Nigeria’s strong appetite for the US dollar is fueling its growing interest in crypto assets, as Google search data shows a strong demand for stablecoins. According to Google Trends data, Nigeria shows the highest interest in Tether, the world’s most popular and well-funded stablecoin, followed by Ghana and Singapore. Stability is the main selling point, but there are also other benefits. Many believe that USDT is the most viable way to bring crypto into the mainstream, as it helps digitize the US dollar, especially in a country that has recently been concerned about currency liquidity.
These digital assets facilitate cross-border payments and remittances, which are a major source of income for many Africans. Stablecoins can reduce the cost, time, and friction associated with sending and receiving money across borders, compared to traditional methods like banks or money transfer services.
Relationship between Stablecoins and Cryptocurrencies
Stablecoins, such as Tether (USDT), USD Coin (USDC), and Binance USD (BUSD), are types of cryptocurrencies typically backed by traditional assets like US dollars and gold. These currencies are designed to be pegged 1:1 with the dollar, aiming to protect stablecoins from the volatility that characterizes major cryptocurrencies like Ethereum and Bitcoin, which have a market cap of around $1.1 trillion. Stablecoins are promoted as a practical means of entering the Bitcoin ecosystem without concerns of financial loss and as a less expensive method of money transfer. Transfer fees for USDT and USDC are often around 0% to 1%.
Young Nigerians are also becoming more interested in the cryptocurrency market, as financial services are scarce in Nigeria. The failure of financial inclusion, especially in rural areas, which can be described as “poor,” is the same reason many Nigerians are drawn to these digital assets.
Backstory
In April of last year, 35% of Nigerians were investors in the cryptocurrency market, according to research published by KuCoin. There is no doubt that high inflation is an issue for the global economy. In Nigeria, increased food prices, petroleum shortages, and supply interruptions have led to its highest level of inflation. Nigeria’s headline inflation rate increased to 22.22% in April 2023 from 22.04% the previous month. This shows that Nigeria’s inflation rate has risen for four months running and is still the highest it has been in 17 years. Inflation climbed by 5.4% from the 16.82% recorded in April 2022 to the same month in 2023.
Many Nigerians are now attempting to defend themselves against high inflation, as well as the probable devaluation of the naira, by using the dollar and stablecoins like USDT. Consequently, in the last few months, the Economic and Financial Crimes Commission carried out simultaneous raids against illegal Bureau de Change operators in various Nigerian cities, further discouraging Nigerians who were eager to acquire the dollar to hedge against the local currency.
What CBN is saying
The Central Bank of Nigeria (CBN) announced that stablecoins and initial coin offerings would be recognized as an investment class, and a regulatory framework would be created. According to the CBN’s “Payment System Vision 2025” research, private stablecoins have become a popular payment option in the country, necessitating regulation of their operations. The regulator, in collaboration with relevant authorities, will develop a regulatory framework for the potential implementation of stablecoin offerings, as stated in the announcement.
What you should know
Stablecoins are said to be safe, stable, and trustworthy, but they come with some risks. Some financial regulators and other industry experts believe these risks are similar to those faced by unregulated assets. Stablecoins are unregulated digital assets. There are no legal restrictions preventing companies operating these types of assets from investing in risky assets. Also, unlike banks, fiat currencies converted to USDT, BUSD, and USDC are not guaranteed by any central bank. Due to these issues, as the adoption of stablecoins increases, so does their use.
However, things appear to be changing as stablecoin issuer Tether reported a profit of $1.5 billion in the first quarter of 2023, more than double the previous quarter. According to the latest certification report, Tether has total consolidated assets of at least $81.8 billion, total consolidated liabilities of $79.4 billion, and excess reserves of at least $2.44 billion, a record high.
For the first time, Tether also included additional categories in its reserve reporting, including Bitcoin, physical gold, overnight repos, and corporate bond allocations. It holds $1.5 billion worth of Bitcoin and $3.3 billion worth of precious metals. Most investments (about 85%) are held in cash, cash equivalents, and other short-term deposits, with gold and bitcoin accounting for about 4% and 2% of total reserves, respectively.
