Saturday, January 28, 2023

The central Africa Republic is the first African nation and the world’s second after El Salvador (who took a similar move on September 7, 2021) to recognize bitcoin as legal tender.

  • The Central Africa Republic (CAR) enacted legislation in April 2021 to recognize bitcoin as an official local currency alongside the CFA franc.
  • Russia and France have interfered militarily in the crisis to pacify the CAR while contending for economic and political dominance. 
  • CAR’s adoption of bitcoin as a legal tender sounds promising, but it may not be economically viable in practical terms.

The Central Africa Republic (CAR) enacted legislation in April 2021 to recognize bitcoin as an official local currency alongside the CFA franc. This move relates to the country’s larger ambitions to address currency issues and incorporate cryptocurrencies into its financial system. The signing makes the CAR the first African nation and the world’s second after El Salvador (who took a similar move on September 7, 2021) to recognize bitcoin as legal tender. CAR’s bitcoin attempt, on the other hand, generated criticism from local and international financial institutions like the International Monetary Fund (IMF) and Bank of Central African States (BEAC). The CAR’s Presidency, on the other hand, feels that the decision would open up new opportunities for the country.

Read: The fall of bitcoin adoption in the Central African Republic

An outlook into CAR’s political landscape

CAR lies in the heart of Africa, bordering Chad, Sudan, South Sudan, the Democratic Republic of the Congo (Kinshasa), the Republic of the Congo (Brazzaville), and Cameroon. The country boasts a population of 5.4 million people and vast natural resources such as gold, diamonds, and uranium. However, the country’s commonwealth has not resulted in economic growth.

Despite its enormous natural resources, CAR ranks among the world’s poorest and most vulnerable countries, according to the World Bank. The United Nations (UN) classified it as one of the world’s least developed countries (LDCs), citing significant poverty and structural barriers to progress.

The Central Africa Republic (CAR) is placed 188th out of 189 nations on the UN Human Development Index (HDI) due to the country’s low standards of living. The CAR’s progress has been stifled by endless bloodshed and brutal civil conflicts caused by a lack of social cohesiveness, religious intolerance, regional imbalances, an unequal concentration of governmental power, and resource mismanagement. Russia and France have significant interests in the CAR’s stability. Both have interfered militarily in the crisis to pacify the nation while contending for economic and political dominance in the African country.

The economic viability of CAR’s Bitcoin adoption 

African countries have turned to cryptocurrencies to protect their earnings from devaluation and inflation, promote financial inclusion, create employment opportunities, and improve cross-border payments and transactions.

Africa has recently had the fastest adoption rate of cryptocurrency, driven mainly by peer-to-peer (P2P) transactions. Ironically, some African governments remain uncomfortable with crypto’s monetary system. Countries like Tanzania, Namibia, Zimbabwe, Zambia, Egypt, Libya, Algeria, Tunisia, Morocco, and Nigeria have outlawed crypto usage.

CAR’s adopting bitcoin as a legal tender sounds promising. However, in practical terms, it may not be economically viable. The crypto-assets volatility makes them financially risky to adopt as legal tenders. Indeed, the economic benefits of the project exceed its economic costs.

Crypto assets have dipped in recent months, with bitcoin losing more than half its worth since November 10, 2021. The all crypto market value now stands at $1.01 trillion, less than half its November 2021 peak of $3 trillion. Extreme volatility in bitcoin leads to changes in consumption, economies, and household wealth.

Furthermore, the crypto might fail to enhance financial inclusion since Bitcoin depends on widespread, fast and reliable internet services. In 2020, the internet penetration rate in CAR was 14%.  Moreover, only 14% of the population had access to power, mainly in the capital Bangui. Also, less than half of the people have mobile phone connectivity.

On the other side, the elites might use the system to continue illicit monetary transfers, which could harm other nations that use the CFA franc. The Central African CFA Franc is the currency of six Central African countries. Any CFA franc holder may convert it to crypto and withdraw it from the regional bloc without the BEAC’s intervention.

Moreover, CAR belongs to the Central African Economic and Monetary Community (CEMAC). The agreement calls for the CFA franc as the region’s only legal currency. Some CEMAC members have challenged to oust the CAR if it fails to reverse its decision.

