Nigeria’s Crypto Ban Impedes eNaira Adoption espite Global Recognition

[TL; DR]

For a long time, Nigeria’s ban on cryptocurrencies impeded the adoption of the eNaira.

On 23 December 2023 Nigeria lifted its ban on cryptocurrencies.

In quarter 3 of 2023 the Naira depreciated by around 23%.

Introduction

Many governments are working hard to find ways to benefit from digital assets like cryptocurrencies. While some governments have legalized the use of cryptocurrencies others have developed their own digital currencies.

Zimbabwe, Nigeria and Bahamas are examples of countries that have launched their crypto assets. Now, the rest of the world wants to see how central bank digital currencies will help these countries to overcome their unique economic challenges.

This analysis looks at the challenges that the government of Nigeria has faced after rolling out its central bank digital currency (CBDC). We will also assess crypto adoption in Nigeria as well as the reasons why many Nigerians use cryptocurrencies.

Role of Government Trust and Confidence in the Naira in the Success of the eNaira

Nigeria’s crypto ban, introduced in 2021, has hampered the adoption of the eNaira and has created much distrust of the government. In an interview with Cointelegraph, Chinedu Albert, a Nigerian tech and innovation legal expert, said the ban on regulated financial institutions from offering services to cryptocurrency exchanges slowed down the adoption of the eNaira.

Chinedu said the adoption of the eNaira will increase once many crypto investors and holders develop trust in the government. The analyst blamed the government for its ill-advised ban on cryptocurrencies and other digital assets. Now, the crypto market waits to see the effect of the recent lifting of the ban on digital assets that came into effect on 23 December 2023.

Read also: Bitcoin Achieves Record Highs in Nigeria, Argentina and Turkey

Basically, the eNaira has failed to perform its purported function. The government had thought that many Nigerians would use the CBDC since the central bank backs it. Nonetheless, the blanket ban on cryptocurrencies made it difficult for the citizens to purchase the eNaira.

Some analysts had envisioned that since the country has a high crypto adoption rate the citizens would easily use the eNaira. As a fact, by the time Nigeria launched the eNaira it was ranked number 6 on the Global Crypto Adoption Index. The country had a higher overall score of 0.26%, than the United States with 0.22%.

Albert also stressed that most of the challenges which the eNaira is facing is a result of government policies that have led to economic problems such as inflation.

The Nigerian government launched the eNaira on 25 October 2021, making it the world’s second public CBDC after Bahamas’ Sand Dollar project. Unfortunately, from the beginning the eNaira had a very low adoption rate.

To this effect, the International Monetary Fund’s (IMF) May 2023 report revealed that the eNaira’s average weekly transaction is 14,000 representing about 1.5% monthly transactions per wallet. This means that about 98.5% of the digital wallets for eNaira have not been used.

Other Challenges Leading to Low Adoption Rate

There are several other challenges affecting the adoption of crypto in Nigeria. First, the Central Bank of Nigeria has a negative stance against digital currencies. Oftentimes, the bank has stated that cryptocurrencies are not suitable for making payments in the country since some people may use it for money laundering and financing terrorism.

Second, there is a lack of public trust in digital assets like cryptocurrencies. Many Nigerians are sceptical about cryptocurrencies as they are afraid of losing their digital assets at any time. In the past the Central Bank of Nigeria (CBN) closed crypto-linked bank accounts. That forced many people to stop using digital currencies.

Also, most Nigerians are unwilling to use the eNaira as they lack confidence in the national currency itself, the Naira. In addition, they do not trust the central authority that institutes the country’s economic policy.

That is the reason why Albert, quoted earlier, believes that many crypto investors will accept the eNaira once the government solves the economic problems associated with the national currency such as high inflation.

Read also: Nigeria’s SEC Unveils New Regulatory Guidelines for Trading

Instead of instituting a blanket ban on digital assets, the Nigerian government should introduce relevant crypto regulations. For instance, it should craft cryptocurrency legislation that prohibits money laundering and other illegal use of digital assets.

The law should also ensure the safety of its citizens’ crypto investments. The truth is that if cryptocurrencies and other digital assets are properly regulated they result in Foreign Direct Investment (FDI) in the country. They can also help to solve some of the economic problems such as inflation and shortage of cash which the country is grappling with.

In the meantime, many Nigerians use cryptocurrencies for various purposes which include trading and remittance. A 2022 report by KuCoin indicates that Nigerians use cryptocurrencies as an alternative to store and transfer assets. Specifically, for many Nigerians Bitcoin and stablecoins help in asset distribution and transfer.

Naira Devalued by 23% in Quarter 3, 2023

According to a local Nigerian media, the value of the Naira decreased by 23% during the third quarter of 2023. Albert blamed lack of trust in the national currency as the major cause of its depreciation.

The local media stated that in Q3, the Naira was trading at N755.27 to the United States dollar. Nonetheless, the rate was more depressed on the black market where it was valued between N770 and N1000 to the US dollar.

Another source revealed that the external reserves decreased from $34.1 billion in Q2 to $33.2 billion in Q3. The reserves decreased after the Nigerian government sold dollars in a bid to strengthen the value of the Naira. The depreciation of the Naira and the dwindling of its external reserves show the instability that exists in the Nigerian economy.

Conclusion

The Nigerian government launched its central bank digital currency, the eNaira, on 25 October 2021. Sadly, the rate of adoption of the eNaira was very low due to lack of public trust in the government and the local currency. A major reason for the low crypto adoption was a blanket ban on cryptocurrencies in the country.