Cryptocurrency adoption is rapidly on the rise in Nigeria despite regulators' attempts to limit access as users seek alternative methods of making transactions.

Nigeria ranked sixth in the 2021 Global Crypto Adoption Index published by blockchain analytics organization Chainalysis in October 2021. Factors driving cryptocurrency usage include a lack of access to traditional finance, depreciation of the naira and inflation. More than a third of Nigerians aged between 18 and 60 surveyed by cryptocurrency exchange KuCoin invest in cryptocurrencies, according to an April report.

This is despite the country's central bank saying in February 2021 that the use of cryptocurrencies is "a direct contravention of existing law" and banning commercial banks from dealing in them. It warned that cryptocurrency trading poses risks including investment loss, money laundering and and terrorism financing.

Peer-to-peer platforms

The clampdown has pushed users on to peer-to-peer, or P2P, platforms such as Paxful and LocalBitcoins.

"There was an initial shock, but water will always find its path and the young people found P2P — the volume [of transfers] they were conducting through banks has been shifted [to P2P], so the banks no longer get those transactions' fees," Adedeji Owonibi, CEO and founder of Nigerian blockchain consultancy Convexity, told S&P Global Market Intelligence in an interview.

"There are thousands of people trading every moment," Owonibi said.

Nearly two-thirds of the 360 Nigerian cryptocurrency investors surveyed by KuCoin used fiat currency to buy cryptocurrency on peer-to-peer exchanges. Many users rely on P2P platforms not only as an on-ramp into cryptocurrency, but also as a tool for sending remittances and engaging in commercial transactions, according to Chainanalysis.

P2P platform Paxful has seen an uptick in customers using its services.

"On Paxful we've seen a big increase in remittances coming into the country," Oyewole Joledo, senior manager at Paxful Nigeria, told Market Intelligence. "For a more agile youth generation, sending money through traditional means seems to be fading out. They need more convenience. They prefer to do all this from their phones."

Remittances

The World Bank had projected remittances sent to sub-Saharan Africa to have increased 6.2% year over year in 2021 to $45 billion, following a pandemic-induced decline in 2020. The Nigerian diaspora had greater disposable income due to lower spending amid the COVID-19 pandemic, allowing them to send more money home, Jimi Ogbobine, head of consulting at Agusto Consulting Ltd. in Lagos, told Market Intelligence.

Nevertheless, converting cryptocurrency into naira is difficult and, as such, deters expats from sending remittances in bitcoin or ethereum, Ogbobine said. As long as the government ban remains in place, friends or family will not be able to walk into a bank and change cryptocurrency into naira, meaning that, for now, people would rather send money through official money transfer operators, Ogbobine said.

Ogbobine has seen cryptocurrency more often used by people in Nigeria remitting money out of the country in order to get around the regulatory roadblocks aimed at stopping outflows.

Still, new rules issued in May suggest a softening of Nigeria's anti-cryptocurrency stance. Entities wishing to launch initial digital asset offerings are directed to submit a white paper, which will be examined by Nigeria's securities and exchange commission, while cryptocurrency exchanges should have a minimum paid-up capital of 500 million naira.

Remittances make up "quite a large chunk" of banks' business, and an increasing fraction of such transactions happen online, according to Teslim Shitta-Bey, managing editor at financial research group Proshare Nigeria.

"Outside of conventional lending and [foreign exchange], digital transactions are very significant," Shitta-Bey said. "Banks' digital income as a share of total income has been rising for the past few years ... because younger generations now do almost all transactions digitally, including remittances."

Remittances are a "very important" source of noninterest income to Nigeria's largest lender, Access Bank PLC, and have increased in recent years, a spokesperson for the company told Market Intelligence. The bank has seen no impact on revenues from the authorities' ban on bank customers making transfers from their bank accounts to cryptocurreny platforms, the spokesperson said.

Macro factors

Lack of financial inclusion, and macroeconomic factors, are also pushing Nigerians to trade cryptocurrencies. Financial technology firm BPC estimates that 57% of Africans do not have a traditional bank account or mobile money account.

Meanwhile, the naira has fallen 60% versus the U.S. dollar since October 2014, annual inflation was 16.5% in April and just 37% of people aged between 15 and 34 were in full-time employment in 2020.

People are increasingly buying tether, a stablecoin pegged to the dollar, as they realize how volatile the dollar-naira exchange rate is, Paxful's Joledo said. "That's important because currently the [exchange] rate is scary for the average Nigerian," Joledo said.

As of June 8, US$1 was equivalent to 415.13 Nigerian naira.