PayPal Abandoned Me; Crypto Saved Me

Nigeria happened to me in 2021. I lost my job because payment gateways like PayPal and Stripe did not offer their services to Nigerians.

But that was not the only time. I was near losing another job in 2022. I went into panic mode. I started seeking alternatives until I stumbled on a conversation on X about accepting payments in crypto.

I immediately went down that rabbit hole, convinced the client to agree to pay with crypto, and received payment for my work in USDT. It is safe to say I never looked back since then. Every penny earned working remotely so far has been in cryptocurrency. This will sound dramatic, but cryptocurrencies—stablecoins, because I need to niche it down—changed the course of my life.

I live and work in Nigeria where stablecoin adoption is experiencing a surge. The reason for this surge can be attributed to the fact that Nigeria (Africa's largest economy) is battling a crippling devaluation of its local currency, the Naira. This has forced citizens towards other forms of storing value as their savings are getting eroded before their eyes. Even though my journey towards discovering stablecoins was because I wanted to get paid for my work, I've stayed here because it has ultimately proven profitable. Especially when you consider the currency devaluation mentioned already. I’m sure my story isn't unique. Thousands of freelancers and knowledge workers who work remotely would give you their version of the same story.

In this deep-dive, we’ll talk about stablecoins in-depth, what they are, the types of stablecoins there are, their use cases, challenges for both users and businesses and a path forward.

Below is an outline of what we’d cover in this piece:

• What are Stablecoins?
• Types of Stablecoins
• Use Cases Driving the Adoption of Stablecoins in Nigeria
• Challenges for Users
• Challenges for Businesses
• Path forward
• Conclusion

Nigeria's crippling economy and inflation which reached a 30-year high of 28.9% in December 2023, as per Trade Economics has pushed millions of people, especially the youth demography into trading and storing value in stablecoins and other cryptocurrencies. According to a report by Chainalysis, between July 2022 and June 2023, Nigeria received over $56.7 billion in cryptocurrencies. This is the highest in Africa, more than doubling that of the country behind it in South Africa with $22 billion.

Source: Chainalysis

What Are Stablecoins?

Stablecoins are cryptocurrencies pegged to another currency, commodity, or financial instrument. This peg gives the stablecoin the same value as the currency they are pegged to. The USDT for example is pegged to the U.S dollar. The crypto market is a very volatile one, and this makes investments in cryptocurrencies unappealing. This is where stablecoins are important because they provide an alternative means of keeping the value of the cryptocurrency steady. They are also a great way to onboard new users into the crypto industry. Nigeria is a perfect example of crypto adoption via stablecoins.

With the government's anti-crypto regulatory outlook through the Central Bank of Nigeria (CBN), stablecoins have proven valuable in onboarding Nigerians into crypto. An excerpt from a Wall Street Journal article succinctly explains this. “For traders and investors, however, Stablecoins address a problem that plagues many popular crypto exchanges around the world—the exchanges don’t have relationships with banks, meaning investors can’t use dollars, euros, or other government-backed currency to buy the cryptocurrencies they want to trade. So to purchase cryptocurrencies, traders often buy stablecoins with dollars on an exchange that has a relationship with a bank and then transfer the Stablecoins to the exchange where they want to trade. Similarly, traders often can’t sell cryptocurrencies for dollars, so they sell into stablecoin instead. As a result, many exchanges use stablecoin as trading pairs, not dollars.”

The last three sentences do not apply to the Nigerian Market because banks—based on directives from the CBN—do not have relationships with exchanges. This has forced Nigerians towards the next best option for getting cryptocurrencies; Peer-to-Peer (P2P) transactions. In 2023, Nigeria had the highest P2P exchange volume in the world. This was after being ranked 18th and 17th in 2021 and 2022 respectively. This is a mind-blowing rate of adoption if I do say so myself.

Nigeria is second only to India on the global crypto adoption index. And with its young and tech-savvy population turning to cryptocurrency to sort their financial needs, it's no surprise the country is first in sub-Saharan Africa for crypto transactions. Between July 2022 and June 2023, the region accounted for just 2.3% of the global cryptocurrency transaction volume. If you think this is small, you are right. Compared to its next emerging market,—Latin America, with 7.3%—Sub-Saharan Africa is the smallest crypto economy in the world.

