The State of Crypto in Nigeria — A Special Report on Crypto Adoption Rate, CBDC and Crypto Ban.
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The State of Crypto in Nigeria — A Special Report on Crypto Adoption Rate, CBDC and Crypto Ban.

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In this special report, CoinMarketCap Alexandria venture to Nigeria — finding out how the high crypto adoption rate, 11th globally, came about and the development of the e-Naira since launch.

The State of Crypto in Nigeria — A Special Report on Crypto Adoption Rate, CBDC and Crypto Ban.

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Nigeria has an unofficial motto: “Naija no dey carry last.” It means Nigeria never comes last, and it speaks to the collective attitude toward life that Nigerians share: a fierce determination to succeed. It’s a motto that’s shaped Nigeria’s modern-day culture, and has no doubt contributed to its citizens’ rapid adoption of all things Web3.

State of Nigeria’s Economy: High Inflation and Weakening Currency

Since declaring independence from Britain in 1960, after nearly a hundred years of colonial rule, Nigeria has become the sixth most populous country globally, and the most populated country in Africa. The country’s $440bn economy is the largest in Africa, and it was one of the fastest growing economies in 2019. Nigeria’s economic makeup has changed considerably over the past generation; its service, financial, and tech sectors have grown, which has led to more citizens moving to cities for jobs.
Yet despite its wealth, relative to other African countries, Nigeria’s economy ranks 26th worldwide when measured by GDP, and 162nd when calculated by GDP per capita (which refers to the average per-person output in Nigeria). Indeed, the number of poor Nigerians is predicted to reach 95 million in 2022 — nearly 50% of the population — and four in ten Nigerians already live below the national poverty line, according to world bank estimates.
Several factors contribute to Nigeria’s high poverty rates today. There was the oil price collapse in 2014 which led to the country’s first recession in 25 years, thanks to the country’s heavy reliance on oil exports. The Nigerian economy has also suffered from high inflation — hitting a 17-year high of 20.8% — compared to 8.2% for the United States. Additionally, Nigeria’s currency – the Naira – has depreciated by 10.6% annually on average since 1973, which has worsened poverty rates across the country and exacerbated its already stubbornly high inflation.

When asked why the Naira was continuously deprecating, Nigeria’s central bank governor Godwin Emefiele explained that because Nigeria’s markets are so reliant on oil exports, whenever there’s a drop in crude oil prices, foreign investors pull out of the markets. And because crude oil sales account for about 90% of Nigeria’s incoming foreign currency, when foreign investors pull out, there follows a drop in the supply of foreign exchange into the country. Whether oil prices are as important as the governor makes them out to be is debatable, but one thing’s for sure: many of Nigeria’s biggest problems relate to its national currency.

Given the impact of the Naira’s weakening, and the country’s intractably high inflation, is it any wonder that Nigerians now use crypto for cross-border trade and to protect their wealth?

Source: qz.com

It should come as no surprise that as of July this year, according to a report by Morning Consult, one in two Nigerian adults reportedly trade crypto at least once a month — the highest proportion of any population on earth. Moreover, Nigeria was ranked sixth on the 2021 crypto adoption index (although it did slip to 11th in the 2022 edition). But besides protecting their wealth from currency depreciation and inflation, what other reasons might explain Nigeria’s positive attitude toward cryptocurrencies?

Why the High Crypto Adoption Rate in Nigeria?

That most Nigerians lack access to financial services is one explanation, according to analysis from KuCoin, a popular cryptocurrency exchange. Fewer than one in four Nigerian adults have a bank account, according to a 2018 survey carried out by EFINA, although more recent data shows more citizens are opening bank accounts. Additionally, there’s still 64 million people unbanked in Nigeria, according to the World Bank, and Nigeria is one of seven countries whose unbanked citizens constitute half of the total unbanked population worldwide.
The government’s ban on certain industries paying for certain imports using foreign currency (they mainly pay with US dollars) left some businesses with no choice but to pay for their products with crypto. The ban came in several stages starting in 2015, and in 2019 Nigeria’s President Muhammadu Buhari extended it to include some additional goods he felt should be produced in Nigeria rather than imported. He was quoted in a statement telling the central bank “don’t give a cent to anybody to import food into the country.” This line of thinking — that people shouldn’t pay for imports using foreign currency — is consistent among other countries where crypto has been quickly adopted, like Pakistan, ranking sixth in global crypto adoption rates.
Like other countries with low GDP per capita, plenty of Nigerians move abroad to study and find better paying jobs, which allows them to send money home in the form of remittances. Data from Nigeria’s central bank shows that remittances have grown consistently over the past decade, rising 2.6% to $5.03bn in the first quarter of 2022. While the government encourages its expats to send money via commercial banks, many Nigerians are aware that the banks’ remittance fees — an average of 7.07% in 2020 according to the World Bank — eat into their payments, and that they could potentially keep more of their money by using crypto instead.

