Nigerians Finding Ways to Overcome Crypto Clampdown

Nigerians Finding Ways to Overcome Crypto Clampdown

By Chibuike Osigwe

Nigeria easily has the largest crypto market in Africa. The high crypto adoption is not a surprise given a high unemployment rate that has seen many taking to crypto-currencies trading as a means of livelihood. Even the middle-aged and older millennials see the digital route as a safe hedge against the country’s high inflation rate and weakening currency. So lots of crypto startups are springing up.

The Nigerian crypto market was actually booming until the intervention by the Central Bank of Nigeria early in the year that tried to shut it out of the country’s financial system. Despite the crackdown, it seems that Nigerians remain undeterred and not ready to let go.

When the CBN mandated banks and financial institutions to prohibit crypto trading, the immediate effect was that traders and investors could no longer deposit or receive funds directly through their bank accounts as most crypto exchanges were forced to close. Reasons advanced by the regulator for its action included the high volatility of the cryptos and their susceptibility to fraud and terrorism financing.

The response from Nigerian enthusiasts was the  embrace of peer-to-peer (P2P) transactions. Almost all crypto exchanges made adjustments for the P2P method. Even this came under the hammer as well in October when the CBN created a list of 20 red flags that would be used to identify accounts possibly being used to trade crypto currencies, and close them.

Nigerians undeterred by crypto ban

What followed since has been a cat and mouse game between the authorities and Nigerian crypto investors. A key feature of crypto currencies is their decentralization. This means that transactions can take place without intermediaries such as banks or any third parties at all. This is one of the stated objectives of Bitcoin founder Satoshi Nakamoto.

Nigerian P2P Trades

Crypto traders in Nigeria adopted the P2P quickly and seamlessly on various crypto exchanges. For instance, Nigerians using the exchange Paxful traded over $6.3 million over a seven-day period,  over $77.4 million in 90 days, reaching a trading volume of $1.5 billion with over 1.5 million users since the ban, according to UsefulTulips, a data platform that tracks the utility use of cryptocurrency in the developing world. Nigeria also became the leading P2P transacting country in Africa on Binance, the world’s biggest crypto exchange by trading volume.  

In carrying out these transactions, Nigerian crypto traders have had to proceed with caution in order not to trigger any of the red flags identified by the regulators. These include bank accounts receiving large amounts of daily inflows from numerous payees, those that appear to operate as foreign exchange bureaus  without authorization, those with large inflows and outflows as well as small companies with higher daily sales than their sizes warrant. 

A weak naira is a spur for crypto adoption

Various chat rooms run by traders on the Telegram messaging app have emerged as platforms to discuss and implement tactics and strategies to enable them continue in business. Some crypto exchanges such as ABiTrader, Patricia and Kurepay moved their operations offshore. A popular strategy is to create an escrow system to facilitate P2P payment transactions. Other payment methods, such as the use of gift cards or offshore-payment companies like Payoneer and Skrill, have also been explored. 

Crypto Margins and Derivatives

Nigerian traders are even diversifying their investments into assets such as crypto derivatives, margin and contract for difference (CFD) trading. These alternatives are favoured by those who want to make returns without actual ownership of a crypto asset. It’s a highly liquid trade unlike P2P transactions, and it’s easy to liquidate funds to a stable coin such as Tether.

In response to this adoption, crypto exchanges are now opening up to accommodate derivatives like the Binance Futures and FTX.  

Other passive traders or investors have also adopted the “Holding” strategy or HODL, as an acronym for “hold on for dear life.”  Here, they hold a particular coin for a long time until the price appreciates. Holding time ranges from a year to 5 years and can be up to 10 years if possible. To effectively do this, the cryptos are  moved to a cold wallet, which is very hard to compromise because such wallets are not connected to the internet. 

After the initial contraction that followed the CBN clampdown, Nigerian crypto trading is picking up once more. P2P trading, which was at minus 43 percent in October, narrowed to minus 5 percent two months later in December.

What Next?

It is difficult to project if the CBN will retrace its stand on crypto currencies. On their part, Nigerians who have found a safe haven from inflation and naira’s loss of value will not be deterred. It seems only an improved economy, including low inflation and a stable, predictable naira will swing things where CBN Governor Godwin Emefiele would want them to be. With Nigeria’s youth bulge, in which those under 35 make up more than 65 percent of the population, about half of whom are officially unemployed, it’s a huge task ahead for the authorities stopping them from flocking to crypto trading.The emergence of a new wave of crypto assets such as  Non-fungible tokens (NTFs), Decentralized Finance (DeFi), Metaverse and Web 3, will make it even more difficult.