Blockchain could unlock Africa's undeveloped derivative market

Support for a decentralised derivative platform could open financial opportunities beyond stock exchanges

The derivative trade market in Africa is still marginally small. Trading on futures has not broken the back of the stock and securities exchange, which remains centralised. This leaves out dozens of instruments that could be traded, unlocking the financial markets.

Fundamentally, derivatives get their value from the price of an underlying asset, such as oil and gas, gold, or stock indexes, currencies and interest rates. You either buy the right to purchase certain products in the future for an agreed price or buy the right, but not the obligation, to purchase or sell the underlying asset at a predetermined price. In some instances, contract buyers do not get to own the assets, but they can hedge off its future profitability.

South Africa has a vibrant derivative market, and Kenya is also mulling the introduction of a derivative exchange (although it aims to replicate the centralised securities exchange). Titled, NEXT, the derivative market under the Nairobi Securities Exchange (NSE) will allow members to trade Equity Index Futures and Single Stock Futures, but will still leave out instruments such as interest rates, price index and stock index.

No other country in Africa seems to have a bulging derivative market, in the end missing out on the tools that could grow financial markets. But with technology, this market could be launched much faster than before. Blockchain and its smart contract facet could enable individual companies to trade their instruments, bypassing centralised systems.

Smart contracts enable users to track and trade with the power of blockchain making it easy to audit prices, sellers and buyers in a single platform. With such a platform, the market for these traders is global.

A decentralised derivative platform demonstrates that blockchain can be used in trade beyond crypto-currency. African nations that are looking to start a derivative market could race ahead with forward looking technology.


To continue reading this article register now