Author: Joseph Lassen

One of our biggest strengths at CMT Digital is our truly global presence, with investors on the ground in the U.S., APAC, and EMEA. For regions where we do not have a local presence, it is incredibly important for us to spend time there, understanding the culture, people, economics, and the dynamics that drive the region’s adoption of new technologies such as blockchain. Recently, one of our investors, Joseph Lassen, traveled to Nigeria to understand how web3 and blockchain technologies are being adopted.

Table of Contents

I. Background on Nigeria

II. The Nigerian Naira (NGN) and Access to Money

III. Stablecoins and Access to USD

IV. Solutions: Other Types of Liquidity and Remittances

V. How Blockchain Technology Can Solve the Problem

VI. Companies Moving the Web3 Ecosystem Forward in Nigeria

VII. Financial Services and Domestic Banking Within Nigeria

VIII. Domestic and International Transfers and Reconciliations

IX. Challenges to Adoption of New Technologies and Blockchain

I: Background on Nigeria

With 231 million people, Nigeria is the largest African country by population, the sixth most populous in the world, and it is projected to be the fourth most populous country in the world by 2050.[1] The median age is 19.2 years old (ranked 207 of 227 in the world).[2] This young population is forward thinking and tech-savvy. Mobile phone proliferation continues to increase, with mobile phone internet penetration at 42.1%.[3]

In Nigeria, the country’s borders are not representative of the tribal or power divides. The national borders were drawn arbitrarily during the Berlin Conference in 1885 with little regard for the groups within those borders. Thus, the country is divided into the following tribe compositions: Hausa (30%), Yoruba (15.5%), Igbo (15.2%), and Other (39.3%).[4] These numbers are important to understand, as the Hausa and Yoruba take turns deciding who the president is going to be, while excluding all other cultural groups from the country’s most elite power structures.

As such, Nigeria is generally ranked as “highly corrupt,” being ranked 149 of 180 countries in the Corruption Perceptions Index.[5] An astounding 44% of citizens surveyed said they had paid a bribe to a government or civil official within the last year.[6] The kleptocratic nature of Nigeria is well-known, with billions of dollars being pilfered from public coffers each decade.

Regarding blockchain adoption, based on a recent study by Consensys, Nigeria is one of the most crypto-savvy countries in the world by almost any metric.[7] Nearly 99% of Nigerians are “crypto aware,” approximately 67% of Nigerians reported using or owning cryptocurrencies and Nigeria ranks first for peer-to-peer (P2P) exchange trade volumes and second for overall adoption globally.[8][9][10]

Observing the demographics of Nigeria, the young age of the population, and the strong demand for blockchain and crypto technology, it is poised to become one of the countries that will benefit most from web3 technologies, namely: transparency, ease of remittance, a refuge from inflation, and identity and financial solutions.

As an additional boon to blockchain adoption in Nigeria, the central bank recently released new guidelines that loosen the rules around banks facilitating crypto transactions – which could lead to additional adoption of decentralized technologies by the traditional financial sector.[11]

II: The Nigerian Naira (NGN) and Access to Money:

The local currency of Nigeria is the naira (NGN). Historically, it has been an extremely volatile currency with an international exchange rate driven largely by the ebbs and flows of the oil and gas market. The Nigerian central bank (CBN) traditionally holds an artificial peg against the dollar, which means, similar to other emerging markets, there are two markets: a gray exchange market and the official central bank exchange rate.

On June 22, 2023, the new government of Nigeria “de-pegged” the official exchange rate of the currency, leading to an approximately 40% devaluation of the local currency overnight. Since then, the currency has continued to devalue at an alarming rate.

The idea behind de-pegging a currency is that it will limit foreign exchange rationing and encourage an inflow of direct investments into Nigeria. During the peg, most of Nigeria’s economy operated at the parallel rate, where dollars were 40% more expensive to obtain through official CBN channels, limiting Nigerians’ international purchasing power.

Due to the de-pegging, the lack of U.S. dollars (USD) that can be purchased in the economy has become more pronounced.[12] Because of inflationary pressures, Nigerians do everything they can to limit their exposure to NGN, and instead keep their savings in global reserve currencies, such as USD.

