A deep-dive into Stablecoin adoption and challenges in Nigeria

12 min readMay 11, 2024

Stablecoin Market Overview

Stablecoins, a class of cryptocurrencies designed to maintain a stable value relative to a specific asset or fiat currency, have emerged as a promising innovation in the ever-evolving world of blockchain technology.

These digital assets aim to provide the benefits of cryptocurrencies, such as fast and secure transactions, transparency, and decentralization, while mitigating the volatility associated with traditional cryptocurrencies like Bitcoin.

Stablecoins have the potential to facilitate financial inclusion by providing access to financial services for unbanked and underbanked populations, streamlining cross-border transactions and remittances, and offering a stable store of value, particularly in economies plagued by high inflation and currency devaluation. By leveraging blockchain technology, stablecoins can enable a secure, transparent, and cost-effective transfer of value without the need for intermediaries.

Stablecoins play a significant role in the cryptocurrency landscape. By May 2024, their total market capitalization stood at around $160.1 billion, representing 6.5% of the entire cryptocurrency market. Notably, the top stablecoins — USDT, USDC, and Dai — hold ranks 3rd, 6th, and 26th, respectively, underscoring their importance. This underscores their significance in the cryptocurrency ecosystem.

The market capitalization of stablecoins is predominantly influenced by market liquidity when viewed from a macro perspective. Despite fluctuations driven by the Federal Reserve’s interest rate policies in 2022, stablecoin market capitalization has consistently grown, outpacing 2021. Although there was a minor decline in 2023, overall stability was maintained, with a resurgence towards the year’s end.

Nigeria, with its growing interest in cryptocurrencies and stablecoins, presents an intriguing case study for their adoption. The country’s population, particularly its youth, has shown a remarkable appetite for novel financial technologies, driven by factors such as limited access to traditional banking services, the need for cost-effective cross-border transactions, and the desire for economic empowerment.

Nigeria as a case Study

In the bustling cities and remote villages of Nigeria, a quiet revolution is stirring, one that could reshape the very fabric of how money moves and wealth is preserved. At the heart of this transformation lies an innovation that may seem enigmatic to some, yet holds the promise of unlocking financial freedom for millions: stablecoins.

Imagine a country where your hard-earned savings are shielded from the ravages of inflation, where sending money to loved ones abroad is as simple as tapping a few buttons on your smartphone, and where the unbanked can access a world of financial opportunities without the barriers of traditional banking.

This is the allure of stablecoins — digital currencies designed to maintain a stable value, backed by real-world assets like the U.S. dollar or gold.

A report by Chainalysis has revealed that stablecoin adoption in Nigeria is on the rise as most people in the country are using it to edge against inflation.

The report showed that between July 2022 and June 2023 Nigeria received over $56 billion in cryptocurrencies, the highest in Africa, followed by South Africa with $22 billion.

Nigeria also had the highest bitcoin transaction volume in the world between June 2022 and July 2023.

In Nigeria, where economic uncertainties and limited access to banking services have long plagued the populace, stablecoins represent a beacon of hope, a chance to break free from the shackles of a financial system that has too often left the most vulnerable behind.

Background Study: Understanding the nature of finance in Nigeria

Traditionally, cross-border payments and remittances in Nigeria have been facilitated through various channels, including banks, money transfer operators (MTOs), and informal methods such as aboki networks. However, these traditional methods often come with significant challenges, including high fees, lengthy processing times, lack of transparency, and unfavorable exchange rates, particularly for remittances sent from abroad.

Nigeria’s interest in stablecoins stems from several factors, including high inflation rates, currency devaluation, and limited access to traditional financial services.

The country has grappled with persistent inflation, eroding the purchasing power of the naira and making it challenging for individuals and businesses to maintain their savings and investments’ value. Stablecoins, particularly those pegged to stable currencies like the US dollar or a basket of currencies, offer a stable alternative for storing value and protecting against the adverse effects of inflation.

