Nigeria is a developing country and innovation usually experience a slow adoption rate, but this hasn't been the case for bitcoin. According to data gathered by Coindance and published in graphic form by TotalCrypto, Nigeria has a disproportionately high share of world bitcoin trading volumes, occupying the 7th place up until July 2018.
In the country, aside from the usual methods for buying bitcoin (mainly exchanges and over-the-counter (OTC) markets), there are other unique ways of trading bitcoin and other cryptocurrencies. We call it black market trades, even if in reality they are more grey in nature.
In a way, the term “black market” is kind of a misnomer, as it merely refers to any unregulated or informal trades carried out by individuals or unaccredited merchants done either online, or physically offline. Despite the name, there are no laws being explicitly broken, as the regulatory framework for crypto in Nigeria - much like in the broader African continent - is still in its very early stages.
DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily reflect that of Cloudbet. None of the opinions here constitute investment advice.
Main types of unregulated markets
Before we proceed, it is important to note that unregulated trades can be extremely risky and aren’t an advisable trading method for beginners as there is substantial risk of loss of funds. That said, they are the go-to option for a great deal of Nigerian bitcoin traders.
Due to their very nature, it’s impossible to estimate just how much these grey markets move in terms of trading volume. However, the sheer prevalence of such options suggests that there is substantial demand, and that the trend is not slowing down anytime soon.
There are basically three categories of unregulated trading options in Nigeria. These are namely: offline merchants/kiosk, online merchants, and WhatsApp escrow groups. Each one has their own pros and cons, and they require a varying degree of trust in a third party.
They are a merchant that has a kiosk that anyone can walk into and buy and sell bitcoin and other cryptocurrencies. The amount of bitcoin is estimated in USD. Just like how commercial banks trade foreign currencies, they have their fixed rates and make a profit from the margins.
For example, a merchant can decide to buy bitcoin at ₦360/$ and sell at ₦365/$. Payments in cash or bank transfers are accepted, and some traders even take other assets like gift cards. Trust comes from physical presence, like cash transactions. Scams are unlikely because transactions happen in person.
Some locations where kiosks can be found include the Adesuwa Rd area, in Benin City, and also Ikeja, in Lagos state.
Pros: the most flexible market, they also usually deal with bulky transactions and different payment methods. Plus, in-person minimises chances for scams.
Cons: usually the most expensive way of buying in the informal space. Also, this method exposes both parties to inherent dangers. Both merchant and client could be robbed either on the spot or on their way home, as they are physically exposed to potential robbers. Also, they are only available in a few major cities around the country.
Online “trusted” merchants
Online merchants are independent cryptocurrency traders that have built a good reputation and gained trust over time. Clients get to know them either through adverts in cryptocurrency WhatsApp groups or by referrals from previous clients.
The client sends the merchant a message stating the details of the trade. They negotiate and reach an agreement. Regardless of who is buying or selling, the client sends funds first. This is to prevent random individuals from scamming the merchant.
The problem is, human behavior is unpredictable, and it is difficult to physically trace the merchant in case things go wrong. Simply put, you just send your funds and hope you don't get scammed. Genuine merchants can also be cloned in phishing attacks, and stories of people falling prey to this technique are not uncommon.
Pros: they are usually readily available and usually have enough funds both in bitcoin and fiat to trade any amount. They have flexible rates and are more open to negotiations than kiosks. Rates are based on negotiation and are generally better than cryptocurrency exchanges in Nigeria.
Cons: this method of trading requires a high level of trust in a third party, and has a high level of risk of exit scams and phishing attacks.
Whatsapp escrow groups
This is by far the most popular way of trading bitcoin in Nigeria. For some people, this is the only method they have ever used.
Putting it simply, these are WhatsApp groups specially created for the purpose of trading cryptocurrencies. The admins of the group serve as escrow for trades, offering a certain degree of trust.
Trades are initiated by participants of the group, who state the amount of bitcoin they intend to buy and the rate they are willing to pay. A seller willing to sell at that price indicates and they notify a group admin. The buyer of the bitcoin sends Naira to the group admin's bank account. The admin confirms recipient of funds and tells the seller to send the bitcoin to the buyer's address. The seller sends the bitcoin and drops the transaction id for the admin to confirm. After confirmation, the admins send the fiat funds to the seller's bank account.
A small escrow fee is usually imposed on groups transactions. Fees are usually ₦200 for transaction below $300 and ₦500 ($1.38) for transactions above $500. Escrow fees are paid by the buyer.
However, It's not risk-free. The group admin can disappear with funds. Scammers can clone the admin's profile to initiate personal transactions at PM(an acronym that means personal message). Participants thinking they are dealing directly with admins they already trust then go ahead with such deals and get scammed. Groups of scammers even go to the length of forming escrow groups, add people from different crypto groups in a bid to scam random individuals.
Pros: It is the easiest and fastest way of buying and selling bitcoin. Rates are also very flexible and deals are also very available. This is the cheapest way to buy crypto in Nigeria.
Cons: require trust, and are susceptible to exit scams and phishing attacks.
Why does unregulated trading persist?
Despite the distinct risk of losing funds, informal trading is still prevalent in Nigeria for several reasons.
Firstly, for beginners, understanding the complexities of our existing financial system is a daunting task. Going through lengthy KYC processes makes it even worse and more burdensome. Exchanges ask for multiple proofs and documents, and individuals see no reason to go through these processes. In some cases they don’t even have the required documents, and see no reason to get them as there are more readily available and easier methods.
Secondly, Nigeria exchanges charge high fees - from deposit, to trading, to withdrawal fees. The most popular bitcoin exchange in Nigeria (Luno) charges fees even for bitcoin deposits, a practice that’s seen as predatory and has been largely abandoned elsewhere. Transactions in the informal market are by far cheaper.
Lastly, black market trades are often faster for naira transactions. After selling your bitcoin for naira on a Nigerian fiat-based exchange, it may take hours or days for your funds to reach your bank account. Worse still, withdrawals are not enabled during weekends.
When compared to black market methods that are instant and available all the time, most regular people would choose the latter.
Impact of informality
Unregulated trading is a recurring theme in Nigerian markets, and a feature of most developing regions. Informality fulfills demands that corrupt or inefficient states simply cannot, and offer alternatives to people who would normally be cut off from the global financial system. Nigeria is a perfect example of this.
On the one hand, these grey markets open more avenues to Nigerians wishing to get into cryptocurrencies. The ease involved has increased bitcoin transactions in Nigeria and helped empower individuals, especially when sending and receiving money from abroad.
On the other hand, they perpetuate the tradition of distrust that plagues many underdeveloped countries. The prevalence of unregulated businesses stifles innovation in the space, and prevent legitimate players from entering the competition - which in turn leads to cartels in the regulated space extracting predatory fees.
However, the pros of individual financial inclusion far outweigh the cons. And in time, the trust generated by the nature of blockchain itself may be just what Nigeria - and other developing countries - need to escape this damaging cycle.