Sub-Saharan Africa crypto value received. Source: Chainlaysis.

Types of stablecoins:

• Fiat-Collateralized Stablecoins: These stablecoins use reserves of a fiat currency like the U.S. dollar as collateral to assure the stablecoin's value. These reserves are maintained by independent organizations like Circle (USDC), Tether (USDT), and TrueUSD (TUSD). All of these are digital dollars backed 1:1 with USD.

• Crypto-Collateralized Stablecoins: These are stablecoins that are backed by other cryptocurrencies. Cryptocurrencies are volatile, and because of this, crypto-backed stablecoins are overcollateralized. This means that the value of the cryptocurrency held in reserve far exceeds the value of the stablecoins being issued. It is insurance for any potential decline in the price of the reserve cryptocurrency. An example of this is MakerDAO's DAI.

• Algorithmic Stablecoins: These are stablecoins backed by an algorithm and smart contracts—a computer program operating based on a set of commands and formula given to it. Algorithmic stablecoins are often under-collateralized, meaning they do not necessarily rely on a reserve to maintain value. These stablecoins maintain their peg via a system that has balancer or share tokens to absorb market volatility. An example is the algorithmic stablecoin TerraUSD (UST) of the Terra blockchain system. To keep its value steady, UST interacted with the governance token LUNA. This dynamic depends heavily on market demands and does not guarantee safety because the entire system can collapse if demand or supply decreases or increases below a certain threshold. This is evidenced by the crash of the TerraUSD (UST) in May 2022, after it plunged by more than 60% and vaporized its peg to the U.S. dollar. This crash sunk over $40 billion of investors' funds in days.

Use Cases Driving the Adoption of Stablecoins in Nigeria

Unlike many other countries where speculation is the catalyst driving adoption, Nigeria’s stablecoins adoption isn't one-dimensional. While multifaceted, the one major cause of adoption has been the efficiency with which financial transactions can be carried out with stablecoins. We'll explore some of the use cases of stablecoins and why the adoption rate has been widespread in Nigeria below.

• Hedge Against Inflation:

Nigeria is currently experiencing one of its worst inflation. In February 2024, Nigeria's inflation was 31.70%. Up by 1.80% from 29.90% in January 2024. To compare year-on-year, the inflation rate in February 2023 was 21.91%, making this year's 9.79% higher. Almost simultaneously, the Naira has lost its value against the dollar by about 55%. Especially since the CBN devalued it in June 2023 as they unified the foreign exchange market. Due to this inflation and a series of negative economic developments, small retail investors have increasingly turned to stablecoins as an alternative to preserve their wealth.

Stablecoins pegged to strong currencies like the U.S. dollar, offer a shield against this value erosion. This has made them a tool of choice for people looking to preserve their wealth in Nigeria. We’ve seen this happen in other countries going through the same economic troubles like Argentina and Turkey.

• Cross-Border Transactions:

Nigerians rely heavily on remittances from abroad. According to the World Bank, $20 billion was remitted to Nigeria in 2023. Of this amount, only 10% reached the Nigerian foreign exchange market. This was disclosed by the Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele. The reasons are not far-fetched. Traditional channels are either too expensive, too slow, or both with remittance fees reaching as high as 20% when using traditional banking systems.

You'd agree that that's a lot of money to lose to fees. As a result, Nigerians are exploring other means of sending money back home. Speaking at a panel discussion at the 2024 Economic Outlook and Budget Analysis organized by the Lagos Chamber of Commerce and Industry, LCCI, Oyedele said, “The World Bank said for 2023 our diaspora remittances was about $20 billion. We estimate that more than 90% of that did not get to Nigeria. They were being externalized.”

“We’ve spoken to loads of Nigerians almost everywhere and they told us how they send money now. They use digital apps. We have the list of those apps. They use parallel market rates. So, they credit Naira here in Nigeria without bringing the Dollars.”

