Stablecoin Adoption and Challenges in Nigeria: A Deep Dive

Whenever you think of cryptocurrency, you probably picture the dramatic price swings of Bitcoin and Ethereum with lines going up and down. But a lesser-known player in the crypto world is quietly changing how we think about digital transactions: Stablecoins.

GIF depicting volatility. From GIPHY

In the Nigerian context, stablecoins have a unique and important role. As a country with an active crypto community and a complex economic situation, the adoption and regulation of stablecoins in Nigeria presents unique challenges and opportunities. With the fluctuation of the Nigerian Naira and restrictions on foreign currency, stablecoins offer a more stable store of value and means of transaction.

In this essay, I discuss the intricacies of stablecoin adoption in Nigeria as a key component of the crypto ecosystem which can drive the overall adoption of web3 technologies in Nigeria, contributing to the global decentralization movement.

Stablecoins. Photo by CoinWire Japan on Unsplash

What are Stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable value, often pegged to a traditional currency like the US dollar or a commodity like gold. This linking to other assets gives them stability, which is why they’re called “stablecoins”.

The Bridge Between Traditional Finance and DeFi

In the world of web3 and crypto, stablecoins play a crucial role in bridging the gap between traditional finance and decentralized finance (DeFi). They:

• serve as a bridge between fiat currencies (like the US dollar) and digital cryptocurrencies.
• offer users the best of both worlds: the speed and security of blockchain technology combined with the stability of traditional currencies.

Types of Stablecoins

There are four main categories of stablecoins, each with its own approach to maintaining a steady value:

• Fiat-Collateralized Stablecoins: These stablecoins are backed by traditional currencies like the U.S. dollar held in reserve. They maintain a direct correlation with fiat currencies, ensuring stability and reliability. Examples include Tether (USDT) and USD Coin (USDC).
• Crypto-Collateralized Stablecoins: Backed by other cryptocurrencies, these stablecoins use smart contracts to monitor the minting and burning of the coin, often with over-collateralization to counteract volatility. Examples include MakerDAO’s Dai (DAI) and Reserve Rights (RSV).
• Commodity-Collateralized Stablecoins: Pegged to tangible assets like gold or oil, these stablecoins provide a digital investment option for those looking to hedge against fiat inflation or invest in commodities. Examples include Tether Gold (XAUT) and Pax Gold (PAXG).
• Algorithmic Stablecoins: Relying on algorithmic mechanisms to control supply and demand, these stablecoins maintain their peg through smart contracts instead of reserves. Examples include Ampleforth (AMPL) and Ethena USDe (USDe).

How are stablecoins used?

Initially, stablecoins were used to buy other cryptocurrencies on trading platforms. However, stablecoins have expanded into various blockchain-based financial services, including:

• Affordable Digital Payments: Rapid transaction processing and minimal transaction fees make stablecoins an optimal option for sending funds globally.
• Savings and Staking: Users can hold stablecoins in interest-bearing accounts or participate in staking mechanisms to earn passive income.
• ICO and Token Sales: Investors can use stablecoins to participate in token sales without being exposed to the price volatility of other cryptocurrencies.
• Collateral in Loans: Stablecoins can serve as collateral for loans in DeFi platforms, providing liquidity to the system.
• Tokenized Assets: Stablecoins can be used to represent real-world assets on the blockchain, providing a way to digitize and trade physical assets.

The Nigerian context: what does the crypto landscape look like?

Nigeria is Africa’s most populous nation, with over 200 million people. It has seen a remarkable surge in the use of stablecoins driven by economic challenges, the Naira’s loss of value, and the need for financial stability. According to a report by Chainalysis, cryptocurrency exchanges recorded $60 billion in stablecoin transactions between August 2021 and July 2023.

The report also noted that the adoption of stablecoins and Bitcoin surged 9% in Nigeria, making it one of six countries worldwide where transaction volume jumped in that period.

Image from Chainalysis

Why are Nigerians using stablecoins more and more?

