Inside Nigeria’s Web3 Market: Crypto Outlook and Regulations

By Shogo Ishida, Yosuke Yoshida Co-CEOs, EMURGO Africa

Nigeria's Web3 market is brimming with promise. A growing number of Nigerians searching for a new store of value in the unhealthy economy, and a large, young and tech-savvy population position it for significant growth of its crypto market. However, addressing regulatory ambiguity will be crucial for unlocking the full potential of this exciting market in 2024.

Key Takeaways

1. Nigerian policymakers rush to crafting regulations after taking a precautionary stance. 

2. Nigeria’s crypto market is expanding fastest in Africa.

3. Young, tech-savvy population totals 60 million, fueling crypto adoption. 

4. Stablecoin is becoming a dominant store of value for retail investors in Nigeria.

1. Crypto Regulation in Nigeria is Moving at a Faster Pace

Crypto regulation in Nigeria is picking up the pace. It's been a dynamic journey with twists and turns, but recent developments signal a potential shift towards a more defined framework.

Previously:

• 2021: The Central Bank of Nigeria (CBN) sent shockwaves through the crypto community by barring commercial banks from facilitating cryptocurrency transactions. This move aimed to curb money laundering and terrorism financing concerns associated with the nascent crypto scene.
• Uncertainties: The lack of specific regulations left the industry in a gray area, creating challenges for businesses and investors. However, individual crypto ownership and trading remained legal.

Now:

• Regulatory Framework Taking Shape: The Nigeria Securities and Exchange Commission (SEC) stepped in to fill the regulatory void. In 2022, the commission issued "Rules on Offering Platforms and Custody of Digital Assets (pdf)," providing guidelines for crypto exchanges and custodians.
• Taxation: The Nigerian Finance Act 2023 (pdf) further solidified crypto's presence by imposing a 10% capital gains tax on crypto transactions. This move acknowledges crypto as a legitimate asset class for tax purposes.
• CBN's Softening Stance: While the CBN maintains its cautious approach, it recently issued guidelines allowing licensed fintech companies and banks to provide payment services for digital currency exchanges. This signals a potential thaw in the relationship between regulators and the crypto industry.

Future Outlook:

• Continued Evolution: We can expect the regulatory framework to evolve further, with the CBN and SEC likely collaborating to establish a comprehensive set of rules.
• Focus on Innovation and Consumer Protection: Striking a balance between fostering innovation and protecting consumers from financial risks will be a key priority for regulators.
• Global Trends: Nigeria's approach to crypto regulation will likely be influenced by international developments and best practices in the US, Europe and China. 

Overall, the Nigerian crypto scene is on the cusp of an exciting new chapter. With a more defined regulatory environment on the horizon, the country is poised to attract further investment and drive innovation in the Web3 space. It's important to remember that regulations are still evolving, and staying informed of the latest updates is crucial for anyone involved in the Nigerian crypto market.

2. Nigeria’s Crypto Market is Expanding Fastest in Africa

There's strong evidence to suggest that Nigeria's crypto market is indeed expanding faster than any other in Africa. Here are some key points to support this:

Transaction Volume:

• Chainalysis Report: A September 2023 report by Chainalysis, a prominent blockchain research firm, revealed that Nigeria's crypto transaction volume grew by 9% year-over-year, reaching $56.7 billion between July 2022 and June 2023. This impressive growth rate outpaces that of other major African crypto markets like South Africa, Kenya, Mauritius, Ghana and Tanzania.

SOURCE: CHAINALYSIS

• Paxful Data: Paxful, a peer-to-peer crypto exchange platform, consistently reports Nigeria as its top African market. As of October 2023, Nigeria accounted for over 60% of Paxful's trading volume in Africa, further highlighting its dominance.

Market Drivers:

• Economic Challenges: Nigeria's struggling economy, with its weakening currency and high inflation, has pushed citizens towards alternative currencies like Bitcoin and US dollar-pegged stablecoins. These offer perceived advantages like inflation-hedging and potential for financial returns.
• High Web3 Awareness: Survey results released in September by US blockchain software firm Consensys and British data analytics company YouGov featuring respondents from 15 countries indicate that Nigeria has the most cryptocurrency-aware population in the world at 99%. This beats developed economies like the United Kingdom, the United States, Japan and Germany. The global average is 92%.
• Regulatory Progress: While still evolving, Nigeria's recent regulatory steps like the SEC's digital asset framework and the CBN's Virtual Asset Service Provider (VASP) guidelines offer a degree of clarity and encourage responsible growth within the crypto market.

Comparison with other African markets:

• While South Africa boasts a more developed financial infrastructure and larger crypto market size, its growth rate lags behind Nigeria's.
• Kenya still enjoys a significant crypto market presence, but its recent decline in activity, potentially due to regulatory uncertainty, further strengthens Nigeria's position as the fastest-growing market.