Apart from using digital apps to avoid these fees and bureaucratic processes involved in remitting money back home, Nigerians have increasingly turned to cryptocurrency. Cryptocurrencies by design guarantee fast, secure, and cheaper means (way less than 20%) of sending funds across international borders. Especially stablecoins.

Apart from remitting money home, because Nigeria's capital controls make it difficult to access international markets, many small companies based in Nigeria have turned to crypto to conduct international trade. Merchants trading with counterparties based in Europe or Asia have also turned to crypto.

Challenges for Users

Despite these benefits, Nigerians face challenges when adopting stablecoins:

• Limited Financial Literacy: Regardless of the impressive adoption rate, financial literacy around stablecoins is still a significant hurdle for many Nigerian users. Many need a basic understanding of crypto, blockchain technology, and stablecoin pegging mechanisms. This knowledge gap creates a vulnerability that can be exploited in several ways like phishing scams, investing in unregulated offerings, misunderstanding stablecoin volatility, etc.

• Regulatory Uncertainty: The CBN's stance on cryptocurrencies has been ambiguous. In 2021 the apex bank issued a letter to commercial banks prohibiting all cryptocurrency transactions, forcing many crypto-focused services in the country to shut down. In 2022 the Nigerian SEC issued a regulatory framework for cryptocurrencies that established registration requirements for exchanges, custodians, and digital asset offerings. This move was an effort towards finding a middle ground for the crypto industry. 2023 saw the SEC begin to process applications for crypto exchanges and licenses and set up a regulatory Sandbox for crypto service providers, signaling support for RWA tokenization efforts. These apparent 'moves towards accepting' digital assets have been thrown into the grey zone in 2024. After approving the launch of a national stablecoin, the cNGN (which was later postponed), the government has gone after exchanges and P2P services shutting down and delisting the NGN token. Overall, regulations remain unclear and the uncertainty is discouraging the pace at which adoption spreads.

Challenges for Businesses

While businesses are gaining from stablecoin adoption, challenges exist:

• Price Volatility: Stablecoins are pegged to fiat currencies, but these currencies can fluctuate. This can introduce an element of risk for businesses relying on stablecoins for transactions.

• Integrating with Existing Systems: Beyond price volatility, businesses face hurdles integrating stablecoins with existing financial systems as they require significant IT infrastructure upgrades. Especially for smaller players.

• Unclear Regulatory Landscape: The unclear regulatory landscape surrounding cryptocurrencies in Nigeria further discourages businesses due to potential disruptions and legal risks.

• Potential Capital Flight: Increased stablecoin adoption could lead to capital flight, as businesses and individuals would move their wealth offshore. This would impact the Nigerian economy negatively.

Path Forward

Despite the challenges, the potential benefits of stablecoin adoption in Nigeria are undeniable. Here are some ways we can take advantage of this and ensure its sustainable growth and that of the economy:

• Collaboration Between Public and Private Sectors: The CBN can work with financial institutions and tech companies to develop clear regulations for the adoption of stablecoins. This will create a safe environment for both users and businesses.

• Financial Literacy Programs: Initiatives that promote financial literacy and crypto education are crucial. These programs can empower Nigerians to make informed decisions about stablecoins and other digital assets. There needs to be more communities like Superteam Nigeria spreading the gospel of stablecoin adoption and helping blockchain projects build, launch, and grow.

• Infrastructure Development: With more investments and initiatives that expand internet access and promote smartphone ownership, more Nigerians will be willing to participate in the digital economy and leverage stablecoins.

Conclusion

Stablecoin adoption in Nigeria is a story in development.  While challenges remain, the potential benefits for individuals, businesses, and the economy are significant. Instead of attacking and trying to stop this technology, through a collaborative approach that prioritizes education, regulation, and infrastructure development, Nigeria can harness the power of stablecoins to create a more inclusive and prosperous financial future.

This deep dive aims to provide a comprehensive overview of stablecoin adoption in Nigeria. By presenting both the opportunities and challenges, it can act as a springboard for further discussion and decision-making among key industry players like the CBN, financial institutions, and technology companies.