Since 2021, The adoption of stablecoins particularly Tether’s USDT by Nigerians has been driven by the following factors:

1. Currency Devaluation: The Naira has lost a lot of its value against the US Dollar, dropping by over 50% in the past 5 years. Nigerians have started using stablecoins to protect their money from the Naira’s falling value and keep their savings safe from inflation.
2. Accessibility and Adoption: It’s easy for Nigerians to access stablecoins through platforms like Binance , which offers a simple way to get USDT and other cryptocurrencies. The availability of peer-to-peer platforms and more businesses accepting stablecoins for payments have also helped increase their use.
3. Facilitation of Payments: Businesses in Nigeria are turning to stablecoins to make payments easier because they are easy to transfer, especially in areas where traditional banking is limited or difficult.
4. Financial Inclusion: The ability to transfer money internationally using stablecoins has empowered Nigerians to participate in the global digital economy and overcome traditional banking challenges.
5. Regulatory environment: Stablecoins have provided a way to get around regulatory barriers and access foreign currency more easily.

The Government’s Stance

The Nigerian Flag. Photo by engin akyurt on Unsplash

The Central Bank of Nigeria (CBN) and the Nigerian government have so far shown a mixed stance towards stablecoins and cryptocurrencies. While the CBN has been historically cautious and restrictive towards digital assets, there are signs that it is now more open to digital assets. The government recognizes the importance of stablecoins as a payment method and wants to create a legal framework for their use.

Nigeria has been active in defining its cryptocurrency regulation for the country’s tech-savvy and pro-blockchain youth population, who are eager to adopt digital assets. According to Coin Telegraph, The Securities and Exchange Commission in May 2022 published a comprehensive 54-page document titled “New Rules on Issuance, Offering Platforms and Custody of Digital Assets” on its website. It clarified and defined digital assets in Nigeria and iterated that all digital asset token offerings, initial coin offerings, and any other blockchain-based offerings within Nigeria or by Nigerian issuers or foreign issuers engaging Nigerian citizens will be regulated by the Nigerian SEC.

The CBN has taken the lead in adopting digital assets. It sees the potential benefits of stablecoins and is addressing their risks. The plan by Nigerian banks to launch a Naira stablecoin was first reported in December 2023.

The Naira Stablecoin’s Promise:

The proposed Compliant and regulated Nigerian Naira pegged Stablecoin, called the cNGN aims to address several longstanding economic challenges faced by Africa’s largest economy.

How It Works:

• The Naira stablecoin (cNGN) is backed 1:1 by Naira reserves held in designated commercial banks.
• The CBN okayed the Africa Stablecoin Consortium (ASC) to pilot this initiative. The ASC comprises top financial institutions, fintech innovators, and blockchain experts.
• cNGN was scheduled to go live on February 27, 2024.

Challenges and Considerations:

• Government influence: Potential concerns regarding government influence over the cNGN may impact its widespread acceptance, similar to the challenges faced by the eNaira.
• Competition with other stablecoins: The Naira stablecoin will face competition from other digital currencies, such as Tether (USDT), which is already widely accepted in Nigeria.
• The regulatory environment for cryptocurrencies is still evolving, and there is uncertainty about the specific regulations that will govern its operations.

As of the current writing, the cNGN stablecoin has yet to be launched, and its release date remains uncertain.

I think it is important to note that while the CBN’s approval of the cNGN Naira stablecoin project demonstrates a willingness to explore stablecoin solutions, the Nigerian government has always been cautious and even strict when it comes to allowing people to use cryptocurrencies in the country. So, even though they are testing the cNGN stablecoin, they are still sending mixed messages about how they feel about cryptocurrency use.

In fact, the CBN has taken a rather restrictive approach to cryptocurrencies in the past.

In February 2021, the Central Bank of Nigeria (CBN) banned commercial banks in Nigeria from engaging in any cryptocurrency transactions. The CBN, in a bid to protect citizens from black market criminal and fraudulent crypto activities, made it clear that the financial system and banking sector of Nigeria would not be linked to cryptocurrency trading.

