From Ban to Regulation: The Rise of Nigeria's Web3 Market and the Construction of a Dynamic Regulatory Framework
The Nigerian government has demonstrated strong support for blockchain technology through a series of policy initiatives and hopes to promote economic growth and innovation through its application.Author: Anshouzheng Legal Services Co., Ltd.
As one of the fastest-growing countries in Africa's Web3 market, Nigeria has immense potential for the development of its Web3 market. Given the current instability of the economic environment, the Nigerian populace is actively seeking new means of value storage. The country's large, young, and open-minded population towards emerging technologies has significantly propelled the booming cryptocurrency market.
Nigeria's Web3 regulatory environment is undergoing dynamic adjustments. In 2021, the Central Bank of Nigeria (CBN) issued a ban on commercial banks participating in cryptocurrency transactions, aimed at curbing the risks of money laundering and terrorism financing associated with the emerging cryptocurrency sector. However, with the rapid growth of the Web3 market, new regulatory frameworks have emerged.
In 2022, the Nigerian Securities and Exchange Commission (SEC) promulgated the "Rules on Digital Asset Offering Platforms and Custodians," providing clear business guidance for cryptocurrency exchanges and custodians. Subsequently, in the 2023 "Nigerian Finance Bill 2023," the government decided to impose a 10% capital gains tax on cryptocurrency transactions, which not only strengthened the regulation of cryptocurrency trading but also indirectly confirmed the status of cryptocurrencies as legitimate taxable assets.
Influenced by multiple factors such as insufficient financial services, high inflation, devaluation of the national currency, and a youthful population, Nigeria's cryptocurrency adoption and trading activities are experiencing rapid growth. Although the Central Bank of Nigeria has yet to recognize cryptocurrencies as legal tender, the use and trading of cryptocurrencies are becoming increasingly frequent across the country.
Despite the CBN's ban on commercial banks participating in cryptocurrency trading in 2021, it did not define the use of cryptocurrencies as a criminal act. Therefore, cryptocurrencies are widely traded on major exchanges in Nigeria, and peer-to-peer trading is also quite popular.
To further regulate the cryptocurrency market, in May 2022, the Nigerian Securities and Exchange Commission issued regulations for digital assets, bringing cryptocurrencies under its regulatory purview. These regulations clarified the operational requirements for cryptocurrency exchanges and defined the legal status of digital assets.
1. Market Status
According to reliable data, Nigeria is leading the development speed of the cryptocurrency market in Africa:
1. Trading Volume:
A report released by the well-known blockchain research firm Chainalysis in September 2023 indicated that Nigeria's cryptocurrency trading volume reached $56.7 billion from July 2022 to June 2023, a year-on-year increase of 9%. This significant growth rate surpassed other major African cryptocurrency markets such as South Africa, Kenya, Mauritius, Ghana, and Tanzania.
Additionally, the peer-to-peer cryptocurrency trading platform Paxful has consistently regarded Nigeria as its largest African market. As of October 2023, Nigeria accounted for over 60% of Paxful's trading volume in Africa, further solidifying its market leadership.
2. Driving Factors:
(1) Economic Crisis: Nigeria is facing economic difficulties, with a weak currency and high inflation rate, prompting the populace to turn to alternative currencies such as Bitcoin and stablecoins pegged to the US dollar.
(2) Cryptocurrency Awareness: According to a survey jointly released in September by the American blockchain software company ConsenSys and the British data analytics company YouGov, Nigeria has the highest level of cryptocurrency awareness in the world, reaching 99%. This proportion exceeds that of developed economies such as the UK, US, Japan, and Germany, with a global average of 92%.
(3) Regulatory Trends: Recent regulatory measures taken by Nigeria, particularly the guidelines issued by the Central Bank of Nigeria (CBN) for virtual asset service providers (VASP), while still being refined, have provided a certain degree of clarity for the cryptocurrency market and encouraged healthy development within a regulatory framework.
3. Comparison with Other African Markets:
Although South Africa has a more developed financial infrastructure and a larger cryptocurrency market size, its growth rate does not match that of Nigeria. Furthermore, Kenya still occupies an important position in the cryptocurrency market, but its recent activity in the crypto space has declined due to regulatory uncertainties.