This lack of liquidity in USD <> NGN has led to the development of peer-to-peer currency marketplaces in Nigeria, some of which run on the blockchain. Examples of these peer-to-peer markets can be seen in most developing economies with inflating currencies.

One of the ways normal citizens access foreign currencies in Nigeria, outside of official banking channels, is through point-of-sale (POS) operators. These are often small, independent operators changing amounts of NGN 15,000 (approximately USD 20). Due to the abnormally small transaction sizes, these systems are not particularly functional for anyone trading even moderate sums of money between currencies.

These fiat-based POS merchants have another significant limitation. Due to the lack of banking infrastructure, and the inability of Nigerian banks to acquire significant amounts of cash at short notice (as they could in the United States at the Treasury window, for example), banks limit the amount of NGN that can be transferred or withdrawn at any one time.[14] The current limit is approximately USD 44 per week for individuals, and USD 11,000 per week for businesses. These central bank limitations in turn limit the amount of NGN and USD that can be acquired by POS operators and traders in the market at any one time.

III: Stablecoins and Access to USD

Looking to blockchain and digital asset solutions, no such limitations exist on USD stablecoins, causing stablecoin volumes in Nigeria to increase rapidly year over year.[15] We see a similar trend in most emerging market economies with high rates of inflation and central bank limitations.

Nigeria alone had over USD 55 billion stablecoin volume transferred into, out of, and inside the country in 2023.[16]

Because the transfer of USDC and USDT are controlled exclusively by the holders of those tokens, there is no limitation on what quantity can be transferred between wallets at any one time – rendering a central bank powerless to curb flows between the currencies. Operating under the assumption that USDC and USDT can frictionlessly be converted to USD 1:1 at any time, the limitation in Nigerian markets becomes one of depth of liquidity: How much USDC and NGN is available through P2P liquidity pools at any one time? The answer has evolved in a couple of ways in Nigeria, primarily split between retail and business use cases.

Various centralized exchanges (CEXs) have created retail peer-to-peer marketplaces that have some liquidity depth, but not nearly enough. Additionally, the Central Bank of Nigeira has recently taken a more aggressive position against peer-to-peer marketplaces, blaming them for increasing the pace of the NGN. This stance has forced Binance to discontinue all of its operations in the country. Prior to the exchange shutting down, it was possible for retail traders to exchange more than $1 million in daily notional volume with less than 10 percent in slippage. Now that this peer-to-peer marketplace is closed, other exchanges may be under pressure as well, especially in the event that the Naira continues to inflate rapidly.

In addition to the retail side of the market, there is also not nearly enough liquidity available for larger corporations to easily trade in and out of NGN <> world currency reserve pairs.

There is often still a significant premium placed on the value of stablecoins over USD, since stablecoins are easier to transfer and do not need to transit through the traditional banking system. The premium of USDC/USDT <> NGN has fluctuated between 2% and 35% over the quoted USD <> NGN spot exchange rate in the past six months.

 This implies a few things:

1. There is a consumer willingness to pay premia to acquire digital assets versus fiat currency in Nigeria.

1. There is a lack of stablecoin supply to African markets (or a lack of buyers of NGN).

1. There is significant demand from the market to access USD liquidity, whether in fiat or via crypto.

2. A large percentage of Nigerians cannot open USD-denominated bank accounts, one way for them to protect themselves against their own inflationary currency is to buy USD stablecoins.

IV: Solutions: Other Types of Liquidity and Remittances

To satisfy hard currency demand, many companies have emerged in Nigeria that create remittance rails and offer additional depth in liquidity pools between NGN and USDC/USDT. These companies are pursuing the following business model: 

Greater liquidity pool depth > lower slippage > more retail uses the platform > more fees to the exchange > more liquidity etc.

The flywheel is clear, and it’s a winner take most market. Fees on both exchange volumes and remittance rails will become competitive and gross margins will likely decline over time. To give a sense of the scale of the winnable market, approximately USD 20 trillion is remitted through Nigerian corridors annually.[17] We believe blockchain-based remittance companies hold a significant competitive advantage, and anticipate that eventually much of the remittance volume will be conducted via stablecoin (or at least blockchain) rails.