According to National Bureau of Statistics, Nigeria in conjugation with Trading Economics, Nigeria’s annual inflation rate soared to 33.2%, the highest since March 1996, from 31.7% in the previous month. The higher inflation is mainly driven by the sharp fall in local currency coupled with the removal of fuel subsidy. Food inflation, which accounts for the bulk of Nigeria’s inflation basket, continued to climb and hit 40% in March, the highest since August 2005, from 37.9% in the prior month. The annual core inflation rate, which excludes farm produce and energy, jumped to a multi-year high of 25.9% in March. On a monthly basis, consumer prices eased slightly to 3%, down from 3.1% in February

Source: National Bureau of Statistics, Nigeria in conjugation with Trading Economics

Additionally, Nigeria has a significant population living and working abroad, contributing to the country’s substantial remittance inflows. According to the World Bank, Nigeria received over $20 billion in remittances in 2022, making it the largest recipient in sub-Saharan Africa. Traditional remittance channels, however, can be costly, time-consuming, and subject to unfavorable exchange rates.

The potential for stablecoins to drive financial inclusion in Nigeria is also a crucial factor driving their adoption. According to the Global Findex Database, only 45% of Nigerian adults had a bank account in 2021, highlighting the significant unbanked and underbanked population. This lack of access to formal financial services can hinder economic growth and perpetuate poverty cycles. Stablecoins, combined with decentralized finance (DeFi) platforms, could provide a viable solution by enabling individuals to access a range of financial services without the need for a traditional bank account or strict KYC requirements.

Challenges with Stablecoins Adoption among Nigerians

Despite a surge in stablecoin interest, Nigeria’s regulatory environment for digital assets remains murky and volatile. The prior administration under President Muhamadu Buhari (2015–2023) took a hardline stance, initially enacting a complete ban on cryptocurrencies. They blamed the falling Naira on crypto use, but critics pointed to the government’s own policies — including dwindling foreign exchange reserves with no corresponding growth in exports — as the true culprits.

The current administration under President Tinubu offered a glimmer of hope by briefly lifting the crypto ban. However, this optimism was short-lived as the ban was reinstated within months. Furthermore, authorities have clamped down on existing peer-to-peer (P2P) markets on major cryptocurrency exchanges, specifically targeting stablecoin trading. This crackdown disproportionately impacts Nigerians who lack access to US dollars through traditional banks, forcing them to rely on black markets and P2P platforms for their financial needs. Notably, the previous administration’s attempt to create a central bank digital currency (CBDC) called the e-Naira also proved unsuccessful.

One of the most significant is the lack of clear regulations and guidelines from the Central Bank of Nigeria (CBN). The regulatory uncertainty has created a climate of ambiguity, deterring businesses and individuals from fully embracing stablecoins due to potential legal and compliance risks.

Adoption barriers, such as lack of awareness and understanding of blockchain technology and cryptocurrencies among the general population, as well as trust issues and concerns about the security and legitimacy of stablecoins, also pose significant obstacles to mainstream adoption. Despite the growing interest in digital assets, a large portion of the Nigerian population remains unfamiliar with the underlying technology and its implications.

Additionally, the scalability of blockchain networks and the infrastructure required to support widespread stablecoin adoption pose challenges. As the number of users and transactions increases, blockchain networks may face limitations in terms of transaction throughput and processing speeds. Furthermore, the lack of robust digital infrastructure, such as reliable internet connectivity and access to computing devices, particularly in rural areas, could hamper the widespread adoption of stablecoins.

Roadmap for Stablecoin Adoption in Nigeria

By implementing this roadmap, Nigeria can create a more favorable environment for stablecoin adoption. This can foster financial inclusion, provide Nigerians with a hedge against inflation, and unlock new opportunities for cross-border trade and remittances. It’s important to note that this roadmap is a starting point, and continuous dialogue and adaptation will be crucial as the stablecoin landscape in Nigeria evolves.

Challenge 1: Regulatory Uncertainty

Solution: The Central Bank of Nigeria (CBN) needs to establish clear and transparent regulations for stablecoins. This can be achieved through:

Collaboration: Convening stakeholders, including industry experts, legal professionals, and user representatives, to develop a comprehensive regulatory framework.
Phased Approach: Implementing regulations in stages, starting with basic guidelines for stablecoin operations and gradually introducing more complex frameworks as the market matures.
Regulatory Sandbox: Establishing a regulatory sandbox to allow for controlled experimentation with innovative stablecoin applications under CBN supervision.