2. Strong Development Potential
Nigeria is known for its young and enthusiastic population towards new technologies and a high penetration rate of smartphones. In Nigeria, the youth aged 18 to 34 account for 26.6% of the total population, reaching approximately 60.3 million, a number that exceeds the total population of many countries. Nigeria's median age is 17.2 years, significantly lower than the average on the African continent (19 years).
This unique demographic structure provides a broad foundation for mobile technology-based cryptocurrency applications and services, showcasing immense potential. Specifically, Nigeria's advantages are reflected in the following aspects:
1. Access to Technology: Nigeria is one of the countries in Africa with the highest smartphone penetration rates, with over 40% of the population owning smartphones. According to Statista's predictions, this figure is expected to grow to 66% by 2025, exceeding 140 million people. This high penetration rate makes it easier for Nigerians to adopt new technologies such as cryptocurrencies.
2. High Internet Usage Rate: Nigeria has the largest internet user base in Africa, with over 120 million users. Widespread internet access provides Nigerian youth with convenient conditions to obtain cryptocurrency information and participate in the cryptocurrency market.
3. Seeking Alternative Investments: Given Nigeria's persistently high inflation rate (approximately 29%), people are looking for alternative investment methods that can combat inflation and achieve wealth growth. Although cryptocurrencies are highly volatile, their potential for high returns attracts many young Nigerians.
4. Entrepreneurial Spirit: Nigerians are known for their entrepreneurial spirit and willingness to take risks. This makes them open to embracing and trying new things, such as cryptocurrencies and stablecoins, viewing them as potential opportunities.
Additionally, Nigeria's young population has the following impacts on cryptocurrency applications:
1. Increased Trading Volume: Nigeria is one of the countries with the highest cryptocurrency trading volume in Africa, with young people making up a significant proportion of traders. According to CoinMarketCap's 2020 report on cryptocurrency adoption, the number of young cryptocurrency users in Nigeria grew by 210.6%.
2. Popularity of DeFi: Decentralized finance (DeFi) applications are becoming increasingly popular among young Nigerians, who are attracted by the potential to earn passive income and participate in permissionless financial systems.
3. Growth of Crypto Startups: To meet the demands of young crypto enthusiasts, startups in Nigeria's crypto sector are thriving. These startups are dedicated to developing innovative products and services, such as cryptocurrency wallets, exchanges, and educational platforms.
3. Development of Stablecoins in Nigeria
In Nigeria's cryptocurrency ecosystem, stablecoins are rising rapidly, becoming the preferred investment tool for retail investors.
Several key reasons underpin this phenomenon:
1. Hedging Against Inflation: Given that Nigeria's current inflation rate has reached a 27-year high, this issue has garnered widespread attention among the populace. Under inflationary pressure, the low returns of traditional savings accounts can no longer maintain the actual value of savings. Stablecoins provide a safe haven for investors seeking to preserve their assets. Particularly in the context of the naira's sharp decline against the dollar, which has depreciated by 47% in the past 12 months, the value of stablecoins has become increasingly prominent.
2. Lower Transaction Costs: Compared to more volatile cryptocurrencies like Bitcoin, stablecoins have lower transaction fees. This characteristic makes them more suitable for everyday transactions and small payments, thus attracting a large number of retail investors.
3. Bridge to DeFi: Decentralized finance (DeFi) applications are reshaping the financial services landscape, enabling users to engage in activities such as lending, borrowing, and earning interest without intermediaries. Stablecoins, such as Tether (USDT), USD Coin (USDC), and Binance USD (BUSD), provide Nigerians with convenient access to participate in these innovative financial services.
4. Familiar and Stable Usage: Stablecoins offer users accustomed to traditional fiat currencies a familiar experience. Compared to other more volatile cryptocurrencies, the price stability of stablecoins lowers the entry barrier for new investors.
5. Convenience for Cross-Border Payments: Stablecoins enable faster and more economical cross-border payments compared to traditional remittance methods. This advantage is particularly important for Nigerians who need to receive remittances from abroad or conduct international business.
Given the numerous advantages of stablecoins, the Nigerian government has actively promoted the development of the stablecoin market in recent years. According to a notice from the Central Bank of Nigeria, banks, fintech companies, and blockchain enterprises in the country are working together to develop a stablecoin called cNGN.
cNGN is expected to draw on the functional concepts of popular stablecoins like USDT and enter market competition. This will help expand its reach beyond Nigeria and promote global stablecoin trading.