We should also consider crypto’s usefulness in getting money to people in need — whether they are in a humanitarian crisis, or have their accounts sanctioned by the state.

In October 2020, the Nigerian government was rocked by some of the biggest protests in decades. The protestors marched against police brutality and the notorious SARS (Special Anti-Robbery Squad) police squad, which had a long record of abusing Nigerian citizens. Water cannons and tear gas were used to beat back the protestors — more than 50 of whom were killed, and dozens of members of civil society and protest groups had their bank accounts frozen. In response, and with some help from famous crypto advocates like Jack Dorsey, the #EndSARS supporters got funds to the protestors using Bitcoin, helping them to avoid the sanctions and continue their protests.
That these protesters could use cryptocurrencies to circumvent sanctions sent shockwaves through the Nigerian political class. One crypto platform operator spoke to the Guardian anonymously and said:
“They know they can’t really stop it. It’s out of their control, and what scares them is they are not used to being in this position.”

Scared they were, but they quickly responded by banning crypto entirely — or so it seemed.

Nigeria Central Bank Bans Crypto?

In February 2021, the Nigeria central bank released a letter to all banks and financial firms who operate in Nigeria which cautioned them against using cryptocurrency, and reminded them that “dealing in crypto currencies or facilitating payments for cryptocurrency exchanges is prohibited.” The letter also asked all recipients to identify persons operating crypto exchanges and ensure their accounts are closed immediately.
This letter understandably led many journalists to believe (and report) that crypto was entirely banned in Nigeria. However, the central bank later clarified that its letter did not constitute a total ban, nor was it meant to discourage people from trading cryptocurrency. Instead, the bank argued, it was merely reiterating a pre-existing ban on banks facilitating crypto transactions that was implemented in 2017, and which was part of the government’s drive for Nigeria to become a cashless society.

Speaking at a seminar in the Nigerian capital, Abuja, central bank deputy governor Adamu Lamtek clarified further:

“What we have just done was to prohibit transactions on cryptocurrencies in the banking sector.”
Before the letter’s publication, Nigerians often bought crypto through legitimate commercial banks; doing so was considered the safest method by which they could use digital currencies. But when all of a sudden these banks couldn’t facilitate crypto transactions on their behalf, they were forced to rely on untrustworthy platforms to keep their businesses afloat. By using these dubious platforms, many people fell victim to scams and fraudulent schemes. Others thankfully discovered peer-to-peer platforms, which meant they could continue using crypto to import goods with an added bonus of not paying the banks any fees.

The e-Naira — Nigeria’s Answer to Crypto?

This series of events, in addition to the Naira’s continuous depreciation, inspired the Nigerian government to contrive a way for its citizens to gain all (or at least most) of the advantages from using blockchain and encourage greater use of the Naira. In the end, they decided to build a central bank digital currency, or CBDC, called the e-Naira.
CBDCs work similarly to cryptocurrencies in that they use digital ledgers (although not necessarily a blockchain) to record transactions. In a way, CBDCs are perhaps most similar to stablecoins because both are pegged to a fiat currency. You use them just like the cash on your credit card, only from an account that the central bank assigns to you. Despite their apparent similarities, it’s important to keep in mind that there are many differences between CBDCs and cryptocurrencies.

One key difference is that CBDCs are centralized, meaning they are controlled by a government or central bank; whereas cryptocurrencies are decentralized and therefore not under anyone’s control. And unlike the cash they represent, CBDCs don’t let you pay for goods and services privately; whereas cryptocurrencies are pseudonymous, which means your transactions appear under a pseudonym (usually your wallet address).