That same month, the Central Bank of Nigeria issued a letter to all Deposit Money Banks (DMBs), Non-Bank Financial Institutions (NBFIs), and Other Financial Institutions (OFIs) operating in Nigeria, reminding them of a 2017 circular, in which the CBN had advised of the risks of transacting in cryptocurrency and instructed them not to ‘use, hold, trade and/or transact in any way’ in such currencies, pending substantive regulation or decision by the CBN.

However, in December 2023, the Central Bank of Nigeria lifted the restriction on crypto assets and urged banks to disregard the initial ban on cryptocurrency transactions.

More recently, there has been tension between the Nigerian government and Binance, a leading crypto exchange. This dispute arose when the Naira’s value dropped significantly against the US Dollar, leading Nigerian officials to accuse crypto trading platforms, particularly Binance, of manipulating the currency and influencing the market.

Binance refuted these allegations, stating that it had no part in the Naira’s decline and did not manipulate the market. The situation escalated with arrests, detainment, and a dramatic escape by Binance’s regional manager, Nadeem Anjarwalla, who fled Nigerian custody. In March 2024, Binance was charged with money laundering and tax evasion, with allegations of laundering $35 million in illicit proceeds on its platform.

The regulatory pressures and negative publicity surrounding the Binance case may hinder the growth of the cryptocurrency sector in Nigeria, further limiting opportunities for development in the digital asset industry.

I believe this high-profile dispute may be bad for the country’s crypto ecosystem, making it harder for legitimate businesses and innovators to thrive.

On the 7th of May, 2024, The Punch reported that The Federal Government, through the SEC, is set to delist the naira from all peer-to-peer crypto platforms as the government steps up efforts to tackle exchange rate manipulators and dollar racketeers.

It remains to be seen how the government will ultimately approach the regulation and adoption of stablecoins in the country.

But why is the government hesitant towards cryptocurrency adoption?

The Nigerian government’s apparent hesitation towards cryptocurrency adoption can be attributed to several factors.

If stablecoins become widely used in Nigeria, it could cause problems for the country’s financial system and the value of its currency. If many people and businesses start holding their money in stablecoins that are not controlled by the Central Bank of Nigeria (CBN) and are not tied to the Naira, it could make the CBN’s policies less effective.

The government is concerned that the increasing adoption of stablecoins pegged to foreign currencies could lead to a greater reliance on these currencies, negatively impacting the demand for the Naira and further weakening it. The widespread use of stablecoins like USDT could even lead to the dollarization of the economy.

The increased use of stablecoins also raises concerns about privacy and transparency in financial transactions. The CBN has said that cryptocurrencies are risky, anonymous, and hard to track, which makes them more likely to be used for illegal activities like money laundering and terrorism financing.

Additionally, the use of cryptocurrencies in Nigeria goes against the key mandates of the CBN as the issuer of legal tender in Nigeria. Cryptocurrencies are issued by largely anonymous entities and secured by cryptography, which prevents oversight, accountability, and regulation by the CBN.

How are Nigerians using stablecoins?

1. Remittances

Stablecoins enable real-time faster cross-border transactions directly from the sender’s wallet to the recipient’s wallet, reducing transaction costs by 200% compared to traditional methods.

Here’s an example.

Fatima, a business owner in Nigeria, regularly receives payments from international clients in US dollars. However, due to the Naira’s volatility and limited access to foreign exchange, she often faces challenges with receiving and converting these payments efficiently. To address this issue, Fatima decides to use stablecoins for her remittance needs.

Fatima converts her incoming USD payments to USDT using Bybit, a crypto exchange. She receives the USDT in her digital wallet and then converts it to Naira via P2P trading. This way, Fatima can access her funds quickly and securely while preserving her money’s value.

Using blockchain technology, stablecoins cut out the middlemen, lower transaction fees, and make payments faster, making global trade easier.

2. Overcoming Dollar Shortages

Nigerian businesses use stablecoins to deal with a lack of US dollars and pay suppliers from other countries. This helps businesses and individuals handle global transactions well, even when there are issues with getting forex.

