The Impact of Cryptocurrency on the Financial System in Nigeria

Abstract

In this paper, we review the benefits and challenges of cryptocurrencies, the decentralized digital money and assets, on the financial system. Afterward, we apply the simple and linear “Transfer Function (Autoregressive distribution Lag Model, ARDL) to examine the effects of selected cryptocurrencies on financial system with specific focus on the foreign exchange market, capital market and the money market in Nigeria. We propose a linear ARDL method to demonstrate how the volatilities in the prices and transaction volumes of Bitcoin. The result shows that the treasury bill transaction amount is explained by its own past, as well as other considered variables. A 1% increase in bitcoin price would result in 0.004% decrease in the volume of transaction of the treasury bill. Also, a 1% increase in bitcoin traded transaction will result in a 0.096% decrease in the money market treasury bill. Regarding the treasury bill rates, the result identified that the treasury bill rate is also explain by own past and other considered variables. A 1% t increase in bitcoin price would result in 0.059% decrease in the treasury bill rates. Lastly, bitcoin volume would result in significant decrease in treasury bills rates in line with expectation. A 1% increase in bitcoin traded transaction will result in a 0.039% decrease in treasury bill rates. Thus, the study contributes to the existing literature by providing how the financial transactions in the cryptocurrency market are drives price discovering in the financial markets in Nigeria. The findings open room for future research since the study is limited to only few financial markets in Nigeria.