Improving Crypto-Assets/ Fiat Cooperation in Nigeria’s financial system.

The fundamental benefits of adopting crypto-assets in modern banking systems cannot be over-emphasized. There’s a need to figure out how we can cleverly remove all the frictions at the intersection of crypto-sphere and traditional/ fiat finance, leverage the current boom in the multi-billion dollar crypto-assets industry and drive economic development in Nigeria.

Nigerian Crypto companies and banks can work together, just like Fintech companies are working together with banks.

Agreed, Cryptos and banks have been seen as bitter enemies, which is understandable. The anti-banks sentiment has prevailed ever since the inception of bitcoin, with cryptos posing threat as a substitute for fiats.

The banks have largely shunned crypto-assets businesses, particularly as it constantly comes under increasing scrutiny from regulators. For crypto to be used by the masses, it currently must be integrated with fiat currency. Both traditional banks and crypto banks have their place, and, with the current mood of distrust, they need each other.

The realities on the ground do not support the fact that the traditional banking system will go away any time soon. In the meantime, we must figure out a way for crypto-related businesses to work together with banks for the sake of fostering innovation and improving customer experience. Complicated, fragmented, or broken as it may seem, banks are playing an important role and offering different financial services to society, but they need to embrace cryptos along with its underlying technology, blockchain in order to grow their businesses.

Such convergence will birth to Fintech 4.0 in Nigeria’s financial system!

While there’s plenty of mutual ground for banks and cryptocurrencies businesses to build strong collaborations, ignoring the existing rivalry of blockchain and financial institutions means shutting one’s eye to the actual reality. The world was moved by bitcoin and other cryptocurrencies because they provided a much better alternative to the widely accepted fiat that keeps losing its value due to inflation.

Moreover, the world has witnessed the manipulation of the financial institutions to control the fiat currencies while claiming to regulate it.

Today, blockchain is being piloted by some big financial services institutions in five primary areas: for clearance and settlement, trade finance, cross-border payments, insurance claims processing, and anti-money laundering (AML) and know your customer (KYC) efforts.

Nigeria’s Crypto-Assets market makers

Cryptocurrencies generally provide an economical alternative to the fiat system, and millions of Nigerian youths have learned how to create “alternative financial opportunity” for themselves leveraging it by trading and speculation. Luckily, Nigeria has a number of local platforms that support purchases and sales of digital coins with the national currency, the naira. Options include Nairaex, Bundle.Africa, FirstKudi, Buycoins.Africa, KurePay, CoinsApp, Quidax, Wallet.ng, Busha, Tradefada, Bitfxt, NaijaCrypto, KuBitX and many more, which support several payment methods powered by FlutterWave, Paystack & KoraPay to buy and sell BTC, ETH including bank transfers.

Nigeria is the top country leading in peer-to-peer Bitcoin transactional trades on the African continent. It had about $34.4 million dollar volume in the 2nd quarter of 2020. This is about 15B NGN from the formal exchanges alone. Volume transactions from p2p trades on WhatsApp, Telegram Groups, and Facebook easily dwarfs the above metric.

There has also been a rise of Stablecoin projects in the ecosystem helping crypto traders to easily hedge their funds against market volatility. As I write, there are about six flavors/ branches of Naira Denominated StableCoin projects: NGNT- Buycoin Africa, NIRX -Nirxblock, NGNC -Nairacoin, ABCD-Bitsika.Africa, NGNX — KuBitX, and NGNC-Dan Holding. These will definitely play very serious roles in disrupting traditional banks’ influence in the crypto-trading space in the coming years.

Making services cheaper with cryptocurrencies.

The cryptocurrency market is only at the beginning stage of its development. However, fiat platforms are already seeing their potential, which addresses inefficiencies and excessive fee structures. Other advantages that crypto-assets possess include borderless transactions, self-sovereignty super-fast transactions, and censorship resistance.

• What are the barriers or obstacles to further adoption of crypto-related activities in the banking industry?
• How can we bridge the gap between traditional finance and crypto?
• What does crypto need from the banking industry and what does the banking industry need from crypto-assets operators?
• What roles can banks play as custodians where Stablecoins are privately issued?
• For cross-border transactions, can Stablecoin cut settlement times from days to minutes by eliminating the need for middlemen?

Current trends that are worth keeping an eye on, include:

• Advances in crypto-asset custody technology, or how digital assets are owned, stored, secured, transferred, and accessed in a decentralized environment.
• A shift from private-permissioned to interoperable blockchain implementations. With many private blockchain implementations coming to fruition, the next step is interoperability.
• More success when scaling the technology with a converged artificial intelligence (AI) framework — and better results when initializing their AI investments.
• Rise of CBDCs.

Fiat market is adapting to the cryptocurrency market.

According to Coinmarketcap, at the beginning of June of 2020, the total market capitalization of 5,705 cryptocurrencies amounted to $275.7 billion. Compared to the fiat market, this is only 0.76% of the $81 trillion of all 159 fiat currencies in circulation recognized by the UN.

The challenge of security vs. transparency

I understand that before cryptocurrencies can live up to their potential and be integrated into the fiat systems, and for governments to embrace their use, serious risk issues must be addressed. Many of these risk issues have their roots in anonymity. Although the path of a cryptocurrency token on the blockchain is open, decentralized distributed network is transparent for all to see, the actual ownership of that token and what it was used for is not. These are what is creating the current distrust. Whereas fiat systems are heavily regulated, crypto-assets are not…for now.

This pseudo-anonymity — a hallmark of cryptocurrencies — is not compatible with current laws and global regulatory trends demanding more transparency and less privacy. Governments want to know who owns assets to guard against money laundering, tax avoidance, and other criminal activities. If governments cannot see a transaction, they cannot identify evaded taxes. Between income, sales, and border adjustment taxes, there is a lot of government revenue at stake.

But there are new tools now available that can easily resolve issues like this.

Possible pathways to Blockchain & Cryptoassets Integration into Traditional Financial Services.

• A unified approach to regulating cryptocurrencies, using new methods suitable for this very novel financial instrument.
• Using DLTs to speed up information-sharing between market participants and regulators.
• Bringing cryptocurrencies into the limelight, and encouraging the issuance of central bank digital currency (CBDC). On the plus side, a CBDC would be far superior among government-regulated markets compared to alternative digital currencies (ADCs) such as Bitcoin, or fiat Stablecoin derivatives.
• Put measures eg. strong KYC, AML etc., that ensure that crypto-assets do not become enablers of criminal activity and tax evasion. Inter-agency collaboration with financial services to implement a coherent, consistent set of controls will help.

Conclusion

For me, collaboration, not competition, is the true strength here for all involved. Different crypto-assets platforms have from the beginning been trying to find a compromise between digital and fiat currencies to attract traditional traders and popularize cryptocurrencies. Cryptocurrency services are moving to a qualitatively new level of customer service, attracting third-party custodians who provide security for client funds, or introducing their custodian solutions.

The fiat financial system should meet crypto-assets operators midway and work in close conjunction with different market makers and companies, and use the strengths of both systems to gain a serious competitive advantage for their products and services.