The large adoption of cryptocurrencies in Nigeria – despite the government ban – will make it difficult for the e-Naira to be widely adopted early on.

The Central Bank of Nigeria (CBN) published a five-stage report detailing its plan to start piloting its own Central Bank Digital Currency, the e-Naira, by the end of 2021. The e-Naira represents an opportunity to facilitate electronic payments and promote financial inclusion in the country, and in order to ensure the adoption of its digital currency, the CBN banned cryptocurrencies earlier in the year. Despite the ban, Nigerians circumvented it by turning to peer-to-peer (P2P) trading, which made the ban ineffective, as cryptocurrency transactions continued to grow. Chainalysis reported that the dollar volume of cryptocurrency trades in Nigeria reached $2.4bn in May 2021, up from $684m in December 2020. Part of the large dollar volume increase was also due to the high volatility of Bitcoin’s price, which doubled over the same period from $18,788.48 to $35,673.12. The e-Naira will not be able to compete with the popularity of cryptocurrencies, even though they are banned.

The e-Naira represents an opportunity for the Nigerian government to improve the financial inclusions of its unbanked population, which is estimated at 36% of its adult population, by taking advantage of the large adoption of smartphones in its country. Like many other African countries, access to bank accounts is limited, but with 90% of Nigerians having access to mobile phones in 2020, many consumers now have access to digital payments due to the strong penetration of smartphones in the country. And with a large, dynamic young population, the adoption of new technology is lot easier to introduce: GlobalData analytics estimates that 75.53% of its population was at least 34 years or younger in 2020. By introducing the e-Naira, the Nigerian unbanked population will be able to access digital wallets and digitally store their cash.

By partnering up with Bitt Inc., a Barbados-based startup that specializes in blockchain technology and helps companies to adopt decentralized technology, the CBN will be able to take advantage of its experience in developing and rolling out a digital currency. Bitt Inc. collaborated with the Eastern Caribbean Central Bank to design and develop its digital currency, the DCash. But in order to ensure the adoption of its own digital currency, the CBN decided to crack down on the cryptocurrency sector in February 2021 by banning licensed financial institutions from participating in cryptocurrency transactions and to close accounts identified as participating in such activity.

The adoption of cryptocurrency in Nigeria was linked to the big role that remittance plays in the economy and the devaluation that has been affecting the Naira for the past five years. According to a 2021 report from the World Bank, Nigeria is responsible for 40% of remittance transfers in Sub-Saharan Africa. But the Sub-Saharan African region has the highest remittance cost with an average cost of 8.2%, compared to the Asian region, which has the lowest average cost at 3%. The cryptocurrency sector became a natural alternative for Nigerians looking to transfer funds at lower costs, as it allows them to internationally transfer funds in real time at a lower cost than traditional remittance providers.

Due to the lack of confidence in the Naira, some consumers use cryptocurrencies as a hedge against the currency’s devaluation. Despite the government clamping down on cryptocurrencies in early 2021, the crypto market adapted by switching to P2P platforms such as Paxful and Binance, which made it more difficult for the government to monitor and restrict such transactions.

While CBN appears to be taking the right direction on developing its digital currency by collaborating with Bitt Inc., incentivising the population to switch from cryptocurrency to the e-Naira may prove to be challenging. It will need to strengthen its currently devaluating currency and ensure that the e-Naira is as convenient to use as cryptocurrencies. Many countries believe that the simple ban of cryptocurrencies should be enough to stop people from trading it. The reality is that despite bans and restrictions, the cryptocurrency market is very likely to exist in parallel to fiat currencies and will continue to exist as a parallel market when we become a cashless economy.

This was written by Chris Dinga, Analyst, Payments, GlobalData