From cowries to the gold standard and now to the current fiat system, money has always been defined by, and evolved with, man's need at the time. Likewise, the rise in digital currencies such as Bitcoin comes at a time of a widespread adoption of technology, flagging confidence in central banks, and the marginalisation of cash. Bitcoin and its kind have become an essential investment niche in recent times, even in Nigeria where it gained popularity from its adoption as a means of payment in the popular Ponzi scheme, MMM.
For the uninitiated, digital currencies are very strange. They exist almost entirely in electronic form, as opposed to the physical cash we carry around. But crucially, they are not issued by a central authority (Government, Central Bank). Unsurprisingly, there is a lot of fuss about this new type of currency, but what can it offer Nigeria?
Introducing Digital Currencies
For a system that has been global practice for less than a century, Fiat money has many faults and critics. Digital currency, in essence, seeks to address some of these. For example, two key characteristics of Bitcoin are its finite quantity and decentralised nature. The finite quantity refers to the fact that there is a fixed number of Bitcoin in potential existence – Bitcoins are continually being mined, and 16 million are currently in existence. To some extent, this acts as a security against the currency being debased, as occurs in a currency devaluation.
The decentralisation point is easier to understand. Bitcoin is not issued by any government or central body so no one can control its supply or value. In some ways, the currency is a blend of free market and technology utopia in the way the system self-policies through what is called Blockchain technology. An extreme yet relevant example can be found close to home with the way the CBN has manipulated the value of the naira under a supposedly flexible exchange rate system. But even with traditional monetary policy, expanding the money supply by printing more notes is antithetical to the bitcoin system.
Anonymity – or rather, pseudonymity – is probably the most appealing feature of digital currencies. Using blockchain provides a way to track bitcoins, by creating a publicly displayed chronological transaction history, without revealing the identity of the related parties. For this reason, regulators have labelled these currencies as a haven for criminal activity, and though Bitcoins especially have been exploited by the underworld, it is not obvious that it is a worse alternative than cash or regular currency.
In reality, digital currencies still have significant deficiencies, and we are still a world away from seeing them replace fiat money. In Nigeria, the absence of supporting digital currency infrastructure makes mass Bitcoin adoption an outlandish idea, at least for now. Nevertheless, they pose interesting challenges to the current financial and political order given their disrespect for central banks, national borders, and transparency.
Regulating the Unregulated
Regulating digital currencies has proven tricky. Some countries, like Luxembourg, have gone the whole nine yards in endorsing national digital currency exchanges. Others, like Russia, have flirted with the idea of banning Bitcoin. Some, like Nigeria, have taken no stance on the matter. However, the Central Bank of Nigeria (CBN) has cautioned the public against the (mis)use of Bitcoin and, at the same time, barred financial institutions from operating with digital currencies. Is the CBN anti-digital currency? The apex bank has rubbished the suggestion.
Amid this, investors have seized the opportunity. At a point, NairaEx, a leading informal digital currency exchange, reported that more than $1 million worth of Bitcoins was traded in the country each week. As these exchanges grow, the calls for regulation and oversight will only ring louder. How will the CBN – or the Securities Exchange Commission – respond to this? Frankly, our regulators are too unpredictable to predict.
Why it Matters to Nigeria
But digital currencies offer one obvious benefit to Nigerians as an alternative to the expensive and burdensome money transfer system currently available. Remittances to Nigeria are sizeable, estimated at $35 billion in 2016 alone. To put this in context, the CBN's external reserve account currently holds $30 billion. Many Nigerians rely on remittances for their daily upkeep, and any way of making the process cheaper and faster would be of great benefit.
And with the CBN's cashless policy gaining momentum, digital currencies are a possible medium to achieving the stated goals.
One obstacle to all this is the low level of financial inclusion in Nigeria today. Similarly, the lack of reliable access to mobile and internet technology undercut the foundation of using digital currencies. It looks like Nigeria is unprepared to reap the primary benefits of Bitcoin.
Right now, few Nigerians would profess any love for the naira or even the central bank. Rising cost of living, low purchasing power, and a high dollar have made things hard for everyone, regardless of income. And the CBN has been helpless (or complicit?) to arrest this trend.
Bitcoin is not a silver bullet. It will not solve Nigeria's financial issues: currency volatility, financial exclusion, etc. But it offers opportunities that cannot be provided by fiat money. Unfortunately, it will remain a plaything of the wealthy and highly sophisticated unless CBN – and the domestic technology community – seek ways of adequately leveraging on it. Even if its only impact were to bring an end to the "no change" epidemic, many Nigerians would count that as a victory.