3. Trading, Savings and Investments

People use stablecoins to trade on various platforms, making it easy to buy and sell digital assets fast. These coins also help protect against inflation and currency drops, which is why many investors like using them. Besides trading, stablecoins are also used for lending.

4. Payments

In Nigeria, stablecoins are used for quick peer-to-peer and international payments, providing a fast and effective way to send money between people.

Image depicting crypto payments. Photo by CardMapr.nl on Unsplash

5. DeFi (Decentralized Finance)

In DeFi, stablecoins are used for various purposes like lending, borrowing, and trading without the need for traditional financial intermediaries. They act as self-contained building blocks that interact with smart contracts to create various financial services, enhancing the efficiency and accessibility of DeFi applications.

For example, in DeFi lending platforms, users can deposit stablecoins like USDC to earn interest on their holdings. These stablecoins help users avoid the volatility of other cryptocurrencies like Bitcoin or Ethereum, making them a preferred choice for DeFi activities where stability is crucial.

Stablecoins offer several potential benefits for Nigerians and the Nigerian economy, including:

Preserving Wealth Amid Inflation and Currency Devaluation

Nigeria has experienced high inflation rates, reaching 28.92% in December 2023. The Nigerian Naira has also depreciated significantly against the US Dollar, losing over 50% of its value in the past five years. Stablecoins like USDT provide a stable store of value, shielding users from the impact of inflation and currency fluctuations. By holding stablecoins, Nigerians can preserve their wealth and purchasing power.

Promoting Financial Inclusion

By providing a digital, decentralized financial system, stablecoins offer access to financial services, particularly for the young, crypto-savvy population of Nigeria. This empowers individuals to participate in the global economy and engage in wealth-creating activities like investing.

Photo by Traxer on Unsplash

Empowering Small and Medium Enterprises (SMEs)

SMEs play a crucial role in Nigeria’s economic development but often face challenges accessing financing and navigating complex regulatory environments. Stablecoins offer SMEs a more inclusive financial ecosystem, allowing them to access capital through crowdfunding and peer-to-peer lending platforms. Stablecoins also enable secure and transparent supply chain finance, ensuring timely payments from businesses to suppliers.

Attracting Investment and Fostering Economic Growth

The adoption of stablecoins in Nigeria has the potential to attract investment and foster economic growth. By providing a stable and efficient financial system, stablecoins can encourage investment in various sectors, contributing to overall economic development. As more individuals and businesses embrace stablecoins, Nigeria’s economic potential becomes more apparent to global investors.

What are the challenges of Stablecoin Adoption in Nigeria For Users and Businesses?

1. Regulatory Uncertainty

• The lack of clear guidelines can make things confusing and risky for users using stablecoins.
• Having clear rules is important to keep users safe and make sure the financial system stays stable.

2. Lack of Awareness

• Users need education and awareness about the benefits and risks associated with stablecoins to make informed decisions about their use.
• Financial literacy in Nigeria is low, so people have to be educated on how stablecoins work, their benefits for saving money, and the risks involved.

Raising awareness. Photo by Patrick Fore on Unsplash

3. Volatility and Market Risks:

• Even though stablecoins try to keep a steady value, changes in the market can make them less stable, which could lead to users losing money.
• Understanding and managing these risks is important for people who use stablecoins.

4. Weakened Monetary Policy

• Users may face challenges related to weakened monetary policy if a significant portion of the population holds their balances in global stablecoins that are not controlled by the CBN and are not pegged to the naira.
• These challenges include increased inflation, depreciation of the Naira, reduced confidence in the Naira, and an increased risk of financial Instability.

5. Trust and Security Concerns

• Stablecoins use complicated technology, can be influenced by the market, and don’t have strong protections for users, so there are risks.
• Not being clear about how much money is kept in reserve and how things work can make people doubt if stablecoins are safe.
• These worries can make users hesitant to use stablecoins, especially for businesses that need to keep transactions secure and build trust with customers.