To understand more thoroughly the ways in which these new blockchain-enabled corridors are creating previously inaccessible value, we can consider the case of an international corporation operating in Nigeria.

V: How Blockchain Technology Can Solve the Problem

Let’s assume Company A is domiciled in the United States but has a subsidiary that earns USD 100 million per year in Nigeria. If the company was interested in repatriating that capital to the United States, it would need to exchange its NGN to USD at the mandated central bank rate. Due to the limitations on currency that can be extracted from the country, the company would need to spend months withdrawing their Naira into more stable currencies. This exposes the company to massive FX and depreciation risk and increases the rates of return required by the locally operating business to compensate for its currency risk.[18]

However, if the company decided to move onto blockchain remittance rails by using any of the up-and-coming exchange and remittance providers, or a P2P marketplace for USD stablecoins, it could have the entire USD 100 million exchanged and re-patriated to the United States in a couple of weeks, at most. Additionally, because crypto settlement times are generally immediate, the corporation would be able to minimize its NGN exposure risk by holding stablecoins as it converts that capital back into fiat. This is a paradigm shift on multiple levels; all enabled by blockchain and new remittance rails.

VI: Companies Moving the Web3 Ecosystem Forward in Nigeria

As the number and scale of companies offering different types of stablecoins, liquidity pools, and fiat to crypto exchanges increases, the ability for companies to remit capital into and out of local currencies will improve. There are numerous interesting businesses being built now in the remittance vertical:

Busha (CMT Digital portfolio company) – facilitates the buying and selling of crypto in Nigeria. This is the largest fiat to stablecoin exchange in the country.

Nestcoin (CMT Digital portfolio company) – its product, Onboard, allows users to spend, store, and transfer their digital assets amongst each other, and to other users. Onboard also facilitates on/off ramping between NGN and stablecoins.

Yellowcard – one of the largest licensed stablecoin on/off ramps in Africa. Yellowcard provides customers the ability to buy and sell USDT, USDC, and PYUSD directly via local currency, and through the company’s payments API. This serves a foundational service within the Nigerian crypto to fiat ecosystem. 

Mento  – stablecoin protocol that aims to create stablecoins that mirror all fiat currencies, which in turn will allow for nearly instant remittance and FX trading. It is beginning with West African currencies and will soon expand across the continent.

Canza Finance  – building a stablecoin protocol to allow the issuance of NGN and other African-focused fiat currencies. The company is also building a DeFi protocol to facilitate the trading of those currencies.

In addition to those listed above, there are dozens of other high-quality companies being built in the country to allow users access to digital currencies, stablecoins, and decentralized financial products and services. We believe the industry within the country is poised to grow significantly in the coming years. CMT Digital is actively monitoring these companies and looking for the best entrepreneurs to partner with in the space.

VII: Financial Services and Domestic Banking Within Nigeria

Another issue facing the Nigerian people is the lack of banks and financial services readily available to the population.

Consumer Banking and Financial Services

Today, there are approximately 4 bank branches in the country per every 100,000 citizens.[19] Compare this to a developed country like the United States, with approximately 28 for every 100,000 citizens.[20] This leads to significant deficiencies in access to financial services for Nigerian people.[21][22] In addition to there being fewer banks for citizens of the country, other factors such as lack of state-issued identification and lack of ability to open accounts, meaning basic depository accounts, inhibits people from transacting in any other means besides cash.

Fortunately, mobile phone penetration coupled with blockchain technologies are allowing people in emerging markets to access safe depository accounts, currencies that do not inflate, and basic financial services that can drastically improve quality of life.

Nestcoin has already been mentioned, but there are other companies that are allowing users, directly from their mobile phones, to gain access to debit cards. These cards can be denominated in NGN or stablecoins. Users can gain access to these products through the POS merchants they deal with every day, so access to basic finances is not limited to finding a bank branch, which is often many miles away.