Challenge 2: Adoption Barriers

Solution: Multi-pronged approach to raise awareness and build trust:

Public Education Campaigns: Launching nationwide campaigns (online, radio, TV) to educate Nigerians about stablecoins, blockchain technology, and their potential benefits.
Financial Literacy Programs: Partnering with educational institutions and NGOs to develop financial literacy programs that include digital asset education.
Pilot Programs: Implementing pilot programs in specific regions or sectors to demonstrate the practical applications of stablecoins and showcase their advantages.
Community Building: Supporting the creation of local meetups and online forums for Nigerians interested in learning more about stablecoins.

Challenge 3: Scalability and Infrastructure

Solution: Investment in infrastructure development and exploration of scalable blockchain solutions:

Infrastructure Development: The government and private sector should collaborate to improve internet connectivity and access to computing devices, particularly in underserved areas.
Blockchain Research: Supporting research into scalable blockchain solutions that can handle a high volume of transactions efficiently.
Offline Transactions: Exploring the feasibility of offline transaction capabilities for stablecoins, catering to regions with limited internet access.

Challenge 4: Limited Access to US Dollars

Solution: Exploring alternative stablecoin options and promoting local adoption:
Multi-Collateral Stablecoins: Encouraging the use of stablecoins pegged to a basket of assets, including commodities or other fiat currencies, to reduce reliance on the US dollar.
Nigeria-Centric Stablecoins: Investigating the possibility of creating stablecoins pegged to the Nigerian Naira, potentially backed by real assets or a combination of fiat and digital assets.

Additional Considerations

Consumer Protection: Developing robust consumer protection frameworks to safeguard users from fraud, scams, and other potential risks associated with stablecoins.
Cybersecurity: Promoting best practices for cybersecurity hygiene among users and businesses involved in the stablecoin ecosystem.
Taxation: Establishing clear tax regulations for stablecoin transactions to provide certainty for users and encourage wider adoption.

Potential Key Use Cases

Remittances:

One of the most promising use cases for stablecoins in Nigeria is facilitating cross-border payments and remittances. Nigeria is among the top recipients of remittances globally, with a significant portion of its population relying on funds sent from relatives and friends living abroad. Traditional remittance channels can be costly, time-consuming, and subject to unfavorable exchange rates. Stablecoins offer a faster, more cost-effective, and transparent alternative for remittances, enabling near-instantaneous transfers across borders without the need for intermediaries.

2. Financial Inclusion:

A significant portion of Nigeria’s population remains unbanked or underbanked, lacking access to basic financial services. Stablecoins, combined with decentralized finance (DeFi) platforms, could provide a viable solution for financial inclusion. By leveraging blockchain technology and stablecoins, individuals can access a range of financial services, including savings accounts, lending, and borrowing, without the need for a traditional bank account. This could empower underserved communities and promote economic growth by providing access to capital and financial tools.

3. Store of Value:

Nigeria’s economy has been plagued by high inflation rates and currency devaluation, eroding the purchasing power of the naira. Stablecoins, particularly those pegged to stable currencies like the US dollar or a basket of currencies, offer a stable alternative for storing value. Individuals and businesses can protect their savings and investments from the adverse effects of inflation by holding stablecoins, providing a hedge against economic instability.

4. Lending and Borrowing:

The rise of decentralized finance (DeFi) platforms has opened up new opportunities for lending and borrowing using stablecoins as collateral. These platforms allow users to lend their stablecoins and earn interest or borrow against their stablecoin holdings, enabling access to capital without the need for traditional financial intermediaries. This could be particularly beneficial for small businesses and entrepreneurs in Nigeria seeking alternative funding sources.

Critiques

One major critique is the potential for centralization and concentration of power in the hands of stablecoin issuers. Many stablecoins are issued and controlled by centralized entities, raising concerns about transparency, accountability, and the potential for censorship or misuse of funds.