As stablecoins become increasingly popular in Nigeria, the cryptocurrency sector is witnessing a wave of innovation. Startups are seeking stablecoin-based solutions to drive the widespread adoption of cryptocurrencies. These solutions include:
Stablecoin-based payment platforms that enable users to pay for goods and services using stablecoins, thereby broadening the application scenarios of cryptocurrencies.
Stablecoin-driven micro-lending platforms that provide small loans to Nigerians without bank accounts, promoting financial inclusion.
Yield-generating stablecoin investment products that offer investors a way to generate stable returns, allowing them to accumulate passive income through holding stablecoins, further enhancing the market appeal of stablecoins.
4. Regulatory Challenges in Nigeria
As the most populous country in Africa, Nigeria has a thriving cryptocurrency market, ranking 11th in Chainalysis's global cryptocurrency adoption index in 2022. At that time, the Central Bank of Nigeria prohibited banks in the country from facilitating cryptocurrency transactions.
Despite the crackdown lasting over two years, the country still jumped to second place in the index ranking in 2023.
License Application
On June 27, 2024, the Nigerian Securities and Exchange Commission (SEC) announced that it had given cryptocurrency exchanges and digital asset traders 30 days to re-register their businesses, or they would face enforcement actions.
This announcement is part of Nigeria's regulatory plan for digital asset trading. The SEC stated that the new registration aims to amend its rules regarding the issuance of digital assets, providing platforms, exchanges, and virtual asset service providers (VASP) custody.
In a statement on its website, the SEC said, "All operating and potential VASPs should access the SEC electronic portal within 30 days of this circular's publication to complete the application process."
The SEC's move comes amid increasing public scrutiny and skepticism regarding digital assets. Earlier this year, Nigerian authorities accused cryptocurrency exchanges, including Binance, of money laundering and disrupting the foreign exchange market.
The International Monetary Fund (IMF) has recommended that Nigeria implement comprehensive regulations for the cryptocurrency industry to address some economic issues. Meanwhile, the Nigerian Securities and Exchange Commission is exploring the tokenization space and plans to experiment with a licensed liquidity pool that includes tokenized bonds and deposits.
The SEC's new regulations mark an important step for the country in strengthening the regulation of digital assets, reflecting Nigeria's recognition of the potential of the cryptocurrency market and its determination to maintain financial order and protect investors. Despite facing numerous challenges, including currency devaluation and pressure on the foreign exchange market, Nigeria's cryptocurrency market remains active.
Binance Executive Incident
The complex regulatory environment faced by Nigeria's cryptocurrency industry is challenging, and earlier this year, reports emerged of a series of incidents between Nigerian authorities and Binance, involving the detention of two of Binance's executives.
The two executives from Binance are Nadeem Anjarwalla, a British citizen serving as the regional manager for Binance Africa, and Tigran Gambaryan, a former IRS agent and current head of Binance's financial crime compliance department.
The detention of Binance executives by Nigerian authorities began in February 2024. The Nigerian government accused Binance of "manipulating exchange rates," leading to a 70% devaluation of the country's currency, and charged the two executives with money laundering and tax evasion, subsequently detaining them.
When Tigran traveled to Nigeria in January, he received a message demanding that Binance pay $150 million in cryptocurrency within 48 hours to resolve the allegations, which he interpreted as a bribe request from a Nigerian official.
On February 28, Nigerian authorities detained the two executives after negotiations broke down. On March 5, Binance removed the naira settlement feature from its platform and withdrew all services from Nigeria. On March 22, Nadeem fled Nigeria.
On March 29, Nigeria's Economic and Financial Crimes Commission charged Binance, Tigran Gambaryan, and Nadeem Anjarwalla with money laundering and related offenses. On April 8, Tigran Gambaryan pleaded not guilty to five counts of money laundering and was remanded to a medium-security prison. On May 24, Tigran Gambaryan collapsed in a Nigerian court, with his family suspecting he had malaria and a severe throat infection. Despite the court ordering his transfer to a hospital, he remained detained in Kuje prison due to inadequate medical facilities.
