The Naira Crisis Is Fueling Bitcoin Adoption In Nigeria - FORBES
The recent economic cash crisis in Nigeria, caused by the naira redesign, political climate, and economic conditions, has increased bitcoin's value proposition for average Nigerians. In Africa, bitcoin offers an indispensable financial safe haven.
- The naira redesign has exacerbated the current economic hardship faced by Nigerians and increased pressure on the unbanked.
- Nigerians headed to the polls on Saturday to decide the next leader of Africa’s largest democracy, with economic challenges being top of mind.
- Given the current economic climate, bitcoin is viewed by many Nigerians—especially amongst the younger generation—as a safe haven for both the underbanked and unbanked as economic conditions worsen.
The naira redesign is only the most recent catalyst magnifying the challenges faced by average Nigerians, a benevolent move to curb economic challenges and counterfeiting notes has resulted in a doubling down on the financial pressures faced by Nigerians.
Nigerians are currently facing record-high inflation at ~21%, a cash shortage of the newly redesigned naira notes, and an incoming administration that will determine the country's course for the next few decades and the continent’s political landscape.
All eyes were on our country as citizens voiced their frustrations at the ballot on Saturday, and our Government continues to wrestle with its growing economic challenges.
Timeline Of The Naira Redesign
Stepping back, the Central Bank of Nigeria announced the naira redesign policy on November 26, 2022, detailing the new issuance of the N200, N500 and N1,000 notes. The primary reasons for this move, according to the announcement, included:
- Battling the double-digit inflation due in part to the record high levels of money in supply that the Central Bank of Nigeria reports being in excess of N50 Trillion as of October last year.
- Curbing the high rate of counterfeiting of the N200, N500 and N1,000 notes.
- And lastly, to reel in the currency in circulation to strengthen the effect of monetary policy, especially against the rising costs across the country.
The redesign does not apply to lower denominations (i.e., N100, N50, etc.) which remain legal tender. Nevertheless, the redesign does carry significant ramifications as the majority of cash held by Nigerians is of the higher denominations.
Then the CBN announced a policy on weekly cash withdrawal limits, starting in December 2022, which currently places a weekly withdrawal limit of N500,000 (~$667) for individuals. The policy document highlights that the limits align with the CBN's intention to transition to a cashless society.
On Jan. 20, the CBN launched a cash swap program in a push to aid the naira redesign transition in rural and underserved communities. The program details that the “old N1000, N500, N200 notes can be exchanged for the newly redesigned notes and/or the existing lower denominations (N100, N50 and N20, etc) which remain legal tender.” However, this exchange is capped at a maximum of N10,000 per person.
The Cash Shortage On New Notes
The redesign is also facing a logistical nightmare as there are only two printing locations for the naira in Nigeria (in Lagos and Abuja), which need to distribute the new notes across the nation. The current insecurity issues in specific locations across the country, the short timeline and the increasing demand for the new notes are huge logistical burdens with considerable financial costs.
At the moment, there is a cash shortage causing Nigerians to wait in lines at ATMs for hours to get their hands on the new notes. The daily withdrawal limit of N20,000, coupled with the unavailability of new notes across banks, makes the situation even worse. Some people are resorting to bringing blankets to sleep in the unmanageably long lines.
The Old Notes Legal Tender Deadline
As part of the naira redesign announcement from last year, the CBN also announced that the old N200, N500 and N1,000 notes were to be considered no longer legal tender after February 10. To further ease the transition, President Muhammadu Buhari issued an order to extend the deadline of the N200 note to remain legal tender until April 20, 2023.
Suffice it to say, the naira redesign rollout has drawn not only criticism from Nigerians, but actually worsened the economic conditions for Nigerians during an election season. It now seems the transition to these new notes may take several more months or possibly years.
The Naira ‘Trilema’
Nigeria is at a critical juncture in its history, where for the first time, there are three separate and distinct naira in circulation with varying levels of adoption, relative FX rates and legal status Digital Naira (both Bank balances and the eNaira), the old and new naira notes. Presently, the naira has been reduced to a general term to refer to these instantiations, which fall into one of two buckets, the digital and the physical, respectively.
In the digital bucket, there are two nairas broadly, the naira stored in Nigerian Bank accounts used in PoS transactions, bank transfers, and other online transactions denominated in naira and the eNaira, which is the Central Bank Digital Currency launched in October 2021 by the CBN in its continued effort towards a cashless Nigeria. According to a report by Bloomberg, eNaira adoption is at 0.5% of the population.
