Nigeria is home to an army of cryptocurrency enthusiasts. Their engagement with this digital asset is well-known; the country is consistently on the list of top markets for cryptos.
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You may recall that, in 2020, Nigeria was named the second biggest market on Paxful, a global cryptocurrency exchange platform, just behind the United States.
Most of the excitement about these digital coins stems from the fact that they can be traded like commodities. But while most cryptos have been used this way, people and businesses are now starting to adopt these assets as units of exchange, just like fiat (e.g. the naira).
The thinking in many quarters is that, at some point in the future, digital currencies (or an evolved version of them) will be the medium of exchange for economies around the world.
But is cryptocurrency really the future of finance, as many crypto analysts claim? Is there a chance that Nigeria will give up the naira as it is for a blockchain-enabled electronic coin?
Are Cryptocurrencies Actually Currencies?
For cryptocurrencies to assume the status of actual money, it has to be all of these at once:
- A medium of exchange.
- A unit of account.
- A store of value.
The growing use of cryptocurrencies as mediums of exchange is actually in line with the dreams of the earliest creators of crypto. The pseudonymous founder of Bitcoin, Satoshi Nakamoto, said that he intended his invention to function as money.
But it’s not clear that he wanted Bitcoin to have just this single function. In any case, it began to be traded on exchanges soon after its creation in 2009. And despite attempts at encouraging merchants to accept cryptos as payment for their products and services, the majority of people hold it (or altcoins) just so they could sell for a profit if its price climbs.
Most merchants who accept cryptos are still setting their prices in fiat. They take payments in Bitcoin or altcoins that correspond to the prevailing exchange value with the local currency. Cryptocurrencies are still not recognized as a proper unit of account, even by most of its supporters.
One respect in which cryptocurrencies may be recognized as actual money is as a store of value. Millions of people across the world trade some of their fiat for cryptocurrencies like Bitcoin, Ethereum, and XRP. They believe that the value of these things will rise over time, thus insulating them wealth against inflationary pressures.
Consider this. In May 2010, Bitcoin was worth less than a cent. By December of 2017, its value stood at $13,000. As of the time of writing this article, one Bitcoin was priced for just over $58,000. A single Bitcoin is now worth several thousand times more than it did just ten years ago.
In summary, the bigger cryptocurrencies have performed fairly well as stores of value. But they haven’t been as successful with the other two criteria for being proper currencies: a medium of exchange and a unit of account.
Why Would We Want Cryptos To Replace Fiat?
Let’s pick up on the point made about cryptocurrencies as a store of value. As the Bitcoin example shows, some digital coins have become more valuable over the years. That’s because:
- Demand for them is growing, and
- There’s a cap on the number of cryptos that can be produced (‘mined’)
This rising value (although often punctuated by dips) makes cryptos like Bitcoin and Ethereum an attractive option for people who want to hedge against inflation. Because the naira has lost much of value to inflation, many Nigerians want to hand in part of their wealth in exchange for cryptocurrencies.
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Another reason for Nigerians’ enthusiasm for these coins is that it decouples their finances from the formal financial system. So they can trade with it, and utilize it for cross-border transactions, without incurring costs imposed by the apex bank, money transfer companies, and other financial institutions.
Given this decentralization and the international use of cryptos, one or a few cryptocurrencies could become a global unit of exchange. Numerous consequences may arise from this; for example, businesses can expand their services to reach people in another continent, and take payments for those services in a universal cryptocurrency.
It could also make it easier to track fraudsters. Every transaction that occurs on the blockchain is time-stamped and open to reference by members of the public. So if there’s a fraudster involved in a Bitcoin transaction, you can track his or her withdrawals, deposits, and transfer on the chain.
Concerns About The Negatives Of Cryptos
In February 2021, Nigeria’s apex bank (the CBN) banned banks from processing transactions linked to people who traded cryptocurrencies. Its officials said they were concerned about the use of cryptocurrencies to launder money or finance illegal activities.
Although there was widespread cynicism about the CBN’s explanations, some of its claims did point to reality about digital currencies. The system is mostly unregulated, and criminals may exploit this to rob their victims.
It’s hard to halt a transaction after it starts. This is due to the nature of the blockchain; the system is built to not allow reversals, regardless of the intention of the parties involved. This problem does not exist with regular currencies.
But security is still a challenge for individuals and exchanges involved in trading cryptos. Many of these have had their coins stolen by unknown assailants.
The following objections stand out. First, there’s a limit to the number of cryptocurrencies that can be produced over time. This means that, as the years go by, specific cryptocurrencies will become rarer, and they will be worth much more in the future. Simply put, they are prone to deflationary trends. This could weaken the economies that use it over the next several decades.
If you’re going to accept cryptocurrencies as payment for your services, you have to bear the volatility that comes with them. The market value for cryptos may swing rather sharply in a single day.
Finally, you will need a lot of energy to power the crypto mining and transaction processes. The global carbon footprint generated by Bitcoins alone is more than the carbon footprint of countries like Nigeria and Argentina. If the world wants to replace fiat, it will have to solve this energy requirement problem.
The Promise Of Cryptocurrencies
Some experts insist that the challenges discussed here are surmountable. We just need to improve existing technologies and build new ones that can sustain crypto transactions. Regular people also have to get on the crypto train.
In the end, the fate of cryptocurrencies and decentralized finance will be determined by the government’s reaction to them. For Nigeria, this part of the crypto story has only just begun.
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