Binance stated that the company requires all users to undergo strict identity verification, and not all transactions are related to the naira; the total trading volume should not be misinterpreted as actual funds flowing through the exchange, and its system automatically suspends to prevent manipulation, with traders attempting to manipulate the market being kicked out. Binance CEO Richard Teng stated that Tigran Gambaryan is not a decision-maker or negotiator for the company but serves as a functional expert in financial crime and policy discussions, accusing Nigerian authorities of illegally detaining Binance executives and demanding large bribes. Nigerian authorities refuted and denied this claim.
As of July 2024, Tigran Gambaryan remains detained in Nigeria, and his case is still under review. Binance has stated that it is working with the Nigerian government to resolve the issue.
Checks and Balances
Olayemi Cardoso, the Governor of the Central Bank of Nigeria, stated that in the past year alone, $26 billion has flowed through Binance's platform in Nigeria, and the sources and users of these funds are not fully identifiable by the central bank. Bayo Onanuga, a special advisor to the Nigerian president, accused Binance of interfering with Nigeria's exchange rate formulation and replacing the role of the central bank.
In February of this year, the Nigerian government requested local telecom companies and other internet service providers to block access to cryptocurrency trading platforms, including Binance, Bitcoin Base, and Kraken. Additionally, OKX announced its exit from the Nigerian market in July due to regulatory issues.
Nigeria's regulatory policies regarding cryptocurrency trading have been changing and adjusting. In January of this year, the Central Bank of Nigeria lifted its previous ban on cryptocurrency trading but continued to prohibit banks and financial institutions from independently engaging in virtual currency trading or transactions. At the same time, the Nigerian Securities and Exchange Commission issued a 30-day ultimatum to cryptocurrency exchanges and digital asset traders, requiring them to re-register their businesses and clearly stating that legal action would be taken against non-compliance. Nigerian authorities have accused exchanges like Binance of money laundering and influencing foreign exchange activities, exacerbating public skepticism and concerns about cryptocurrency platforms. The cryptocurrency market itself carries high risks and uncertainties, and such regulatory actions and accusations further undermine public trust in cryptocurrency platforms.
Overall, the difficulties of cryptocurrency regulation in Nigeria primarily lie in how to effectively curb illegal activities using cryptocurrencies while meeting certain financial needs and balancing regulatory policies with market development. This requires the government to continuously explore and refine relevant regulatory measures and legal frameworks.
5. Specific Regulatory Policies for Web3 in Nigeria
The Nigerian government has officially approved a national blockchain policy as a key initiative to promote the transformation of the digital economy. This policy aims to build a blockchain-centric economic system to support secure transactions, data sharing, and value exchange among multiple parties (including individuals, businesses, and governments). Although the policy document has not yet been made public, the government has instructed relevant regulatory bodies, including the Central Bank of Nigeria and the Securities and Exchange Commission (SEC), to begin formulating a regulatory framework to ensure the effective deployment of blockchain technology across various sectors.
The introduction of the national blockchain policy highlights Nigeria's strong interest in blockchain technology and its high recognition of its potential to drive economic development. Nigeria has rapidly become one of the most proactive countries in adopting digital assets globally, with its large population widely using cryptocurrencies for remittances, online transactions, and more.
The Nigerian government's active embrace of blockchain technology aims to leverage its advantages while implementing corresponding regulatory policies to ensure the healthy development of blockchain technology. This is significant for attracting investment and promoting the development of Nigeria's blockchain ecosystem. The involvement of regulatory bodies such as the Central Bank of Nigeria and the Securities and Exchange Commission reflects the government's thoughtful consideration of the potential impacts of blockchain technology, aiming to ensure robust market development through regulation while maintaining financial stability and protecting investor rights.
Additionally, the Nigerian government plans to establish a cross-departmental steering committee to oversee the implementation of the blockchain policy. This committee will play a central role in coordinating collaboration between different departments and other stakeholders.
In May 2023, the Nigerian government reaffirmed the launch of its blockchain policy and emphasized its vision: to support secure transactions, data sharing, and value exchange among multiple parties by building a blockchain economy, thereby promoting innovation, trust, growth, and prosperity.
According to Bloomberg, the Nigerian SEC is exploring the issuance of tokenized tokens backed by equity, debt, or property (non-cryptocurrency) on approved digital asset exchanges.
In summary, the Nigerian government has demonstrated its firm support for blockchain technology through a series of policy initiatives and hopes to promote economic growth and innovation through its application.
