Cryptocurrencies are often seen as an investment opportunity, particularly in countries susceptible to deprecating and unstable national currencies.

Oil-rich Nigeria should be one of Africa's economic success stories. But the country of 200 million people has been through several years of financial woes that have touched every member of society. A falling currency, high inflation and political unrest have taken their toll, while the government of President Muhammadu Buhari has struggled to come to grips with the financial instability. The Central Bank of Nigeria devalued the currency, the naira, by 24% in 2020, sending shockwaves through the economy. A further devaluation of 10% could not be ruled out. The naira has depreciated against the US dollar 30% in the last five years. The collapse in global oil prices was a big factor. Oil represents 80% of Nigeria's exports and 50% of government revenues. The pandemic was also a factor. In countries with high levels of poverty and poor health systems, COVID-19 posed a serious risk due to the large numbers of people living in overcrowded conditions. In Lagos, the capital, most of the city's 20 million inhabitants live in slums.

Unemployment during the years of recession was estimated to be 33% of all working-age people. Young people have been especially hard hit. Nigeria has a median age of just 18. Among the many young people out of work are those with educational qualifications who had hoped for good jobs but have found that the only work available is poorly paid, low-skilled work with no security. Among these disillusioned workers, who move from one low-paid job to another, the future looks bleak. It is in this environment that cryptocurrencies have gained a following. Cryptocurrencies such as bitcoin seem to offer opportunities of betterment, despite the risks. And Nigerians are gravitating towards them in growing numbers.

Trading in cryptocurrencies has become easy with trading apps such as Paxful (https://paxful.com), the bitcoin trading platform. In 2020, 1.1 million cryptocurrency trades took place each month. This has made Nigeria third in the world, behind the US and Russia, in cryptocurrency trading. These trades are carried out mostly at a modest level: $100 was the average amount of each trade. Still, it added up to $65 million a month. Bankers advise that cryptocurrencies carry huge risks. This is unregulated trading with wild fluctuations, which could lead to ruin. Nigeria's government first attempted to ban the trade in 2017 but this had little impact. In 2020, it again became alarmed and barred banks from handling any cryptocurrency-related transactions. For investors this meant their bank accounts could be frozen if the bank suspected they were trading cryptocurrencies. It is unlikely, however, that this prohibition will close down the trade. Investors can shift to foreign bank accounts and they can revert to peer-to-peer trading. A risk for the government is that the trading will continue below the radar and much of it could be connected to illegitimate transactions.

In a country with currency controls and runaway inflation, cryptocurrencies can look like a viable alternative. For the many people struggling in the ravaged economy, alternative sources of income have an appeal as a kind of insurance. Nigeria's many young people are comfortable with digital finance. Many are active in trading in foreign currencies anyway and digital currencies can act as insurance against exchange rate fluctuations. The depreciation of the naira against the dollar has thus persuaded many to explore cryptocurrencies.

Protests against police brutality erupted in late 2020 and were met by security forces using teargas and water cannon. Some of the civil society groups that raised money to free protesters or to provide first aid at the protests found their bank accounts frozen. These groups have shifted to keeping their funds in cryptocurrencies to protect them from raids. The groups soon devised ways to get round the government clampdown on cryptocurrencies by using foreign platforms. They also took in bitcoin donations to fund their activities. By these means, protesters and civil society groups were able to keep functioning financially and sidestep government restrictions on their finances.

Nigeria's experience is being closely watched by other countries where cryptocurrencies are also gaining ground. Attempts to ban them were ineffective as traders and platforms found ways round the ban. It also tended to drive the trading underground, facilitating illegitimate activities such as money laundering by criminal organizations. A more pragmatic approach would be to devise ways to regulate digital currencies, although the users would find ways round regulation. For governments, the best long-term solution is probably the hardest: to fashion policies for stabilizing the official currency and promoting inclusive development. Poverty, unemployment and repressive security forces are some of the aspects of Nigeria's environment that have contributed to the rise of cryptocurrencies.

Questions

What are the worrying features of the Nigerian economy?

Why have cryptocurrencies taken off in Nigeria?

What lessons can other governments learn from the experience of Nigeria in trying to curtail the use of cryptocurrencies?

What policies should the Nigerian government be following to restore its finances?