Crypto in Nigeria: Through the lens of currency conversion
The Tale of The Three Entrepreneurs
“If you gave me a billion dollars and twenty years, I couldn’t find a way to trade with a company or another counterparty in Nigeria,” said MicroStrategy’s CEO, Michael Saylor on a podcast with Lex Fridman.
“No amount of money! Give me 10 billion dollars, I couldn’t do it,” he elaborates. “Because you get shut down at the banking level. You can’t link up a bank in Nigeria with a bank in the US. You get shut down at this credit card level, because they don’t have the credit card, so they won’t clear. You get shut down at the compliance FCPA level, because you wouldn’t be able to implement a system that interfaced with somebody else’s system if it’s not in the right political jurisdiction.”
“On the other hand, three entrepreneurs in Nigeria, on the weekend, could create a website that would trade in this lightning economy using open protocols without asking anybody’s permission. So you’re talking about something that's a million times cheaper, less friction and faster to do it, if you want to get money to move.”
Admittedly, Saylor’s rhetoric often borders the cinematic, but his message is clear:
It’s difficult to navigate a financial system as the one in Nigeria, and;
Decentralised finance, using open protocols, might offer a solution.
It’s an important statement, worth exploring in more detail. The relevance extends beyond Nigeria, but speaks to high-inflation and financially restrictive environments in general. These are conditions found across emerging markets, and arguably, to some degree, in developed economies as well.
Often, when considering emerging markets and crypto adoption, attention focuses on remittances and cross-border payments, or in some cases, such as under Venezuela’s hyper-inflationary conditions, Bitcoin and stablecoins are highlighted as a store of value.
In this blog, we focus more on the dynamics around currency conversion, or forex trading, the importance of access to global markets for local economies, as well as the potential for crypto-native platforms to offer alternative base infrastructure.
The Challenge of Currency Conversion in Nigeria
Each day, the Nigerian Foreign Exchange Market (NAFEM) accounts for approximately $75 million to $100 million USD of turnover across spot, forwards, and swaps, achieving an approximate yearly turnover of $31 billion USD.
This might sound like a significant sum. However, given that daily trade volumes across OTC FX markets reached up to $7.5 trillion USD per day in 2022, the sum of $31 billion for Africa’s largest economy with a GDP of $477 billion USD and significant reliance on product export, is rather peculiar. So, what’s going on?
Firstly, the FX market in Nigeria has been severely hampered due to the implementation of certain monetary policies, which, despite their originally well-intentioned purposes, have resulted in more harm than good. These policies were initially put in place to address soaring inflation rates for the Nigerian Naira (NGN).
As evidenced by the figure below, since 2003, the NGN has depreciated by a staggering 86% against the US dollar.
Figure (1) = NGN / USD Exchange Rate
Seeking to combat the loss of purchasing power and reinvigorate the NGN, the former governor of the Central Bank of Nigeria, Godwin Emefiele, intervened by imposing a ban on 43 specific items, effectively prohibiting their access to the FX market.
The ban also aimed to bolster local industries by promoting domestic production and increasing demand for locally sourced products while discouraging the purchase of international goods. However, the adverse impacts of limiting access to the FX market for these crucial sectors cannot be overlooked.
Following the ban, Nigerian businesses have encountered significant challenges in obtaining essential products, such as specialised chemicals, leading to disruptions in the general supply chain. In addition to strained trade relations, the ban also spurred the growth of the black market, and exacerbated inflationary pressures as the cost of local goods continued to soar.
Ultimately, the decision was widely deemed a failure, and only recently have we seen some of the restrictions lifted. However, throughout this period, the black market expanded to such proportions that Nigeria was placed on the 'red list' of countries by financial watchdogs, including the UK Financial Conduct Authority (FCA).
The lingering effects of these challenges persist today, significantly impacting the financial system and affecting businesses and everyday people throughout Nigeria and the diaspora.
Importance of Access to Global Finance in a Local Market
From Michael Saylor’s perspective, conducting business transactions with Nigeria is risky and best to be avoided. Let’s take a smaller London-based FX company, holding an FCA licence, as a case in point.
With sales desks making a minimum of 150 cold calls per day to domestic and international companies' CEOs, CFOs, and directors, these types of companies typically handle trade volumes exceeding $1 billion USD over the calendar year, exchanging various exotic currencies such as Thai Baht (THB), Singapore Dollar (SGD), South African Rand (ZAR), and others. If such a business were found to be engaging in transactions with a 'red listed' jurisdiction such as Nigeria, the consequences would be severe, including licence forfeiture, fines, company investigations, business closure, and even prosecution.
But the impact for businesses and everyday people in Nigeria is even more severe. Access to FX markets is crucial to a country's economy as it facilitates global trade and allows business to engage in international risk management. For example, a Nigerian iron mining company seeking to hedge its exposure to the NGN can work with an FX broker to limit risk through a short futures contract on the NGN, positioned to minimise the adverse effects of currency devaluation. Lack of access means local businesses are left vulnerable and unable to overcome a negative economic spiral.
