Author: Lawyer Chen Shanghai
As one of the fastest-growing countries in Africa's Web3 market, Nigeria's Web3 market has a very promising development prospect. At present, more and more Nigerians are trying to find a new way to store value in an unhealthy economic environment. Nigeria's large, young population and strong interest in emerging things have all promoted the development of Nigeria's cryptocurrency market.
Web3 regulation in Nigeria is in dynamic development. As early as 2021, the Central Bank of Nigeria (CBN) explicitly prohibited commercial banks from facilitating cryptocurrency transactions in order to curb money laundering and terrorist financing issues related to the emerging cryptocurrency field.
However, with the further rapid development of the Web3 market, new regulatory rules have also been introduced. In 2022, the country's Securities and Exchange Commission (SEC) issued the "Digital Asset Offering Platform and Custody Rules", which provide guidelines for virtual currency transactions and custody of cryptocurrency exchanges and custodians. In 2023, the Nigerian Finance Bill 2023 was introduced, requiring a 10% capital gains tax on cryptocurrency transactions, further strengthening the regulation of cryptocurrency transactions, which indirectly recognized that cryptocurrency is a legal tax asset class1.
Affected by factors such as insufficient financial services, high inflation, depreciation of the national currency, and a young population, the adoption and trading of cryptocurrencies has grown rapidly in Nigeria. Although cryptocurrencies are not recognized as legal tender by the Central Bank of Nigeria, the use and trading of cryptocurrencies are growing rapidly in Nigeria.
In 2021, the Central Bank of Nigeria banned commercial banks from participating in cryptocurrency transactions, but there are no laws or provisions that criminalize the use of cryptocurrencies. As a result, cryptocurrencies are widely traded on cryptocurrency exchanges in Nigeria, and peer-to-peer transactions are also popular.
In May 2022, the Nigerian Securities and Exchange Commission (SEC) issued regulations on digital assets, bringing cryptocurrencies under its regulatory scope. Under these regulations, cryptocurrency exchanges operating in Nigeria must obtain a license from the Securities and Exchange Commission and comply with certain requirements. The regulation also defines digital assets and clarifies the legal status of digital assets in the country.
I. Current Status of Nigeria’s WEB3 Market
Relevant data show that the development speed of Nigeria’s cryptocurrency market is leading in Africa:
1. Trading volume:
A report by Chainalysis, a well-known blockchain research company in September 2023, showed that Nigeria’s cryptocurrency trading volume increased by 9% year-on-year, reaching US$56.7 billion between July 2022 and June 2023. This astonishing growth rate exceeded other major African cryptocurrency markets such as South Africa, Kenya, Mauritius, Ghana and Tanzania2.
In addition, the peer-to-peer cryptocurrency trading platform Paxful has also consistently listed Nigeria as its largest African market. As of October 2023, Nigeria accounted for more than 60% of Paxful’s trading volume in Africa, further highlighting its dominance.
2. Market drivers:
(1) Economic challenges: Nigeria’s troubled economy, weak currency, and high inflation have prompted Nigerians to turn to alternative currencies such as Bitcoin and stablecoins pegged to the US dollar.
(2) High Web3 awareness: A survey released in September by US blockchain software company Consensys and UK data analysis company YouGov showed that Nigeria is the country with the highest cryptocurrency awareness in the world, reaching 99%. This proportion exceeds developed economies such as the UK, the US, Japan, and Germany. The global average is 92%.
(3) Regulatory trends: Nigeria’s recent regulatory measures, the Central Bank of Nigeria’s (CBN) Virtual Asset Service Provider (VASP) Guidelines, while still evolving, provide a degree of clarity and encourage the cryptocurrency market to grow under regulation.
3. Compared with other African markets:
Although South Africa has a more developed financial infrastructure and a larger cryptocurrency market, its growth rate lags behind Nigeria.
In addition, Kenya still has an important position in the cryptocurrency market, but its recent activity has declined due to regulatory uncertainty.
2. Nigeria's potential for WEB3 development
Nigeria has a young population that is interested in new technologies and has a high smartphone penetration rate. Nigerians aged 18 to 34 account for 26.6% of the total population. Nigeria currently has a population of 226.7 million, of which 60.3 million are young people, which is more than the total population of many countries. Even so, the median age in Nigeria is 17.2 years old, while the median age on the African continent is 19 years old.
This creates fertile soil for the adoption of mobile-based crypto applications and services, and its development potential is endless, including the following:
Technology access: Nigeria has the highest smartphone penetration rate in Africa, with more than 40% of the population owning smartphones. According to Statista, this percentage will grow to 66%, or more than 140 million people, by 2025. This rate of technological penetration makes Nigerians more receptive to new technologies such as cryptocurrencies.
High Internet Usage: Nigeria has the largest internet user base in Africa, with more than 120 million users. Widespread internet access allows Nigerian youth to easily access cryptocurrency information and participate in the cryptocurrency market.
Searching for Alternative Investments: With inflation hovering around 29%, Nigerians are looking for alternative investments to hedge against inflation and grow their wealth. Cryptocurrencies, despite their volatility, have the potential for high returns, which attracts Nigerian youth.
Entrepreneurial Spirit: Nigerians are known for their entrepreneurial spirit and willingness to take risks. This makes them willing to embrace emerging things such as cryptocurrencies and stablecoins as they see them as potential opportunities.