The stability of stablecoins is dependent on the robustness of the underlying mechanisms and the ability of issuers to maintain adequate reserves. If a stablecoin loses its peg to the underlying asset or currency, it could result in significant volatility and potential losses for users.

The adoption of stablecoins could have implications for monetary policy and financial stability in Nigeria, potentially impacting the CBN’s ability to effectively implement monetary policies and maintain control over the country’s money supply.

There are also concerns about the potential use of stablecoins for illicit activities, such as money laundering or financing terrorism, due to the pseudonymous nature of transactions and lack of regulatory oversight.

Additionally, the lack of a clear regulatory framework and legal protections for stablecoin users in Nigeria could expose individuals and businesses to various risks, including fraud, theft, or operational failures of stablecoin issuers or platforms.

Suggestions

To address the critiques and potential risks associated with stablecoin adoption in Nigeria, several suggestions can be considered:

1. Regulatory framework: The CBN and relevant authorities should develop a comprehensive regulatory framework for stablecoins, addressing consumer protection, AML/CFT measures, reserve requirements, and reporting obligations for issuers and service providers.

2. Oversight and transparency: Stablecoin issuers should be subject to regular audits and reporting requirements to ensure transparency and compliance with reserve requirements.

3. Public-private collaboration: Collaboration between traditional financial institutions, stablecoin providers, and regulatory bodies could foster the development of secure and compliant stablecoin-based financial services.

4. Education and awareness: Initiatives to educate the public on the risks and benefits of stablecoins, as well as best practices for their use, should be implemented to promote informed decision-making.

5. Decentralized alternatives: Exploring decentralized stablecoin projects that mitigate the risks associated with centralized issuance could be a viable alternative.

6. Robust risk management: Stablecoin platforms and users should implement robust risk management strategies and contingency plans to mitigate the risks associated with volatility, liquidity constraints, and operational failures.

Conclusion

The adoption of stablecoins in Nigeria presents significant opportunities and formidable challenges. Stablecoins have the potential to drive financial inclusion, facilitate remittances, provide a stable store of value, and enable access to innovative financial services through decentralized platforms. However, regulatory uncertainty, adoption barriers, scalability concerns, and potential risks related to centralization and volatility pose hurdles that must be addressed.

Collaborative efforts from various stakeholders, including policymakers, industry players, and the fintech community, are necessary to foster an enabling environment for stablecoin adoption. Regulatory clarity, educational initiatives, investments in digital infrastructure, and robust risk management strategies will be crucial for realizing the full potential of stablecoins in Nigeria while mitigating potential risks.

Ultimately, stablecoin adoption in Nigeria represents a significant opportunity to leverage innovative technologies to address long-standing challenges in the financial sector, promote economic empowerment, and drive inclusive growth.

References

Global Findex Database 2021 Edition: https://databank.worldbank.org/source/global-financial-inclusion#
Decentralized Stablecoins: A Critical component of the cryptocurrency ecosystem 1/3: https://scapital.medium.com/decentralized-stablecoins-a-critical-component-of-the-cryptocurrency-ecosystem-9df1dcaa70de
Chainalysis ,The 2023 Global Crypto Adoption Index: Central & Southern Asia Are Leading the Way in Grassroots Crypto Adoption: https://www.chainalysis.com/blog/2023-global-crypto-adoption-index/
Worldbank, Personal remittances, received (current US$): https://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT
National Bureau of Statistics, Nigeria in conjugation with Trading Economics data on inflation: https://tradingeconomics.com/nigeria/inflation-cpi
Cryptocurrency Trading:CBN Orders Banks To Close Operating Accounts: https://www.cbn.gov.ng/out/2021/ccd/volume%203%20number%202%20cbn%20update%20february%202021.pdf
P2P crypto ban imminent as Nigeria calls crypto a national security issue: https://techcabal.com/2024/05/03/p2p-crypto-ban-imminent/
Nigeria launches eNaira — Africa’s first digital currency: https://african.business/2021/10/finance-services/nigeria-gears-up-for-enaira

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