Stablecoin Adoption in Nigeria — A Deep Dive

15 min readMay 15, 2024

As the most populated country in Africa, Nigeria is a leader in global cryptocurrency trading volume. Despite some limitations, young Nigerians see crypto as a way to deal with inflation and earn money online.

Things were rocky in early 2023, with the Central Bank of Nigeria (CBN) banning banks from working with crypto companies. However, in December 2023, the CBN lifted the ban, signalling a potential move towards a more regulated crypto market.

Recently, in May 2024, things took another turn. The government classified crypto as a national security risk, and some fintech companies are now blocking crypto transactions.

In line with CBN regulation, we will close the account of anyone engaging in crypto or other virtual assets transactions and share their details with relevant authorities — Moniepoint notification on May 2, 2024.

This article dives into stablecoins, their use cases, and challenges in Nigeria. So, let’s start with why stablecoins matter.

Table of content
∘ Why Stablecoins?
∘ Types of Stablecoins
∘ The CBN and Stablecoins in Nigeria
∘ Top 5 Use Cases of Stablecoin in Nigeria
∘ Challenges of Stablecoin Adoption
∘ The Road Ahead
∘ Key Takeaway
∘ References

Why Stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable price, typically pegged to a fiat currency like the US dollar. Unlike traditional cryptocurrencies known for not being stable, stablecoins aim to hold a consistent value relative to their peg.

Different stablecoins achieve stability through various methods, such as holding reserves of the pegged currency (fiat-backed) or other crypto assets (crypto-backed). Like other cryptocurrencies, stablecoins can be used for digital transactions, offering potential advantages in speed and cost.

The Nigerian currency, Naira has been suffering from inflation, with prices of goods and services generally rising over time. This has reduced the Naira’s purchasing power. In simpler terms, each Naira buys you less and less with each passing year.

On the other hand, stablecoins are designed to maintain a relatively stable price. Since they are typically pegged to a reserve asset like the US dollar, their value fluctuates much less than the Naira. This makes them a more attractive option for storing value.

For example, if you buy a stablecoin pegged to the US dollar today, its value should theoretically remain close to $1 even if the Naira weakens. This allows you to preserve your purchasing power over time, unlike the Naira which might lose value due to inflation.

Types of Stablecoins

Stablecoins achieve stability through different mechanisms, which categorize them into four main types:

Fiat-backed stablecoins: These are the most common type. They are backed by reserves of real-world currencies, usually held in bank accounts. For every stablecoin in circulation, there’s an equivalent amount of the reserve currency stored. Examples include Tether (USDT) and USD Coin (USDC), both pegged to the US dollar.
Commodity-backed Stablecoins: These stablecoins use commodities like gold, silver, or even real estate as collateral. The value of the stablecoin is tied to the value of the underlying commodity. Examples are scarce due to the complexity of managing physical assets, but Pax Gold (PAXG) is a popular option backed by physical gold reserves.

3. Crypto-backed stablecoins: These stablecoins are collateralized by other cryptocurrencies, typically established ones like Bitcoin or Ethereum. The value of the stablecoin is determined by the value of the crypto holding it up. This approach is complex because the underlying crypto can be unstable itself. Dai (DAI) is a well-known example.

4. Algorithmic stablecoins: Also known as non-collateralized stablecoins, they are the most unique. They don’t rely on any external assets for collateral. Instead, they use smart contracts and algorithms to manage supply and demand. If the price of the stablecoin goes above its peg, the algorithm increases supply to bring the price down. Conversely, if it falls below the peg, the supply is decreased. TerraUSD (UST) was a popular algorithmic stablecoin, but lost its peg in May 2022, highlighting the inherent risk in this approach.

While stablecoins offer more stability than the Naira, they are not entirely risk-free. The peg mechanism can sometimes break (depegging), and the value of the stablecoin can fluctuate depending on market conditions

The CBN and Stablecoins in Nigeria

Nigeria’s stablecoin adoption is driven by high inflation and faster transactions. Nigerians use stablecoins like Tether (USDT) and USD coin (USDC) to evade the weakening Naira. Unlike traditional methods, stablecoins offer a quicker and cheaper way to send and receive money.