Blockchain solutions also potentially solve numerous other problems associated with a lack of financial infrastructure, including:

1. Access to financial services without physical ID, which many Nigerians do not have (only 18% of Nigerians have a national ID number, and only 43% of new births are registered with the government)[23]

2. Access to financial services without going to a physical banking location

3. Access to other financial instruments (consumer debt, micro-lending, or yield-bearing assets)

4. Direct integrations with companies such as Busha for access to stablecoins and inflation hedges

5. Mobile integrations with companies such as Fonbnk, which allow users to use mobile minutes as digital currency

VIII: Domestic and International Transfers and Reconciliations

In addition to simple access to financial services, there are also issues directly related to the banking system itself, which are also being solved with blockchain technologies.

Domestic Payments and Transactions

In Nigeria, the domestic money transfer system is relatively solid when compared to other African countries; however, it is still far from perfect. This section refers specifically to the transfers between banks within Nigeria (excluding all international remittances, or other countries in Africa). Generally, there are four reasons banks will remit money to one another within the country:

1. When a customer sends funds directly to another customer at a different bank

2. When a customer from Bank A withdraws cash from an ATM owned by Bank B. Bank A will remit the withdrawn capital to Bank B

3. When a customer holding a debit card from Bank A conducts a transaction through a POS system at a retailer, who is banked by Bank B. Bank A would remit capital to Bank B to cover the amount of the transaction. In this section we are including the cash agents previously mentioned

4. The same as number three above, but just with a credit card

In the case of number one, the existing switches (a switch is a company that facilitates money transfers between banks) between the banks function well enough. However, in the other cases, there can be significant issues when transactions are cancelled, fail, or are not reconciled properly. Let’s use the POS example (number three).

If a customer tries to purchase something from a store with a card, but the transaction fails, the payment processor has 72 hours to reconcile the transaction prior to the customer being reimbursed in full. In nearly all cases, these reconciliations happen at the switch level reconciled manually. In approximately 13% of cases, these reconciliations do not happen on time or are inaccurate, leading to disputes between the issuers, venders, customers, and banks.[24] The rates of failure are actively decreasing the value of cashless transactions in the country that would have otherwise gone through by nearly 5% monthly on all volumes.[25]

Fortunately, blockchain is a beacon of hope. By implementing a permissioned blockchain amongst the banks, with each bank running its own node and conducting all transactions on a P2P basis, receipts, reconciliations, and refunds can happen automatically, nearly instantly, and with full transparency on-chain.

Nigeria has one of the best switching infrastructures among the African countries, a noteworthy achievement given the ineffectiveness of the current switches within the country. This means that any blockchain solution, such as Zone Network, that can solve this problem, will be in a prime position to disrupt the core infrastructure of the banking network across the continent. We are bullish on the ways in which blockchain can improve even the most core infrastructure layers in traditional finance.

International Payments

One of the worst parts about the financial infrastructure in Nigeria is the inability for visitors, or those without a Nigerian bank account, to pay via debit or credit card.

During my two weeks in Lagos and Abuja, there were countless times when my cards would not work, even after a transaction would be attempted on four or five different POS machines. To combat this lack of ability to pay in most situations, I would attempt to extract cash from ATMs nearly every day. However, the ATMs were just as dysfunctional as the POS systems. In nearly 50% of cases, the ATMs would be out of cash, and if I was lucky enough to find one that had cash, it would have an impossibly low withdrawal limit of approximately NGN 10,000 (approximately USD 13), or the transaction would fail for no discernible reason. Thus, many times I was left with four non-working cards, and a negligible amount of cash, which is not ideal in an emerging market.

Numerous companies, including some mentioned previously in this piece, are developing products that would allow me to use a temporarily issued debit card (issued by a Nigerian bank) that can then be funded by USDC or USDT, which is an amazing step forward. Once rolled out to the public, this type of a solution would circumvent the ineffectiveness of the current POS and processing infrastructure and reduce the friction many travelers associate with traveling to countries like Nigeria.

IX: Challenges to Adoption of New Technologies and Blockchain

While we believe the opportunity set in Africa has the potential to be immense, there are still very significant barriers to the adoption of web3 technology. As CMT Digital reviews opportunities on the continent, some of these barriers become primary considerations in our risk assessments, including the inability to raise capital (or being forced to raise capital on extremely predatory terms), still relatively low internet penetration, and regulatory challenges.