But what about those three entrepreneurs on the weekend? With the emergence of crypto networks such as Bitcoin and Ethereum, the proliferation of stablecoins and smart contracts, and the rise of both centralised and decentralised crypto exchanges, the reality is changing. This is of interest, not just in terms of the potential impact for business and everyday people on the ground, but also from an integration perspective, where we see the crypto industry coming together with traditional finance to give birth to a new type of financial ecosystem.
Crypto in Nigeria
It turns out that aside from those three entrepreneurs, millions of Nigerians participate in the crypto markets, achieving far more than the country’s FX trade volumes, generating $56.7 billion USD in crypto volumes between July 2022 and June 2023.
Chainalysis has ranked Nigeria the world’s second in terms of crypto adoption, and with a 9% rise in transactional volume over the past year, Nigeria is among the only six countries which saw a rise in volumes during the bear market, outperformed only by Vietnam and Saudi Arabia.
Figure (2) = International Volume Shift
If we look at the overall appetite to develop crypto infrastructure in Nigeria, we can see a clear interest from equity investors in local startups as well.
| Company | Nature of Deal | Size | When? | Led By |
|---|---|---|---|---|
| Bitmama | Raise | $1.65m USD | 2022 | N/A |
| Bitmama | M&A | $1m USD | 2023 | Purchased Payday (Neobank) |
| Canza | Raise | $3.27m USD | 2023 | Fenbushi Capital |
| Nestcoin | Raise | $1.9m USD | 2023 | Hashed Emergent |
| Afriex | Raise | $10m USD | 2022 | Sequoia Capital |
| VIBRA | Raise | $6m USD | 2021 | N/A |
Figure (3) = Recent Investments in Crypto Infrastructure In Nigeria
For reference, Bitmama is a crypto exchange. Payday is a remittance firm, while Canza is a decentralised investment bank. Nestcoin purports to be digital money, Afriex targets remittances, and VIBRA provides wallet services. All of these companies, which have closed some of the most high-profile deals with global investors such as Dragonfly Capital, Sequoia Capital and Consensys, are crypto focused and looking to build out local infrastructure.
Furthermore, despite regulatory complexities surrounding crypto, the Nigerian government has spotted the need to support young talent with the launch of a $618m USD fund for entrepreneurs looking to raise funds within the tech and creative sector.
But of course, anyone familiar with crypto in Nigeria will point to peer-to-peer (P2P) trading as one of the most significant activities in the space. P2P trading involves direct transactions between individuals or entities, typically bank-to-bank, while exchanging cryptocurrencies either on-chain or at a cryptocurrency exchange.
This method of trading has gained traction and is facilitated through various channels, including centralised exchanges and dedicated P2P platforms. However, in Nigeria, P2P trading is often organised informally through platforms like Telegram and WhatsApp groups.
We had the opportunity to speak with industry experts such as EMURGO Africa’s CEO, Ahmed Amer, and David Effiong who is closely involved with crypto education in Nigeria through Ayaversity, who shed light on the significance of P2P trading in Nigeria. They highlighted how P2P trading is commonly used to gain access to the crypto ecosystem where stablecoins and Bitcoin are used for a range of economic activities from payments and loans to remittances and global trade.
The recent decision by the Central Bank of Nigeria to reverse its prohibition on local banks and financial institutions serving crypto firms, which was initially set in February 2021, marks a notable shift in the country's stance toward cryptocurrencies. Both Ahmed and David pointed out that this is a significant development for the biggest crypto economy in Africa, but that actual integration with banks in Nigeria will likely take a long time to actually take shape. P2P trading is likely to continue to be a dominant method of exchange for the foreseeable future.
Conclusion
In global finance, Nigeria's story, viewed through the lens of currency conversion and cryptocurrency adoption, serves as a microcosm of the broader financial challenges faced by emerging markets. Conventional banking systems and monetary policies have long imposed barriers to economic growth and innovation.
However, the emergence of cryptocurrency, decentralized finance, and the rapid growth of peer-to-peer (P2P) trading within Nigeria signal a promising shift. With the world's second-highest crypto adoption rate and a growing ecosystem of crypto-focused startups, Nigeria is reshaping its financial landscape.
As the Central Bank of Nigeria reevaluates its stance on cryptocurrencies and the government supports local talent with substantial funding, there is optimism for a more inclusive and accessible financial future. P2P trading has become pivotal in this transformation, providing a means for individuals and businesses to gain access and exposure to the crypto ecosystem and better navigate challenges entrenched in traditional finance.
In this narrative, Nigeria underscores the adaptability of individuals and entrepreneurs who, with the help of blockchain technology, are redefining financial norms. As we witness the convergence of crypto and traditional finance, a new financial ecosystem is taking shape, extending hope not only to Nigeria but also to emerging markets worldwide.
In summary, the story of currency conversion in Nigeria is not just a tale of obstacles; it represents a story of innovation, empowerment, and the potential for a more inclusive financial landscape.