A chainalysis report shows Nigerians are among the highest adopters globally, using stablecoins to fight inflation and for faster payments. Transactions are primarily peer-to-peer or international transfers. Despite this, day-to-day purchases with stablecoins are still uncommon.

Web3 envisions a future where stablecoins are integrated with DeFi applications. Nigerians could use them to borrow, lend, and earn interest. The aim is to create a more inclusive financial system. Stablecoins could become a tool for the millions of Nigerians to access financial services.

The Central Bank of Nigeria (CBN) has cast a cautious shadow over the cryptocurrency landscape, creating a key challenge for stablecoin adoption in the country. In 2021, the CBN issued a directive prohibiting banks from facilitating cryptocurrency transactions. This move signalled a strong stance against cryptocurrencies, including stablecoins.

In an attempt to stop the devaluation of the currency, Naira, the Nigerian government has blocked access to cryptocurrency exchanges operating in the country. How does a government block access to websites? Usually, it’s through telecom operators, which can be asked to blacklist specific IP addresses. In the case of Nigeria, the Nigerian Communications Commission (NCC) ordered telecom companies to restrict consumer access to the websites of Binance, Coinbase, Kraken and many other crypto exchanges, including local operations.

Do these restrictions work? Well, to an extent, but those who want to buy crypto assets have a way. VPNs can get around IP restrictions. Binance confirmed that “some” of its Nigerian users have experienced issues accessing the site. IP blocking is a game of whack-a-mole, hard to enforce and hard to maintain.

Peer-to-peer (P2P) platforms are particularly popular in Nigeria — according to blockchain forensics firm Chainalysis, Nigeria ranks first in global P2P exchange trade volume. While the IPs of well-known P2P platforms can be blocked, many smaller ones have not registered and that could in theory dodge an IP freeze.

The Nigerian government blames these crypto exchanges for the devaluation of the naira. The official reason given for the move against IPs is, according to Premium Times, the “continuous manipulation of the forex market”, and the decision was taken “following reports that currency speculators and money launderers were using [crypto platforms] to execute criminal activities.

CBN has cited concerns about money laundering, terrorist financing, and potential risks to financial stability as reasons for its cautious approach to stablecoins. Currently, there is no specific regulatory body for stablecoins in Nigeria. This lack of clarity creates uncertainty for businesses and individuals interested in using them. Without clear regulations, businesses hesitate to offer stablecoin-related services, hindering their wider adoption and potential benefits for Nigerians.

In Nigeria, several firms have indicated an interest in developing a stablecoin. One of which is the Compliant-Nigerian-Naira (cNGN). Let’s explore the proposed cNGN stablecoin with the eNaira central bank digital currency.

eNaira CBDC

The Nigerian eNaira is a ground-breaking initiative in Africa, being the first official Central Bank Digital Currency (CBDC) launched on the continent. It is essentially the digital equivalent of the physical Nigerian Naira. It’s a legal tender issued and backed by the Central Bank of Nigeria (CBN), just like the paper bills.

The eNaira runs on a private blockchain because the CBN wants to control onboarding, KYC, and the creation of eNaira. This is why the CBN used the Hyperledger Fabric, a system that allows private organisations to create their private blockchain.

The digital currency is stored electronically in a secure eNaira wallet on your phone or other devices. Unlike cryptocurrencies, the eNaira’s value is pegged to the physical Naira, meaning 1 eNaira = 1 Naira.

Despite the launch in October 2021, the eNaira has seen a slow initial uptake. The CBN is working on strategies to increase its user base, such as partnerships with financial institutions and offering incentives for eNaira transactions.

cNGN stablecoin

The cNGN stablecoin is a proposed digital currency project in Nigeria that has generated significant interest. The goal is to reshape the financial landscape in the country.

