Bitcoin: Will Cryptocurrency Succeed as Legal Currency in the Central African Republic?

The Central African Republic has become the second country to adopt cryptocurrency as legal tender, but experiences in El Salvador, the first country to do so, suggest a bleak outlook.

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May 9, 2022

Artist’s impressions of Bitcoin with the Central African Republic flag

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The Central African Republic (CAR) has become the second country to bid for bitcoin legal tender, but economists say the project has little chance of success.

From April 20, the cryptocurrency must be accepted as a payment along with the CFA franc, in a move aimed at putting the war-torn country’s economy “on the map of the most daring and visionary countries in the world,” the presidency of the Central African Republic said in a statement. statment.

But if events in El Salvador – the first country to legally tender for bitcoin, in September 2021 – are anything to go by, the CAR experiment will likely fail.

El Salvador’s president, Nebep Bukele, introduced bitcoin with the promise that it would boost the economy, help people who don’t have access to banking facilities and save money on remittances. But the rollout of a national bitcoin app, Chivo, failed, prompting the International Monetary Fund and economists to urge El Salvador to abandon the experiment as its debt mounts.

According to a study by Fernando Alvarez at the University of Chicago and his colleagues, Chivo has almost not been downloaded yet in 2022. They found that the user of the intermediary app stores and transfers only US dollars on Chivo, not Bitcoin. And only 1.6 percent of national transfers were received in digital wallets in February, says El Salvador’s central bank, indicating that usage is low.

This failure is not due to lack of commitment. Alvarez says that no country has ever launched a secondary currency with such financial, legal and political support and failed.

New Chivo users get a $30 bonus for signing up, which is 0.7 percent of Salvadorans’ average annual income. The researchers found that the government also covered transaction fees and fuel purchases backed by bitcoin, but more than 60 percent of those who downloaded the app abandoned it after the subscription incentive was withdrawn.

Bitcoin advocates often cite a lack of uptake of the cryptocurrency as the reason for its lack of widespread use, but El Salvador’s failed experience suggests that this is a fallacy, says Alvarez.

“Even with a significant payment, it appears that bitcoin, given the limitations we are facing now, is not an effective means of payment,” Alvarez says.

Alvarez says CAR’s decision to adopt bitcoin in place of the preferred US dollar may mean that there is a greater willingness to swap state-backed currencies for cryptocurrencies. But nearly all measures of development — from education and poverty rates to technological infrastructure — indicate that it will be harder for new technology to survive in the Central African Republic than in El Salvador, says Billy Jack of Georgetown University.

Internet and smartphone access is required to pay with Bitcoin. Only 55 percent of people living in El Salvador had some form of internet access in 2020 – and that dropped to just 10 percent in the Central African Republic.

“People are very, very poor,” Jack says. “So I would be surprised if you could withdraw [off rolling out bitcoin in CAR]. “

Other African countries have turned to digital payment systems. M-PESA, a simple mobile banking system that originated from people trading mobile credit, is used by more than 90 percent of people in Kenya to store and transfer local currency via SMS. It is not used in the Central African Republic but is popular in many other African countries.

The success of M-PESA shows that it is possible to provide banking services to the unbanked in Africa and lift people out of poverty, but the technology uses existing platforms and infrastructure, not a new, evolving currency that many do not understand. “It’s a huge leap from cash to mobile money, and another huge leap from mobile money to bitcoin,” Jack says.

To boot, new technologies have to hit a sweet spot between simplicity and motivation, says Alvarez.

If bitcoin is widely adopted in the Central African Republic, it is more likely to stuff the pockets of criminals and warlords rather than boost the country’s economy, says Benedict Manzin of risk analysis firm Sibylline Ltd.

The Central African Republic government is struggling to maintain its power outside the capital, and reports suggest it is using Russian mercenaries to kill rebels in exchange for access to mining sites and other illicit activities, according to the charity Human Rights Watch.

“[Bitcoin] It becomes another way for people to get their money out of the country, so it will lead to corruption and make abuses by mercenary groups more viable,” says Manzin.

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