The move reduces the likelihood of artificial price differences between the naira and cryptocurrencies in different markets.
On June 14, Nigeria, known for its growing adoption of cryptocurrencies like Bitcoin (BTC), floated its national currency, the naira, allowing banks and other forex market actors to trade it freely. The new policy could have several implications for crypto traders.
Foreign currency traders can now exchange at rates set by the market instead of those set by the Central Bank of Nigeria (CBN). This move follows the president’s decision to implement a 10% crypto tax on capital gains and could be a game-changer for Nigeria’s crypto industry, positively or negatively.
Cointelegraph spoke with a local crypto expert, David Osawaru, who said that fluctuations in the value of the naira against other currencies, including cryptocurrencies, may impact the profitability of crypto trades. A rapid drop in the value of the naira would have a negative impact on crypto traders, with the inverse causing a spike in profitability.
Press Release: Operational Changes to the Foreign Exchange Market …https://t.co/80AqEHqJub pic.twitter.com/ClbVJducnN
— Central Bank of Nigeria (@cenbank) June 14, 2023
According to Osawaru, in the case of rapid naira devaluation, there’s the possibility of crypto traders experiencing higher transaction costs due to potential changes in exchange rates. Increased volatility could result in wider bid-ask spreads, making it more expensive to buy or sell cryptocurrencies using the naira.
Cryptocurrencies are typically traded on exchanges, and these exchanges rely on the liquidity of different fiat currencies, including the naira, to facilitate smooth trading. If the liquidity of the naira decreases, it becomes more challenging to match buyers and sellers at desired prices, leading to potential slippage and increased trading costs.
Liquidity refers to the ease with which an asset can be bought or sold without significantly impacting its price. When the liquidity of a currency decreases, it means there is a reduction in the availability of buyers and sellers in the market, which can result in wider bid-ask spreads and increased price volatility.
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Osawaru said that free-floating the naira could reduce arbitrage opportunities for cryptocurrencies by minimizing price discrepancies across different markets. If the naira’s exchange rate is allowed to adjust freely, it becomes less likely for significant price disparities to exist between the naira and cryptocurrencies across different trading platforms or exchanges.
To mitigate any possible negative effects of this new policy on the crypto market and the economy, the Nigerian government could introduce cryptocurrency policies to foster a more liquid and efficient trading environment, encourage market-making activities and ensure transparency.
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