investor confidence within the Kenyan crypto sector. However, he also expressed optimism regarding the broader cryptocurrency developments across the African continent, hinting at the potential for positive changes that may ultimately influence the Kenyan crypto landscape. 

“We are seeing positive developments in the Southern part of Africa with Botswana, Mauritius, and South Africa all launching Virtual Asset Service Provider Licenses that regulate Digital Asset Fintechs.

MiCa passed by the European Union parliament is another positive development as it regulates stablecoin issuers, on ramps and off ramps and exchanges.” 

Zoom out  

Kotani Pay is not the first entrant into Neo banking in Kenya. Notably, Vodafone and Safaricom pioneered the space with the launch of M-Pesa in 2007, introducing a mobile phone-based money transfer service that has since become an integral part of Kenya’s financial landscape. 

Furthermore, within the Kenyan crypto ecosystem, Kotani Pay faces competition from Machankura. This company also facilitates the use of Bitcoin via basic mobile phones, even in the absence of internet connectivity. Founder Kgothatso Ngako expressed reservations about Kotani Pay’s stellar-based system, deeming it to have inherent flaws. 

He said: “If you are running a solution on Stellar, then you’re firstly promoting Stellar and then promoting the solution. People have heard about Bitcoin even in the most remote places in Africa.

Also, I don’t think there’s been this overall optimization for payments in the other cryptocurrencies. Everything is an on-chain transaction. Very few have a second layer implementation that is as widely adopted as the Lightning Network.”