The CBN's move to a cashless society, furthered by the introduction of the eNaira CBDC, continues to draw criticism for its potential to be used to clamp down on freedoms, especially financial freedom, through intrusive surveillance programs.
For those seeking access to the US dollar to battle inflation and safeguard their wealth, varying FX rates apply depending on whether you are exchanging the old or new notes, with some no longer accepting the old notes (including the N200 note). This rate is based on the "unofficial market" rate, N755 to $1, and not the CBN's N450 to $1, which only the privileged few can access.
To make matters worse, amid the scarcity of the new notes, there are reports of individuals selling these scarce bills for the older notes at a premium, effectively spawning a temporary "naira-to-naira" rate.
Interestingly, in the local commodities market, paying for goods digitally (i.e., via bank transfer or PoS) will require paying the total price; however, paying with the new naira notes may give you a 40-50% discount rate.
Given the current situation with the naira, it is evident that the exchange between these nairas is no longer fungible in both the physical and digital context. Fungibility is a necessary component of money, so to say we are in a precarious situation is an understatement.
Against this backdrop of economic challenges, Nigerians have continued to flock to cryptocurrencies, mainly USD stablecoins and bitcoin, to hedge against current inflation and circumvent the various limitations on naira transactions in online payments. It is no wonder Nigeria was ranked 11th on the Chainalysis 2022 Global Crypto Adoption Index and 17th for P2P exchange trade volume.
Sending payments to and from Nigeria has generally been a challenge, often due to blacklists. For years, Nigerians have been cut off, in various ways, from global financial rails. This situation is the result of having global financial rails that are subject to arbitrary, geopolitical priorities beyond Africa, which considers restricting Nigerian access acceptable collateral damage in order to prioritize compliant efficiency in the countries that control these rails. However, these global challenges even create hurdles for people sending money between African countries. The result is thousands of payment networks that aren't interoperable with each other.
The relatively recent increase in stablecoin adoption across Africa is one of the consequences of that reality. Nigerians are moving to a more accessible version of the US dollar, which safeguards against inflation. The current limits on Nigerian debit cards for online transactions, standing at N10,000 ($13) monthly, have also inspired many Nigerians to use US dollar virtual cards to make online purchases.
The issue remains that US dollar virtual cards and, more specifically, USD stablecoins are just a band-aid to our money problem. Though they somewhat help combat inflation, these stablecoins entirely depend on the US dollar, which has geopolitical implications, which means Nigeria is still operating under the same geopolitical precepts that are partly to blame for our current situation.
Bitcoin Is Providing Hope
There is still hope, however, as bitcoin offers a global alternative to traditional financial rails. Bitcoin's ecosystem is devoid of arbitrary geographical and class-based exclusions. Bitcoin is the only financial system that is genuinely sustained and maintained by its stakeholders. These stakeholders run miners to defend bitcoin, run nodes to protect the network, and build tools to increase its usability in their jurisdictions, regardless of politics. Bitcoin users are able to improve access for people that need it directly and educate others to ensure bitcoin users can enjoy the benefits of this open source money.
At a fundamental level, bitcoin is a tool. It is a protocol with a free open, accessible, permissionless, and decentralized network that allows people worldwide to regain control of their money. Therefore, it is an adjacent monetary network that people can opt into to protect against inflation, preserve and grow their wealth (due to bitcoin's scarcity), and make instant, cheap, global payments without discriminatory barriers. Just like the internet democratizes information, bitcoin democratizes money.
Bitcoin remains a lifeline for Nigerians when economic uncertainty, political unrest, and unemployment are at record highs. For those in the diaspora, it has become the only medium to remit from the hard work they've put in abroad, not fractions reduced by high fees, as is the case with traditional rails such as Western Union.
Remittances And Commerce
Traditional rails for sending remittances to Nigeria typically involve substantial fees and sometimes multiple days before receiving funds.
For context, according to the Chainalysis 2022 Crypto Index Report, Africa currently receives $49 billion in remittances globally. As such, many Nigerians are now sending remittances using bitcoin. In 2022, according to the same Chainalysis report, Sub-saharan Africa accounted for $100 billion in on-chain cryptocurrency volume, 16% higher than in 2021. With the recent naira redesign debacle, we might expect those numbers to be even higher in 2023.