It's important to note that the crypto market remains dynamic and volatile, and future growth trajectories could shift. However, based on current trends and available data, Nigeria's claim to the title of Africa's fastest-growing crypto market seems well-founded.

3. Nigeria’s young, tech-savvy population is fueling crypto adoption

Nigeria boasts a young and tech-savvy population which enjoys a high smartphone penetration rate. Nigerian aged between 18 and 34 constitute 26.6% of the population. For a current population of 226.7 million people, that translates to 60.3 million youths, which is higher than the entire populations of many countries. Even so, the median age in Nigeria is 17.2 years compared to a continental median age of 19 years. This means Nigeria will keep dominating Africa’s crypto scene in coming decades.

This creates a fertile ground for adoption of mobile-based crypto applications and services. Here’s how:

• Tech-acquisitiveness: Nigeria has the highest smartphone penetration rate in Africa, with over 40% of the population owning smartphones. Statista forecasts this will grow to 66% or more than 140 million by 2025.This tech-savviness makes Nigerians more receptive to new technologies like cryptocurrencies.
• High internet usage: Nigeria boasts the largest internet user base in Africa, with over 120 million users. This widespread internet access allows young Nigerians to easily access information about cryptocurrencies and participate in the crypto market.
• Search for alternative investments: With inflation hovering [around 29%,](https://www.thecable.ng/breaking-rising-food-costs-push-nigerias-inflation-rate-to-28-9?ref=blog.emurgo.africa#:~:text=The%20consumer%20price%20index%20(CPI,percent%20in%20the%20previous%20month.) Nigerians are looking for alternative investments to hedge against inflation and grow their wealth. Cryptocurrencies, despite their volatility, offer the potential for high returns, attracting young Nigerians.
• Entrepreneurial spirit: Nigerians are known for their entrepreneurial spirit and willingness to take risks. This has made them embrace new technologies like cryptocurrencies and stablecoins as they see them as potential opportunities.

Impact of the young population on crypto adoption:

• Increased trading volumes: Nigeria has one of the highest cryptocurrency trading volumes in Africa, with young people making up a significant portion of the traders. According to a CoinMarketCap 2020 report on cryptocurrency adoption Nigeria recorded 210.6% growth in young crypto users.
• Rising popularity of DeFi: Decentralized finance (DeFi) applications are gaining traction among young Nigerians, who are attracted to the potential for earning passive income and participating in a permissionless financial system.
• Growth of crypto startups: The Nigerian crypto space is seeing a boom in startups, catering to the needs of young crypto enthusiasts. These startups are developing innovative products and services, such as crypto wallets, exchanges, and educational platforms.

4. Stablecoins are Becoming Dominant a Store of Value for Retail Investors

In the dynamic Nigerian crypto scene, stablecoins are rapidly emerging as the preferred tokens for retail investors. 

But why are these US dollar-pegged digital currencies stealing the show? 

• Hedging Against Inflation: Nigeria's inflation rate, currently hitting a 27-year high, is a major concern for citizens. Traditional savings accounts offer meager returns that are easily eroded by inflation. Stablecoins provide a safe haven for investors seeking to preserve the value of their savings. With the Naira’s value also plunging against the US dollar, losing 47% of its value in the past 12 months, stablecoins are becoming a better alternative. 

SOURCE: Xe Currency Data, Nigeria

• Lower Transaction Fees: Compared to volatile cryptocurrencies like Bitcoin, stablecoins boast significantly lower transaction fees. This makes them ideal for everyday transactions and micro-payments, attracting retail investors who want to utilize crypto 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 like Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) act as the lifeblood of DeFi, allowing Niger
• ians to participate in these innovative financial products.
• Ease of Use and Stability: Stablecoins offer a familiar experience for users accustomed to traditional fiat currencies. Their price stability makes them less intimidating for new investors compared to the often-volatile world of other cryptocurrencies.
• Cross-border Payments: Stablecoins can facilitate faster and cheaper cross-border payments compared to traditional money transfers. This is particularly beneficial for Nigerians who receive remittances from abroad or conduct international business.

In accordance with a circular issued by the Central Bank of Nigeria in December, a collaborative effort involving Nigerian banks, fintech firms, and blockchain companies is underway to create a stablecoin named cNGN for the Naira this year.

Anticipated to uphold the standard features found in prominent stablecoins in Nigeria such as USDT, the cNGN token is designed to possess interoperability features with various public blockchains and compete in the market. This capability will enable it to broaden its functionality beyond Nigeria, facilitating smooth global transactions.

The growing popularity of stablecoins is fueling a wave of innovation in the Nigerian crypto space. Startups are developing:

• Stablecoin-based payment platforms which  allow users to pay for goods and services using stablecoins, promoting wider crypto adoption.
• Stablecoin-powered micro-lending platforms that offer small loans to underbanked Nigerians using stablecoins as collateral, fostering financial inclusion.
• Yield-generating stablecoin investment products that allow investors to earn passive income on their stablecoin holdings, further boosting their appeal.

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