6. Integration with Existing Systems

• Making stablecoins work with traditional financial systems like payment platforms and accounting systems can be tricky for businesses.
• Existing financial systems in Nigeria, such as payment platforms and accounting software, may not be designed to easily integrate with stablecoin networks.
• There needs to be sufficient liquidity and adoption among users.
• If stablecoins are not widely accepted, their utility for payments, remittances, and other financial services are limited.
• To use stablecoins smoothly and efficiently, businesses need to plan carefully, invest in technology, and follow the rules.

What can regulators do to tackle these issues?

1. Strengthening the Naira

• The Nigerian government should implement policies to strengthen the value of the naira and address the underlying causes of inflation and currency devaluation.
• This may include measures to diversify the economy, increase foreign exchange reserves, and improve the efficiency of the foreign exchange market.
• By reducing the demand for foreign currency and stablecoins, the impact of stablecoin adoption on monetary policy can be mitigated.

2. Transparency and Disclosure:

. Regulators should require stablecoin issuers to provide clear information about their reserves, backing assets, and operational processes.

. Regular audits and public disclosures can help build trust among users.

3. Anti-Money Laundering (AML) and Know Your Customer (KYC):

• Regulators should enforce AML and KYC regulations to prevent illegal activities facilitated by stablecoins.
• This might be hard to achieve due to the decentralized, anonymous nature of the blockchain.
• However, proper oversight and enforcement of these regulations can help manage risks.

4. Consumer Protection:

• Regulators must ensure that stablecoin users are aware of risks and limitations.
• Consumer protection laws should cover stablecoins, addressing issues like fraud, loss of funds, and dispute resolution.

5. Market Integrity and Stability:

• Regulators can monitor stablecoin markets for manipulation, insider trading, and other irregularities.
• Intervention mechanisms, such as circuit breakers, can help maintain market stability during extreme volatility.

6. International Coordination:

• Stablecoins operate globally, so international cooperation is necessary.
• Regulators should collaborate to harmonize rules and prevent regulatory arbitrage.

Cooperation. Photo by Cytonn Photography on Unsplash

How can Stablecoin Adoption keep growing in Nigeria?

1. Educational Campaigns

• Spreading awareness about stablecoins through educational campaigns.
• Helping people and businesses understand the pros and cons.
• Increasing knowledge to build comfort in using stablecoins as a reliable financial option.

2. Collaborations

• This involves key players like banks, fintech companies, individuals, and regulators.
• Efforts should be made to include stablecoins in current financial systems.
• Easy use and access to stablecoins in different transactions should be improved and encouraged.

3. Clear Regulations

• The CBN and other authorities should create clear and supportive rules for stablecoin operations.
• This will build trust, ensure compliance, and create a safe environment for stablecoin usage.

4. Accessible Platforms

• Offer more platforms and exchanges for easy stablecoin access.
• This allows more Nigerians to get, use, and benefit from stablecoins in everyday finance.

The Future of Finance in Nigeria

Nigeria’s financial system is becoming increasingly divided between traditional banks and Web3 finance. While traditional banking services provide the backbone of financial infrastructure, Web3, with its decentralized, peer-to-peer transactions, offers a more inclusive alternative.

Web3, with its decentralized, peer-to-peer transactions, makes it easier for people to transact without middlemen. For example, sending money to someone in another country using your regular bank can take days and cost a lot. But with Web3 and stablecoins, you can send money quickly and cheaply.

Stablecoins are a key part of Web3 finance. They differ from traditional fiat currencies because they use blockchain technology to ensure transparency, security, and efficiency. Fiat currencies can be controlled by institutions or governments, while stablecoins operate on decentralized networks.

In a country like Nigeria, where many people don’t trust big institutions and the government, stablecoins offer a way for more people to access and manage their money securely and fairly.

In conclusion, stablecoins have a lot of benefits for individuals, but their widespread adoption and use could have a negative effect on the overall economy of Nigeria.

It is up to all of us as decision-makers to collaborate to find the right balance between innovation and safeguarding the nation’s economy.

All References and Resources used can be found here

Thank you for reading this essay!

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