It is a project developed by the Africa Stablecoin Consortium (ASC), a group of Nigerian financial institutions, fintech companies, and blockchain experts. This collaboration aims to leverage the expertise of various stakeholders to create a robust and trustworthy stablecoin.

Similar to Nigeria’s digital currency, eNaira, cNGN could potentially bring more Nigerians into the financial system, especially those without access to traditional banks. Regulations around cryptocurrency and stablecoins in Nigeria are still evolving. The eNaira, already launched by the Central Bank of Nigeria, presents competition for cNGN.

Initial plans for a February 2024 launch were for a “sandbox environment,” meaning a limited trial run not accessible to the general public. This suggests a cautious approach by the ASC to test and refine the cNGN system before wider rollout.

From my research, the success of cNGN and eNaira will depend on various factors, including:

Clear guidelines from Nigerian authorities for building user confidence.
Cooperation between the ASC, the Central Bank of Nigeria, and other stakeholders for a successful launch.
Educating Nigerians about the benefits, to drive adoption.

The cNGN stablecoin has the same use cases and challenges as other fiat-backed and crypto-backed stablecoins.

Top 5 Use Cases of Stablecoin in Nigeria

Stablecoins are a novel financial instrument with the potential to reshape transactions and financial inclusion. Here’s a breakdown of their key use cases from both a user and business perspective:

Obstruct inflation

In countries with high inflation, like Nigeria, stablecoins offer a more stable value store than the local currency. Users can hold them to preserve purchasing power over time. Inflation can erode the value of your savings over time. This means a loaf of bread that costs #500 today might cost #1000 next year due to inflation.

Unlike fiat currencies, many stablecoins are pegged to assets with a more stable value, like the US dollar. This means their price should ideally stay relatively stable compared to a local currency experiencing high inflation.

The data below shows that interest in bitcoin and stablecoins increases when naira’s value drops.

Stablecoins volume received by Nigerian exchanges vs. Naira value

Some platforms offer interest in holding stablecoins. While not guaranteed, this interest earned can outpace inflation, allowing your holdings to maintain or increase purchasing power. The effectiveness of a stablecoin as an inflation obstruction depends on how well it maintains its peg. If the peg breaks and the stablecoin loses value, it won’t protect against inflation.

2. Faster and cheaper remittances

Money earned by Nigerians who are employed in other countries and sent back home to their families or communities is typically sent through various channels such as banks, money transfer services, or online platforms. They serve as an important source of financial support for many families in Nigeria, contributing to their livelihoods, education expenses, and healthcare.

Top 10 highest remittance-receiving countries in the world in 2023

Traditional remittance methods, like money transfer services, can be slow and involve multiple intermediaries, leading to delays and fees. Stablecoin transactions occur on blockchain networks known for their fast processing times. This significantly reduces the time Nigerians work abroad to send money back home.

These traditional money transfer services also often charge high fees, eating into the amount received by the beneficiary in Nigeria. Stablecoin transactions cut out some of these middlemen, leading to lower overall fees. While transaction fees exist on blockchains, they are typically lower than traditional remittance services, especially for smaller transactions.

As blockchain technology provides transparency in transactions, Nigerians working abroad can track their transfers in real-time, offering peace of mind about where their money is going.

3. Cross-border payments

Stablecoins facilitates seamless cross-border payments, eliminating the need for currency conversions and associated fees. This benefits freelancers, online shoppers, and individuals with international business dealings.

Cross-border payments often face hurdles like slow processing times, high fees, and currency fluctuations. Stablecoins address these issues and offer several advantages for international transactions.

Nigeria received over $56 billion in crypto, between July 2022 and June 2023

Traditional cross-border payments involve multiple intermediaries, each taking a cut. Stablecoins, operating on blockchain networks, bypass these intermediaries, leading to significant cost reductions. Unlike traditional systems with waiting periods and cut-off times, stablecoin transactions leverage blockchain technology for near-instantaneous settlements. This means faster access to funds for the receiver.

