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Lessons for Nigeria as US regulator permits banks to use stablecoins

Lessons for Nigeria as US regulator permits banks to use stablecoins

The US Office of the Comptroller of the Currency (OCC) on Monday said federally regulated banks now have the approval to carry out trade and other activities in independent node verification networks (INVNs) or use stablecoins to perform bank-permissible functions, such as facilitate payment transactions for customers.

A stablecoin refers to a new class of cryptocurrencies that offer price stability and are backed by a reserve asset such as the US dollar or Euro.

According to a letter, the approval forms part of a strong framework for ushering in an era of stablecoin-based financial infrastructure, identifying important risks while allowing those risks to be managed in a technology-agnostic way.

“Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products,” Brian P. Brooks, acting comptroller of the Currency, said.

The statement, while unprecedented and a major win for the global cryptocurrency market, is markedly removed from the approach of financial regulators in Nigeria and other African countries.

In Nigeria, the Central Bank of Nigeria (CBN) has in the past taken a wary position in the cryptocurrency market, sometimes warning of dire consequences should deposit money banks attempt to conduct any activity in the market. To date, some cryptocurrency exchanges still say most banks shy away from conducting business with them because of the position of the CBN.

Top among the list of fears for the CBN is the high volatility the market was once reputed for and the so-called anonymity it grants traders. However, stablecoins were created to specifically address the volatility in the cryptocurrency market.

The idea of stablecoins was born by the high volatility in the valuation of cryptocurrencies like bitcoin. For example, in 2017, the world’s largest cryptocurrency by valuation rose from a level of about $5,950 in the early weeks of November 2017 to above $19,700 in December of the same year, only to come crashing to $6,900 by early February 2018. Even the intraday price of bitcoin can swing uncontrollably: it is common to see the cryptocurrency moving in excess of 10 percent in either direction within a span of a few hours.

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It is important to note that the spike and crash of the market in 2017 and 2018 have also been attributed to the low adoption by institutional investors. The price in 2017 was driven largely by get-rich-quick investors, who pumped money into the market only to cash out after December 2017.

The current resurgence in prices of top cryptocurrencies is linked to increased adoption by large institutional investors and a positive regulatory outlook like the OCC’s pronouncement.

“We’re now seeing more and more institutional investors come into play. Facebook, PayPal, Square – some of the biggest names in the business are entering the cryptocurrency space and this is going some way to allaying the doubts that have previously undermined bitcoin, ensuring that any future hit to its price will not be as significant as we’ve seen in the past,” Marcus Swanepoel, CEO of Luno, said.

The surge in the market is also driven by growth in stablecoins projects such as Tether (USDT) and Circle’s USDC.

USDC registered a growth of 800 percent in 2020, with the stablecoin having hit the $4 billion mark in market capitalisation recently.
With the Nigerian economy in recession, the apex bank needs to look towards new technological advancement to generate revenue. The market is already booming in Nigeria even without the approval of the CBN.

Recent statistics from Usefultulips show Nigeria leads Africa in peer-to-peer lending in 2020, posting monthly P2P volumes of between $25.8 million, followed by South Africa and Kenya, respectively, posting about $8.2 million and $7.7 million monthly.

Another recent report names Nigeria as the second largest in terms of bitcoins traded next to the US on the peer-to-peer market. Nigeria had traded 60,215 bitcoins valued at $566 million. Kenya is second in Africa in bitcoin trade growing more than 390 percent in 2020, while South Africa comes in third on the continent.

Binance also reported that it has processed a total volume of $280 million for P2P trades alone from Nigeria as of 2020.

This is the new reality that government institutions like the National Information Technology and Development Agency (NITDA) and Securities and Exchange Commission (SEC) are starting to embrace. NITDA had said in December that it planned to earn $6 billion from Blockchain technology by 2030. The SEC now has a cryptocurrency regulatory document and it is expected to follow up soon with a more detailed framework. The CBN meanwhile is sticking to its silent treatment.