The recent launch of the "Send Globally" feature by the US-based bitcoin company Strike, in partnership with the Nigerian bitcoin-company Bitnob, now enables remittances from the US to Africa to happen at "lightning speed." I'm personally an investor in Bitnob via Recursive Capital precisely because I see growing demand for global fintech rails in Nigeria. You can directly send money over bitcoin's Lightning Network and have it settled in the recipient's local currency, including naira. Despite the naira confusion, this offers the best possible conversion rate with lower fees than any of the traditional rails.
Driven by a desire to avoid inflation and long ATM lines, local merchants in my neighborhood in Kaduna are increasingly turning to accept bitcoin as a form of payment. Fellow bitcoiners from around Nigeria I've corresponded with have confirmed a similar trend in their respective areas. It continues the long-standing trend of retail cryptocurrency transfers, as transfers below $1,000 make up 85% of cryptocurrency transfers in Africa as of June 2022, according to the earlier referenced Chainalysis report.
It is true that, like many regions worldwide, Nigeria has some regulatory uncertainty about using bitcoin for payments. Bitcoin is neither banned nor outright encouraged by the CBN or related authorities. It has been solely championed by the people, which has increased the use of bitcoin peer-to-peer markets, especially on platforms such as Paxful, for on-and-off ramping into the more volatile local currency when necessary.
According to the World Bank, as of 2021 over 55% of the adult population in Africa was unbanked. The unbanked in Nigeria rely on cash as their primary means of transacting and wealth preservation. That means the naira redesign has been disastrous for the unbanked. In this context, bitcoin offers an alternative medium that protects people's economic sovereignty and gives them access to a global monetary network.
Integrating bitcoin’s Lightning Network in consumer applications makes it easier than ever for average Nigerians to send and receive money locally and globally. In areas where internet access is unavailable, services such as Machankura provide access to the Lightning Network over USSD codes, comparable to text messages, making it much easier to bank the unbanked using bitcoin than any foreign alternative. Machankura, like Bitnob, was developed in Africa for Africans. These tools give the unbanked unparalleled financial access.
Bitcoin is unique to other cryptocurrencies in various ways; One worth highlighting is that it has no single "leader," "foundation," or other similar central authority. Therefore, it continues to grow through global community efforts. Many Africans see bitcoin as a crucial part of their financial freedom toolkit. They aim to help educate others about it and integrate it into local communities such as Bitcoin Ekasi in South Africa, Bitcoin for Fairness in Zimbabwe, and many others.
Many challenges still need to be addressed to make bitcoin even more accessible on the continent, whether in relation to more tools (which require developers), infrastructure, funding for bitcoin projects and ventures, or education. However, bitcoin already solves numerous challenges faced by Nigerians today.
Bitcoin Grassroots Movements
Looking forward, I expect to see Africa become the most important and influential market for bitcoin development over the next five to ten years, with Nigeria undoubtedly leading this effort. The innovation here is driven by real demand for financial alternatives.
The economic experiment that my home state of Kaduna is a testament to what can be achieved if governments foster an environment where innovation and entrepreneurship can flourish. Namely, the local government focused on enabling economic access among rural, unbanked populations rather than trying to force them into a system designed for urban customers. This is a blueprint I believe can be replicated in various states across the country.
In short, bitcoin is here to stay, as are Nigeria's economic challenges. Many Nigerians seek ways to integrate with and leverage bitcoin tools to remain economically competitive in global markets, regardless of our local politics. Hope remains.
Financial inclusion begins with building better tools, such as those that make bitcoin easier to use in times of economic chaos. Financial inclusion continues when local stakeholders create more favorable regulations to ensure average Nigerians can continue to decide how to use their own money, even after the chaos settles or evolves. That means accessing whatever money works best for them, both bitcoin and the various nairas.
With the announcement today of Mr. Bola Ahmed Tinubu as President-elect by the Independent National Electoral Commission, the incoming administration must now decide whether they go down in history as the administration that noticed the economic shift toward a global, apolitical money and used that opportunity to leverage more fair access to international rails than foreign financial service providers have ever offered. Or alternatively, continue our legacy of floundering economic policies and corruption. Although the challenges are great, in my opinion, it is high time Nigeria harnesses its long-standing evident potential and capitalizes on the burst of bitcoin activity unleashed across the country by the harsh economic winter.
2023 could be brighter and more full of opportunity than ever.
I remain bullish on Nigeria.