Apart from this, the impact of a young population on cryptocurrency adoption includes:
Increased trading volume: Nigeria has one of the highest cryptocurrency trading volumes in Africa, and young people make up a large portion of traders. According to CoinMarketCap’s 2020 report on cryptocurrency adoption, Nigeria’s young cryptocurrency users grew by 210.6%4.
Growing popularity of decentralized finance (DeFi): Decentralized finance (DeFi) applications are gaining popularity among young Nigerians, who are attracted by the potential to earn passive income and participate in a permissionless financial system.
Growth of crypto startups: Startups in the Nigerian crypto space are booming to cater to the needs of young crypto enthusiasts. These startups are developing innovative products and services such as cryptocurrency wallets, exchanges, and educational platforms.
III. Development of Stablecoins in Nigeria
In the vibrant Nigerian cryptocurrency space, stablecoins are rapidly rising as the token of choice for retail investors.
The main reasons are as follows:
Hedge against inflation: Nigeria's inflation rate is currently at a 27-year high, which is a major concern for the nation. Traditional savings accounts yield meager returns and are easily eroded by inflation. Stablecoins provide a safe haven for investors seeking to preserve the value of their savings. With the naira's sharp fall against the dollar, which has depreciated by 47% in the past 12 months, stablecoins are becoming a better choice.
Lower transaction fees: Stablecoins have much lower transaction fees than more volatile cryptocurrencies such as Bitcoin. This makes them ideal for daily transactions and small payments, attracting retail investors who want to use cryptocurrencies for daily purchases.
Gateway to DeFi: Decentralized Finance (DeFi) applications are revolutionizing financial services, enabling users to lend, borrow, and earn interest without intermediaries. Stablecoins such as Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are the lifeblood of DeFi, enabling Nigeriens to participate in these innovative financial services.
Ease of use and stability: Stablecoins offer a familiar experience for users who are used to using traditional fiat currencies. Compared to other cryptocurrencies that often fluctuate, the price stability of stablecoins makes it less daunting for new investors.
Cross-border payments: Stablecoins can facilitate faster and cheaper cross-border payments than traditional transfers. This is particularly beneficial for Nigerians who receive remittances from abroad or conduct international business.
As a result, the Nigerian government has been committed to developing the stablecoin market in recent years. According to a previous notice issued by the Central Bank of Nigeria, Nigerian banks, fintech companies and blockchain companies are working together to create a stablecoin for the naira called cNGN.
The cNGN token is expected to emulate the functional design of stablecoins popular in Nigeria, such as USDT, and participate in market competition. This functionality will enable it to expand its functions beyond Nigeria and facilitate smooth global transactions.
The growing popularity of stablecoins has driven a wave of innovation in the Nigerian cryptocurrency field, so startups are seeking:
Stablecoin-based payment platforms that allow users to pay for goods and services with stablecoins and promote the widespread use of cryptocurrencies.
Micro-loan platforms driven by stablecoins use stablecoins as collateral to provide small loans to Nigerians with underbanked accounts and promote financial inclusion.
Income-generating stablecoin investment products that allow investors to earn passive income by holding stablecoins further enhance the attractiveness of stablecoins.
Fourth, Nigeria WEB3 specific regulatory policies
At present, the Nigerian government has approved a national blockchain policy as part of its efforts to transform to a digital economy. The policy aims to create a blockchain-driven economy that supports secure transactions, data sharing, and value exchange between people, between businesses, and between governments. Although the policy document has not yet been made public, the government has instructed regulators, including the Central Bank of Nigeria and the Securities and Exchange Commission (SEC), to develop regulatory instruments to deploy blockchain technology in various sectors in Nigeria.
The release of the National Blockchain Policy reflects Nigeria's growing interest in blockchain technology and its recognition of its potential to promote economic development. Nigeria has become one of the fastest adopters of digital assets in the world, with a large population using cryptocurrencies for various purposes, including remittances and online transactions.
The government's move to embrace blockchain technology shows that it is now seeking to leverage its advantages while supporting the application of blockchain technology with corresponding regulatory policies. This is essential to attract investment and promote the development of the Nigerian blockchain ecosystem. The involvement of regulators such as the Central Bank of Nigeria and the Securities and Exchange Commission shows that the government considers the potential impact of blockchain technology on the Nigerian economy and recognizes the need for certain regulation of the development of the market, taking advantage of the technology and economic form while maintaining financial stability and investor protection.
In addition, the Nigerian government intends to approve the establishment of a multi-sector steering committee to oversee the implementation of blockchain policy. The steering committee will play a key role in coordinating and promoting cooperation between different departments and other stakeholders.
In addition, in May 2023, the Nigerian government approved a national blockchain policy as part of the country's efforts to transform into a digital economy. According to a statement released on Twitter by the Federal Ministry of Communications and Digital Economy, "The vision of the policy is to create a blockchain-driven economy that supports secure transactions, data sharing, and value exchange between individuals, businesses, and governments, thereby enhancing innovation, trust, growth, and prosperity for all."
According to Bloomberg, the Nigerian SEC is considering allowing the issuance of tokenized tokens backed by equity, debt or property (but "not cryptocurrency") on licensed digital asset exchanges.
Overall, the introduction of a series of policies by the Nigerian government shows the government's expectation to embrace blockchain technology and use its potential to promote economic growth and innovation.
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