Regardless of the divergent opinions on cryptocurrency, a major question remains: can Africa adopt Bitcoin as a reserve currency?
- Bitcoin, the inaugural decentralized currency, has found a place within the global financial landscape since its introduction in 2009.
- The steady rise and mass adoption of Bitcoin has got many government regulators worried it could destabilize national currencies and eventually rise to the world’s reserve currency status.
- Bitcoin is a decentralized digital currency, meaning centralized entities, including the government or a central bank, do not control it.
What is a reserve currency
A reserve currency represents a significant quantity of money that central banks and other major financial institutions maintain to prepare for transactions, investments, international debt obligations, and a cushion for the local exchange rate. Many commodities, including oil and gold, are priced in the reserve currency. Countries hold such currency to pay for these goods.
The countries use these reserves to facilitate international trade and stabilize their currencies’ value. The US dollar remains the dominant reserve currency globally, representing approximately 60 per cent of global reserves. Other reserve currencies include the euro, the Japanese yen, and the British pound. With the recent de-dollarization debate gathering momentum, the Chinese Yuan has been fronted as a possible reserve currency.
For Africa, the issue of reserve currencies remains particularly important. Many African economies heavily rely on natural resources priced in the US dollar, including diamonds, gold, and oil. Consequently, African countries have often struggled with inflation and currency fluctuations, significantly affecting their economies. Moreover, many African countries have limited access to international financial markets. Thus, these nations suffer economic sanctions, often subject to political instability, further exacerbating their economic challenges.
Bitcoin, the inaugural decentralized currency, has found a place within the global financial landscape since its introduction in 2009. Bitcoin proponents have fronted it as a revolutionary technology that could revolutionize the conventional financial landscape. However, critics have dismissed Bitcoin as a volatile, unregulated nature and an avenue for criminal financial activity to thrive. Regardless of the divergent opinions on cryptocurrency, a major question remains: can Africa adopt Bitcoin as a reserve currency?
Bitcoin as a reserve currency in Africa
Bitcoin’s steady rise and mass adoption have got many government regulators worried it could destabilize national currencies and eventually rise to the world’s reserve currency status. As such, many are closely watching the developments within the crypto industry to see what happens with the now highly prominent Bitcoin.
However, many uncertainties remain regarding Bitcoin’s capacity to replace the US dollar’s standing as the world’s reserve currency. Although many investors and crypto fans have long lauded Bitcoin as a superior alternative to fiat currencies, conventional market professionals argue differently. Nevertheless, The possibility is not entirely ruled out. An outlook into whether Africa will adopt Bitcoin as a reserve currency would require policymakers to consider both sides of such a move going into the future.
Advantages of Bitcoin as a reserve currency
Secure and decentralized
Bitcoin is a decentralized digital currency, meaning centralized entities, including the government or a central bank, do not control it. Because of its decentralization, Bitcoin stands as more secure and less susceptible to government control or meddling. This might be incredibly tempting to African nations historically suffering political instability and corruption.
People can conduct Bitcoin transactions without intermediaries like banks or payment processors. This implies that users can complete cross-border transactions swiftly and affordably without costly currency conversions or transaction fees. This might be especially helpful for African nations with limited access to international financial markets and eliminates the high cross-border transaction costs.
Hedge against inflation
The world’s biggest cryptocurrency, Bitcoin, has a fixed supply of 21 million coins. In 2021 crypto experts confirmed that over 90 percent of this total had already been mined. Although newly minted Bitcoins will not remain available forever. The number of coins available to mine will decrease over time, with a long way to go before all of them enter circulation. As things stand, the supply of new coins will not deplete until 2140.
Those favoring fixed supplies, like Bitcoin, regard this as digital scarcity. Lower supply means higher demand, thereby increasing prices. Experts say this sets crypto and Bitcoin aside from the global financial system. Central banks can effectively print more money through quantitative easing, which can lead to inflation. Bitcoin’s limited supply preserves, making it immune to inflationary pressures. This could prove particularly appealing to African countries that have struggled with high inflation rates, significantly impacting their economies.
The flipside of Africa adopting Bitcoin as a reserve currency
Bitcoin is known for its extreme volatility, with its value fluctuating wildly daily. The volatility stems from crypto’s immature markets and investor speculation. Bitcoin is expected to become less volatile as clarity around the currency develops and markets become more efficient. This volatility could pose a significant concern for African countries looking for a stable reserve currency to stabilize their economies.
Bitcoin as a reserve currency would require a central governing authority to control supply and usage within economies. However, Bitcoin is a decentralized currency without any central entity. Operating in an unregulated market means governments and financial institutions have control or little oversight.
This lack of regulation could be a significant concern for African countries that have experienced financial instability and fraud. However, government regulators are catching up. Regulations for crypto and Bitcoin usage remain underway in many countries.
Relatively lower mainstream adoption
In Africa, individuals, businesses, corporations, and merchants already use Bitcoin as payment and an investment asset. However, the adoption has mainly been among medium to small enterprises. Many mainstream institutions remain skeptical about crypto. Bitcoin as a reserve currency only becomes possible if the mainstream government and private institutions adopt it. Despite Bitcoin’s tremendous growth potential in Africa, mainstream adoption will take time, based on the current statistics.
Bitcoin uses sophisticated technology requiring a high level of technical ability to develop and maintain. Without the essential technological competence and infrastructure, African nations may struggle to embrace Bitcoin as a reserve currency.
In summary, although Bitcoin has certain potential benefits as an African reserve currency, there are also considerable hurdles and issues to consider. Bitcoin’s severe volatility, lack of regulation, and the technological obstacles to adopting and sustaining a digital currency system may outweigh the potential advantages for many African nations.
Furthermore, it is critical to note that Bitcoin is not a cure-all for Africa’s economic problems. Adopting Bitcoin as a reserve currency would not solve the fundamental concerns of political instability, corruption, and economic inequality that persist in many African nations.
Instead, African nations should build robust and stable economies that are less reliant on natural resources and more diverse. Potential transformation might come from investing in education research and innovation, infrastructure, improving governance, and reducing corruption.
While Bitcoin could offer future advantages as a reserve currency, it is unlikely to be a realistic alternative for many African nations in the short term. Instead, African governments should concentrate on developing robust and stable economies less exposed to external shocks while remaining resilient to global market challenges.