Many stablecoins are pegged to stable assets like the US dollar. This offers predictability and protection against fluctuations in the sender’s or receiver’s local currency. Blockchain transactions are publicly recorded, ensuring transparency and immutability. This reduces the risk of fraud and errors compared to traditional systems.

Additionally, traditional systems often have operational hours, but blockchain transactions with stablecoins can occur anytime, anywhere.

Top stablecoins by market dominance — Coinpedia

4. Reaching new markets

Stablecoins open doors to new markets, particularly for businesses selling digital products or services globally. Customers pay using stablecoins, eliminating currency conversion hurdles.

In many developing countries, a significant portion of the population lacks access to traditional banking services. Stablecoins, accessible through crypto wallets, open up new customer segments for businesses by facilitating easier online payments.

Setting up traditional payment infrastructure for businesses entering new markets is complex and costly. Stablecoins offer a faster and more affordable way to start accepting payments from new customers.

Also, for businesses operating in regions with unstable currencies, stablecoins pegged to assets like the US dollar provide more price stability and predictability regarding international transactions.

Not everyone in new markets may be familiar with or comfortable using cryptocurrencies. Building awareness and education around stablecoins is crucial for adoption.

5. Fundraising and investment

Businesses raise capital through stablecoin offerings, reaching a wider pool of global investors. Compared to traditional fundraising methods that involve banks and intermediaries, stablecoins leverage blockchain technology for faster settlement times and potentially lower fees. This benefits both startups that are raising capital and investors who are participating in funding rounds.

Traditional financial markets have operational hours, but fundraising with stablecoins can happen anytime, anywhere on the global blockchain network. This increased accessibility opens up new opportunities for startups and investors alike.

Stablecoins being divisible into tiny units enables fractional ownership of assets. This allows for greater participation in fundraising by making investments more accessible to a wider pool of investors, even those with limited capital.

The rise of Decentralized Finance (DeFi) powered by stablecoins opens doors to innovative fundraising models. For instance, Initial Coin Offerings (ICOs) are conducted using stablecoins, simplifying the process and reaching a broader investor base. Blockchain transactions involving stablecoins are publicly recorded, ensuring transparency and immutability. This increases investor confidence by reducing the risk of fraud or errors compared to traditional methods.

Challenges of Stablecoin Adoption

Nigeria has emerged as a leader in cryptocurrency adoption, but there are concerns about the implications of widespread stablecoin use. While stablecoins offer unique advantages, their adoption presents a complex set of challenges that need to be addressed;

Financial stability concerns

The CBN fears widespread stablecoin adoption could undermine its control over monetary policy. Stablecoins could disrupt money supply and capital flight if not carefully regulated.

If Nigerians flock towards stablecoins as a primary store of value, the effectiveness of the CBN’s traditional monetary policy instruments could be reduced. Nigerians might convert their Naira holdings to stablecoins, leading to capital outflow and further weakening the Naira.

While some stablecoins are pegged to supposedly stable assets like the US dollar, they are not immune to price fluctuations. If the peg weakens or breaks, it can cause instability in the Nigerian financial system, especially if stablecoins are widely used for transactions or savings.

Many stablecoins rely on reserves of underlying assets like US dollars to maintain their peg. If these reserves are not managed properly or become inaccessible, it can threaten the stability of the stablecoin and potentially cause financial panic.

The anonymity associated with some cryptocurrencies can be attractive for criminal activities. If stablecoins become widely adopted, they could be used to launder money or finance illegal transactions, impacting financial stability and security.

Security and operational risks

Cryptocurrencies, including stablecoins, operate on decentralised networks. While this offers transparency, it also makes them vulnerable to hacking attacks. Users could lose their funds if exchanges or wallets holding stablecoins are compromised. Incidents like the 2020 Tether hack, where 300,000 units of USDT were stolen, highlight the potential vulnerabilities.

While designed for stability, some stablecoins, particularly those backed by crypto assets, can experience price fluctuations, especially during market downturns. This volatility can negate the perceived advantage of stability.

