View of Nigeria’s capital Lagos. Image from NAPARAZZI via flickr.com. License: Creative Commons
Nigeria regulates cryptocurrencies. What has long happened in Europe, North America and most of Asia is now arriving on the African continent. Nowhere else do Bitcoin and other cryptocurrencies fulfill such an important economic function. This underlines a new analysis. It stands to reason that the financial regulator SEC in Nigeria will be one of the first in Africa to start regulating Bitcoin and other cryptocurrencies. After all, Nigeria is the most populous country in Africa, the largest economy on the continent and its “crypto hotspot”. If you ask Google Trends where Bitcoin is being searched for most in the world, Nigeria is by far in first place – followed by South Africa by the way.
The SEC of the country has now presented a regulation that was still rather unclear. Above all, she announces that “publishers or sponsors of virtual assets” are to be regulated by the commission. The prerequisite for this, however, is that the SEC regards the asset as “security”, an English-language term that is only inadequately translated into German as “security”. However, the SEC emphasizes that every virtual asset will be considered security as long as its issuer does not prove the opposite, for example by showing that the asset has a specific purpose. At the same time, the SEC means that it regards “crypto assets” as commodities, i.e. goods or raw materials, if these are traded on a regulated exchange. Bitcoin and other cryptocurrencies are thus becoming commodities. While little is known about how tight the regulation will be, some observers are optimistic that prudent regulation will help create the legal certainty many investors need.
A holey banking system and a weakening currency
Like hardly any other country, Nigeria makes it clear that cryptocurrencies have now also arrived in Africa. As already mentioned, the country has the highest density of Google search queries; the analysis company Chainalysis gives it eighth place in their “Global Crypto Adoption Index”, after South Africa and Kenya. These three countries apparently form the most important crypto locations on the continent, with Nigeria naturally enjoying the highest importance as the largest economy. In fact, Bitcoin and other cryptocurrencies fulfill certain functions in a country like Nigeria that are rarely similarly relevant in Europe. The financial infrastructure in the country is partially full of holes, and the regulators have issued strict requirements on how citizens can spend their money. Ray Youssef from the P2P exchange Paxful says that many people in Africa already have money – but could not use it. If citizens have access to a banking system, it is often cut off from the rest of the world, making it almost impossible to send money abroad. Even if you only want to send it to the neighboring country, you have to make several jumps, which often involve a change in dollars on the black market, high fees and long waiting times. Another problem with Nigeria’s financial system is its own currency, the naira. In any case, it has depreciated sharply against the dollar over the past decade, and reportedly lost a good 35 percent in 2020 alone. Because the government fixes exchange rates, but the actual price is often negotiated on the black market, the actual value of the naira is difficult to determine. Finanz.net and Google calculate 382 naira for one dollar, but a calculation of black market prices calculates 465 naira. The exchange rate peg is associated with the usual problems that start with the black market and end with price pegs and capital controls. Some banks are now going so far as to allow their customers to spend a maximum of 100 dollars, which is causing considerable problems for many Nigerians, especially business people. I do not know whether the banks are reacting to stricter regulation or whether the rule expresses a dollar shortage. The economic situation in Nigeria was already unfavorable in mid-2017, as described, the decline in the price of oil, inflation in the naira, as well as price fixing and capital controls paralyzed the economy. Apparently nothing has changed in this situation since then; rather, the economically devastating year 2020 is likely to have exacerbated the situation. At least the World Bank fears that Nigeria will slide into the “worst recession in four decades”. Under these circumstances, Bitcoins and other cryptocurrencies become both an important store of value and an instrument for Nigerian residents to send money abroad – or to receive money from abroad. Chainalysis’ report on Bitcoin in Africa confirms this.
Bitcoin as Africa’s single currency?
According to the analysis firm, Africa is the region with the smallest cryptocurrency economy. The continent receives and sends a good 8 billion dollars a year through onchain transactions. Yet these relatively small amounts “create a life changing benefit in the region” by enabling “low-cost remittances and an alternative method of saving”. In no region in the world is the proportion of small traders and private users among crypto users as high as in Africa. A large part of this, according to Chainalysis, is what is known as remittance, which means the transfers from guest workers abroad to their families at home. The countries south of the Sahara – which also includes Nigeria – provide 25 million guest workers in other countries, who sent around 48 billion dollars to the region in 2019. Chainalysis’ analyzes show that around $ 562 million in cryptocurrencies “was sent from overseas to Africa the size of private payments”. Not all of these payments are likely to represent a remittance from guest workers, “but regions with a high concentration of migrants from Africa, such as North America, Western Europe and East Asia, are strongly represented.” Both together – origin and volume of the payments – could be a strong indicator that cryptocurrencies are used for remittance.
However, transfers between African countries are just as important. The fact that high fees and long detours make these payments difficult is likely to be a major obstacle to the integration of African economies – and one of the reasons for the old, so far unfulfilled dream of an African single currency. The CEO of Paxful knows some examples of Africans who use Bitcoins to move money between African countries, for example from South Africa to Nigeria or from Kenya to Malawi. Bitcoin and other cryptocurrencies could trigger a sustainable, positive economic effect in this part of the world more than anywhere else – namely, to tear down the hurdles that prevent the economic integration of Africa. In addition, cryptocurrencies are paving the way between Africa and other parts of the world such as China, which is increasingly present on the continent. Many Nigerian entrepreneurs have business contacts in China, but often have problems transferring money directly to China, which is why they have to exchange naira for dollars on the black market and send them to China via Hong Kong. With cryptocurrencies, such payments are much easier, cheaper and faster. Chinese investor Dovey Wan adds for Chainalysis that Chinese citizens working in Africa often use cryptocurrencies to bring money back to China.