Startup Ecosystem and Paradoxes of Raising Capital

In every single meeting I had with a founder or other VC funds while in Lagos, the dearth of investment capital into African start-ups was mentioned. While the amount of capital flowing into African web3 startups is increasing, it is still a de minimis amount compared to other industries and geographies.

While there is still a small amount of nominal volume being invested into the African continent, the trends are quite positive, and it appears that institutional capital allocators continue to be more comfortable with the geography.

Low Internet Penetration Rates

It is estimated only 51% of people in Nigeria have access to the internet (approximately 110 million).[27] While this number is large, the number of people without access to the internet, and thus basic digital financial services and online information, is massive. The issue that arises here is no different from many other developing nations: citizens are able to purchase basic phones and mobile plans, but they are unable to afford smartphones. This can be exemplified by the fact that the World Bank estimates 91% of the population of Nigeria are mobile subscribers.[28]

There have been approaches by companies such as Fonbnk to onboard non-smartphone mobile subscribers into the benefits of web3 by making mobile minutes transferrable into tokens or digital assets that can be transacted in physical locations. Building infrastructure that aligns with the needs of the populations in Africa, with demographics that are substantially different from those in developed countries, is likely the best approach to increase the web3 userbase on the continent.

Lack of Financial Infrastructure

Per a KPMG report, only about 45% of the Nigerian population is banked.[29] This is defined as having access to basic financial services such as a bank account, remittances, or the ability to transfer money domestically that is not a cash transaction. Thinking through the use cases that blockchain enables, many are financial in nature: wallets, digital assets, stablecoins, DeFi, etc. If users have previously been unbanked, there is a small possibility that they will be able to understand the nuances of the crypto markets.

Therefore, as smartphone and internet penetration continue to increase, the barrier of entry to digital assets and blockchain will need to decrease considerably in order to gain, and retain, users. Keeping user applications as simple as possible to start will encourage users to use the new technology.

Governmental Prohibitions and Regulatory Uncertainty

 Each country in Africa has its own approach and regulatory framework for digital assets and blockchain technology. Because the technology is so new, many governments have taken an approach that can be summarized as “ban it until we understand it.” Today, approximately 20% of countries in Africa have outlawed crypto and digital assets.[30] We have seen recent examples of blockchain companies being targeted by governments and regulators in cases such as Worldcoin in Kenya.[31] While these examples are stark, and certainly stifle innovation, the benefits of cryptocurrencies, especially stablecoins, seem to outweigh the risks that founders and users perceive in some cases.

Fortunately, the new administration in Nigeria has been more friendly toward the industry, going so far as to encourage banks to work to provide stablecoin and digital asset payments to their clients.

One of the other primary, and generally unspoken, barriers to the adoption of cryptocurrencies in many African countries is their transparent nature. We must be careful here not to generalize, or paint governments in Africa generally as corrupt, but it is hard to argue against the fact that there is a large amount of corruption at the government level across the continent.

One of the ways in which this corruption functions is through grey economies (offshore bank accounts, cash payments, verbal agreements, etc.). With the implementation of blockchain technology, transactions of public institutions could be forced out into the open, which would challenge the existing governmental power structures. While this would undoubtedly have a positive effect on corruption and transparency indices, the corrupt leaders of these countries have zero incentive to allow the technology to be adopted in their countries if it sheds light on these types of activities. As is the debate across the world: the confrontation is a question of old practices versus new technology.

Conclusion

In general, users who reside in countries with fiat currencies that have exorbitant inflation rates will figure out ways to diversify their assets into stablecoins regardless of whether their government has given explicit approval to do so. The significant user growth over stablecoin remittance rails, other DeFi functionality, and tokenized experiences in countries across sub-Saharan Africa, regardless of the regulatory frameworks in those countries, seems to bode well for the continued adoption of blockchain and web3 technology across the continent, and in emerging markets generally. We at CMT Digital are excited by their prospects and will continue to source and diligence the most exciting companies we come across in the ecosystem.