Unlike traditional bank accounts, access to stablecoins relies on private keys. Losing these keys essentially means losing access to your funds. Secure storage and management of private keys is crucial but can be challenging for some users.

Some stablecoins rely on centralised entities to hold reserve assets. If these custodians are compromised or experience financial difficulties, it could threaten the stability of the peg and lead to financial losses for users.

Limited infrastructure

Due to the growing population and demand for internet services, Nigeria has one of the largest smartphone markets in Africa. The market is growing staggeringly, with market penetration estimated to reach 66% by 2025.

Despite the penetration, many Nigerians do not fully understand stablecoins' underlying technology and risks. Lack of financial literacy can lead to impulsive investment decisions and financial losses.

For widespread adoption, stablecoins need to integrate seamlessly with traditional banking systems. However, a significant portion of Nigeria's population remains unbanked or underbanked. This lack of integration makes it difficult for people to easily convert between fiat currency and stablecoins.

Also, there are relatively few cryptocurrency exchanges in Nigeria. This limited infrastructure makes it inconvenient for people to buy, sell, or withdraw cash using stablecoins.

Social concerns

The anonymity associated with some crypto transactions raises concerns about the financing of criminal activities. Social engineering scams, phishing attacks, and fraudulent investment schemes targeting stablecoins can disproportionately impact those new to the space.

Many Nigerians, particularly those outside urban areas or with limited technological exposure, may not be familiar with stablecoins or cryptocurrencies in general. This lack of awareness can hinder adoption and make them susceptible to scams or misinformation.

Understanding how stablecoins work, their risks and benefits, and how to use them securely requires a certain level of financial literacy. If a significant portion of the population lacks this knowledge, it can intensify social inequalities and exclude them from potential financial gains.

Even stablecoins pegged to fiat currencies can experience some price fluctuations. This inherent volatility can be concerning for potential users, especially those unfamiliar with the crypto market or with limited financial resources.

The Road Ahead

These challenges ravaging the widespread of stablecoin in Nigeria can be resolved. Most importantly, the government must be ready to show support and acceptance.

Firstly, the Central Bank of Nigeria (CBN) can establish clear regulations for stablecoins. This will mitigate risks like money laundering and ensure proper reserve management by stablecoin providers. Regular audits of stablecoin reserves by independent bodies can increase trust and confidence in the peg mechanism.

“Global crypto trading platforms should be registered or licensed in Nigeria and subject to the same regulatory requirements applicable to financial intermediaries following the principle of the same activity, same risk, and same regulation,” — a recent IMF report highlighted.

Secondly, exchanges and wallet providers should invest in robust security measures and user education on secure storage practices to prevent hacks and scams. Promoting the use of well-established and secure blockchain protocols can minimize vulnerabilities in smart contracts used by stablecoins.

The government and private collaboration can expand and promote smartphone affordability to increase digital inclusion. Collaboration between cryptocurrency companies and banks can facilitate easier conversion between fiat and stablecoins. The establishment of more cryptocurrency exchanges across Nigeria can improve accessibility.

Lastly, educational institutions can launch financial literacy campaigns to educate Nigerians about stablecoins, their risks, and benefits. The CBN can set up regulations focused on consumer protection to safeguard users from scams and promote transparency in the stablecoin market.

I believe Nigeria can create a more stable, secure, and inclusive environment for stablecoin adoption. An environment that allows Nigerians to tap into the potential advantages stablecoins offer, such as faster and cheaper transactions, new investment opportunities, and financial inclusion for the unbanked population.

Key Takeaway

Stablecoins hold immense promise for Nigeria. They can revolutionize remittances, expand financial inclusion, and offer new investment opportunities. The responsibility lies on the Central Bank of Nigeria (CBN), financial institutions, educational bodies, and the tech industry to work together.

Nigeria can utilise the power of stablecoins for a more inclusive and prosperous financial future. The call to action here is clear — collaborative effort is needed to address the challenges and sustain the potential of stablecoins for Nigerians.