Some of these differences are cause for serious concern. Each and every CBDC transaction, for instance, leaves a digital fingerprint which the state can monitor, which means CBDCs don’t reproduce one of cash’s key benefits: privacy. In theory, the state could monitor which political party you pay membership to, which newspapers and books you buy, or even where you buy your coffee from, provided you pay for those goods and services with CBDCs.

The state could also prevent citizens from buying or selling certain items via the CBDC code itself; items that could, for instance, be used to protest against police brutality and oppression, or books that might promote different ideas than those the state approves of.

And lastly, some have expressed concerns that in times of economic uncertainty, people could move their money from traditional bank accounts and into CBDCs. This could create an e-run on the banks because only a fraction of bank deposits are backed by actual cash and eligible for withdrawal, thanks to the fractional reserve system the banks use today.

It wouldn’t be fair, however, to say that CBDCs like Nigeria’s e-Naira are entirely without merit. They could allow the central bank to airdrop money to individual citizens, or citizens of a certain demographic, or those who live in a certain area, without first ascertaining their bank details, which would be highly useful during financial crises or natural disasters. Additionally, CBDCs could compel the big banks to innovate more in the payments and current account sector, which they overwhelmingly dominate today with legacy infrastructure.

Overall, however, it should by now be clear that the e-Naira and every other CBDC are merely digital versions of the fiat currencies they supplement, only with a few crypto-like quirks mixed in with a lot of crypto-like marketing. They don’t offer any of the privacy benefits that cryptocurrencies do, nor do they protect their users — including Nigerians who use the e-Naira — from inflation or currency depreciation. And yet, these drawbacks did not dissuade Nigeria’s central bank from launching a CBDC in October 2021.

When Nigeria launched the e-Naira, it became the first African country, and the second country worldwide, to launch a CBDC. During the launch, $200 million worth of e-Naira was issued to an assortment of banks and financial institutions in order to encourage them and their customers to use the new CBDC. The central bank considered the launch a great success after 33 banks and 120 merchants registered with the e-Naira platform during the launch event. Shortly after the launch, President Buhari said e-Naira adoption could “increase Nigeria’s GDP by $29bn over the next 10 years.”
However, not everyone agreed that the e-Naira would solve the biggest issues that Nigerians faced. Because it’s pegged to the Naira itself, it’s unclear how or why an e-Naira would more effectively protect Nigerians’ wealth from inflation or currency devaluation than, say, stocks, bonds, gold, Bitcoin, Ethereum, or even a dollar-backed stablecoin like USDC. Another question that hasn’t yet been answered is: if nobody wants to buy Naira, why would anyone want to buy an e-Naira?

Future of Crypto in Nigeria

In spite of these problems, data gathered three months after the launch showed the e-Naira app was still downloaded nearly 700,000 times from 160 countries, and had supported 35,000 transactions. These figures, while somewhat encouraging, don’t actually paint a particularly successful picture when you consider the fact that in El Salvador, three million people downloaded the government’s Chivo app within a comparable timeframe. For context, El Salvador’s population is one thirtieth the size of Nigeria’s. Furthermore, after asking dozens of Nigerian business owners for their opinion on the e-Naira, Al Jazeera journalists discovered that most Nigerians they spoke to had never even heard of it.
So it seems that despite the Nigerian government’s attempts at enticing its citizens away from decentralized currencies through its CBDC, Nigerian citizens just aren’t that interested. In fact, crypto adoption has steadily ticked upwards across Nigeria despite the e-Naira’s release: KuCoin reports that 33.4 million Nigerians traded or owned crypto assets as of April 2022, in spite of the e-Naira’s launch and the restrictions on trading crypto.
And yet, in spite of Nigerians skirting sanctions and importing goods using cryptocurrencies, the Nigerian government has in fact warmed to the crypto space. Well, a bit. In early September, the Nigerian Export Processing Zones Authority — which regulates and operates free trade zones in Nigeria — began discussions with Binance about developing a dedicated free zone for blockchain and crypto firms, similar to Dubai’s virtual free zone. Although a deal hasn’t yet emerged, it’s a step in the right direction, and shows the Nigerian government is starting to get serious about becoming a major player in the Web3 economy.
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