[1] https://www.cia.gov/the-world-factbook/countries/nigeria/

[2] Median age (cia.gov)

[3] Nigeria mobile internet user penetration 2029 | Statista

[4] Nigeria - The World Factbook (cia.gov)

[5] Corruption Perceptions Index by Country 2024 (worldpopulationreview.com)

[6] https://www.transparency.org/en/countries/nigeria

[7] https://consensys.io/blog/whats-the-most-crypto-savvy-country-in-the-world-hint-its-not-the-usa

[8] https://cointelegraph.com/news/99-of-nigerians-are-crypto-aware-consensys-report

[9] https://medium.com/@princeeniola7/the-future-of-web3-in-nigeria-667dbcb3af53

[10] https://go.chainalysis.com/rs/503-FAP-074/images/The%202023%20Geography%20of%20Cryptocurrency%20Report.pdf?version=0

[11] https://cointelegraph.com/news/nigeria-central-bank-rules-crypto-transactions

[12] Why Nigeria’s Naira Currency Has Plunged and Dollars Are Scarce (NGN/USD) - Bloomberg

[13] https://restofworld.org/2021/a-bank-at-every-corner-store-agency-banking-is-transforming-nigerian-business/

[14] https://www.africanews.com/2023/01/09/nigeria-restricts-cash-withdrawal-to-44-a-week-per-individual/

[15] https://www.reuters.com/technology/nigeria-crypto-usage-growing-further-report-says-2023-09-19/

[16] https://unicorngrowthcapital.medium.com/unlocking-liquidity-across-borders-6357f8018391

[17] https://tradingeconomics.com/nigeria/remittances

[18] https://www.cbn.gov.ng/Out/2022/CCD/RevisedCashWithdrawal.pdf

[19] Commercial bank branches (per 100,000 adults) - Nigeria | Data (worldbank.org)

[20] Commercial bank branches (per 100,000 adults) - United States | Data (worldbank.org)

[21] https://www.ceicdata.com/en/nigeria/banking-indicators/ng-branches-per-100000-adults-commercial-banks#:~:text=Number%20for%202015.-,Nigeria%20NG%3A%20Branches%3A%20per%20100%2C000%20Adults%3A%20Commercial%20Banks%20data,of%203.779%20Number%20in%202006.

[22] https://www.theglobaleconomy.com/USA/bank_branches/

[23] https://financeincommon.org/sites/default/files/2020-11/ID4D.pdf

[24] https://guardian.ng/issue/what-has-gone-wrong-with-nigerian-banking-2/

[25] https://punchng.com/e-payment-falls-to-n37tn-as-failed-transactions-mount/

[26] https://briterbridges.com/stories/2023/1/26/why-1-of-venture-financing-matters-more-than-you-think-in-africa

[27] https://www.statista.com/statistics/1124283/internet-penetration-in-africa-by-country/

[28] https://data.worldbank.org/indicator/IT.CEL.SETS.P2?locations=NG

[29] https://assets.kpmg.com/content/dam/kpmg/ng/pdf/nigerias-financial-inclusion-the-way-forward.pdf

[30] www.imf.org/en/Blogs/Articles/2022/11/22/africas-growing-crypto-market-needs-better-regulations

[31] Worldcoin suspended in Kenya as thousands queue for free money - BBC News

For informational purposes only, and should not be relied upon as legal, business, investment, or tax advice.  The views expressed herein are those of the author as of the time of writing and may not necessarily represent the views of CMT Digital and its affiliates. Certain information contained in the piece has been obtained from third-party sources, including from portfolio companies of CMT Digital. While taken from sources believed to be reliable, CMT Digital has not independently verified such information.

 References to any securities, digital assets, tokens, and/or cryptocurrencies are for illustrative purposes only and do not constitute a recommendation to invest in any such instrument nor do such references constitute an offer to provide investment advisory services. This content is not intended for investors or prospective investors and should not be relied upon when making any investment decision, including a decision to invest in any vehicles managed by CMT Digital. Such offerings are only made via formal offering documents. 

 Past performance is not indicative of future results. Any projections, estimates, forecasts, and/or opinions expressed in this piece are subject to change without notice.

CMT Digital and its affiliates may have made investments in companies, assets or tokens discussed in this piece and may in the future make additional investments, including taking both long and short positions, in connection with such instruments without further notice.