BEAC previously published a notice declaring CAR’s acceptance of bitcoin “null and invalid” because it breaches the community’s values. If CEMAC follows through on their threat, CAR may face significant economic implications. Overall, the bitcoin experiment’s economic costs seem to outweigh its economic gains. As a result, the CAR must evaluate whether to continue with its digital currency stance.

Read: Blockchain: A pathway towards sustainable development in Africa

bitcon

Africa has recently had the fastest adoption rate of crypto, driven mainly by peer-to-peer (P2P) transactions. [Photo/prescouter]

An outlook into the shifting power axis and the effect of CAR Bitcoin adoption

Beyond economics, CAR’s adoption of bitcoin has a political undercurrent. Since colonial times, the French government has played a significant foreign role in CAR. CAR’s official currency is the CFA Franc, and the Central Bank of France holds its national reserves. The CFA franc is likewise a regional currency, regulated by the BEAC and tied to the euro.

The French Treasury holds a considerable portion of CAR’s foreign currency (at least 50%). In addition, several French enterprises operate in CAR, using its natural resources. From independence until 2013, no CAR leader could win the president without France’s complete backing.

This changed when Michel Djotodia, the leader of a rebel faction, was elected President of the CAR. After the takeover, tensions increased, prompting the formation of an UN-backed peacekeeping force. The force is known as the Multidimensional Integrated Stabilization Mission in the Central African Republic (MINUSCA) and the French military operation Sangaris. Unfortunately, military actions did not prevent mass killings.

Following the election of Faustin-Archange Touadéra in 2016, France took advantage of the chance to remove most of its soldiers. Russia took advantage of France’s exit and began supplying the CAR military with personnel, ammunition, and weapons and participating in the country’s political affairs.

Russia and Sudan met with multiple CAR rebel factions in 2018. They signed a preliminary peace pact, which France claims undermined UN-led discussions between the government and armed factions.

Since taking power in 2016, CAR President Touadéra has allied with Russia. The association has helped protect him against rebels and any coup attempt. France is concerned about Russia’s growing influence in the CAR, and the two nations have been fighting for control in the African country.

The current acceptance of bitcoin seems to have a political undertone. It may be related to Moscow’s growing influence in the nation. The action weakens the CFA Franc, which France supports, and, in principle, the French connection, the former colonial power. On the other hand, it has made the CAR’s financial system more available to Russia, which has struggled to manoeuvre through recent economic and monetary sanctions imposed by Western nations.

Future trends

Trends in the future of money are constantly changing. Countries, researchers, and organizations have many theoretical beliefs on money and building a financial system from various standpoints.

The acceptance of bitcoin by the CAR is a fascinating new frontier. It provides practical insights into using cryptocurrencies as legal cash. According to early indications, CAR’s experiment is driven by political rather than economic motives.

Nonetheless, it may draw international investments from Russia in return for the apparent strategic cooperation. In a war-torn nation like CAR, where rebel groups control most of the region, bitcoin may give some reprieve for secure and private financial transactions.

However, this advantage will only be available to members of the top class who have access to digital gadgets and the internet. As I said in this article, the currency is unlikely to enhance financial inclusion since most of the population lacks access to the infrastructure required to use it.

Furthermore, since the government may be unable to monitor inputs and outflows, it may generate chances for money laundering. Notably, if CEMAC members follow through on their threat to remove CAR from the regional group, the country may be financially unstable and harm its economy.

Furthermore, bitcoin’s volatility makes it untrustworthy legal money in any economy. The present drop in the value of bitcoin is an excellent illustration. Moreover, adoption is unlikely to make CAR more desirable to investors. Investors are more concerned with political stability, steady power supply, the rule of law, security, digital infrastructure, and local knowledge or labour, all of which the CAR lacks.

Accordingly, while the government of the CAR takes the next steps, it must assess both the economic costs and advantages of its bitcoin experiment, as well as how this will foster economic and political stability. The analysis presented in this study may serve as a helpful guide in this respect.

Read: The state of cryptocurrency adoption in Africa per country

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