Impact of Digital Currency Adoption on Exchange Rate in Nigeria

Nigeria has witnessed rapid growth in the use of digital currencies, particularly cryptocurrencies and dollar denominated stablecoins, alongside the introduction of the eNaira, increasing the ability of individuals and businesses to convert naira holdings into digital assets and conduct cross-border transactions outside conventional banking channels which raised concerns about possible effects on the demand for the naira, capital movements and exchange-rate stability. This study, therefore, examined the impact of digital currency adoption on exchange rate in Nigeria. The study specifically seeks to examine the trend and pattern of digital currency adoption and exchange rate in Nigeria; to determine the impact of digital currency adoption on the exchange rate in Nigeria; and to examine the causal relationship between digital currency adoption and exchange rate in Nigeria. Secondary monthly time-series data on exchange rate and other macroeconomic data were obtained from relevant national and international sources such as the Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS), International Monetary Fund (IMF). The data were analyzed using correlation analysis, Augmented Dickey-Fuller unit root testing, ARDL estimation, Bounds Test for cointegration, estimation of long-run coefficients, Error Correction Model, and post-estimation diagnostic and stability tests. Findings of the study revealed that digital currency adoption did not exert a statistically significant individual effect on the exchange rate in the long run leading to the conclusion that digital currency adoption is relevant to exchange-rate dynamics in Nigeria, although its influence is predominantly a short-run and dynamic phenomenon rather than a statistically significant independent long-run effect. Based on the findings, the researcher proffered the following recommendations among others; the Central Bank of Nigeria and relevant financial regulators should strengthen the monitoring of digital currency transactions, particularly transactions involving naira conversion into foreign-currency-denominated digital assets; and that digital currency indicators should increasingly be incorporated into the country's foreign-exchange market surveillance framework.