As African nations move increasingly toward developing central bank digital currencies (CBDCs), one country seems to either have not got the memo, or perhaps badly misread it. In April, the Central African Republic (CAR) became the second country in the world, after El Salvador, to adopt bitcoin as legal tender alongside its existing currency, the CFA franc.
The move comes amid an explosion in cryptocurrency use across Africa — often via informal channels — with central banks struggling to keep up.
The country is working with Mara, a cryptocurrency firm backed by Coinbase which is also active in Nigeria and Kenya, with no timeline yet specified for the cryptocurrency’s roll out.
Decisive but divisive
While the office of CAR president Faustin-Archange Touadéra has described the move as “a decisive step toward opening up new opportunities for our country”, the measure has prompted surprise and alarm among observers and international bodies.
An International Monetary Fund (IMF) spokesperson told The Banker that the move “raises major legal, transparency and economic policy challenges for both the country and the economic and monetary community of central Africa”.
Closer to home, the move drew condemnation from the Bank of Central African States (BEAC), the Cameroon-based monetary authority that governs the CFA franc, used by six central African countries. The authority said it was not informed of the move ahead of the announcement.
“The adoption of an official currency other than the CFA franc is problematic in light of measures put in place to manage monetary issuances and monetary policy,” BEAC governor Abbas Mahamat Tolli wrote in the letter addressed to the CAR’s finance minister Hervé Ndoba which was leaked online.
Mr Tolli further stated that the CAR’s new cryptocurrency law “can be read as calling into question the monetary co-operation of central African states”.
Unusable currency
With internet and smartphone penetration in the CAR being among the lowest in the world, the use of bitcoin wallets is set to be beyond the capabilities of the majority of the country of five million. For banks, the requirement to process bitcoin transactions on top of their existing operations is set to cause significant headaches.
“For years, central banks have worked with lenders to get them to implement proper on- and off-ramping procedures for cryptocurrency holdings that incorporate know-your-customer (KYC) and anti-money laundering (AML) checks,” says Co-Pierre Georg, associate professor at the University of Cape Town and South African Reserve Bank research chair in financial stability studies.
“Making bitcoin legal tender puts banks in a really difficult position, regarding how it is converted into deposits in CFA francs. It’s likely to be a very difficult process to manage in a KYC-compliant fashion,” he adds.
Strong suspicions
The introduction of bitcoin as legal tender cuts across recent efforts to improve governance in the CAR, which ranks 154th out of 180 countries in Transparency International’s Corruption Index for 2021.
In May, the World Bank praised the government for making “significant efforts” in recent years to improve public financial management via the digitisation of services, with recent reforms introduced to digitalise the country’s tax administration.
Observers have been quick to highlight Mr Touadéra’s close relationship with Russia as a likely explanation for the move. Russia sent paramilitaries to the CAR in 2020 to bolster Mr Touadéra’s regime in the face of a mounting threat from armed groups. France and human rights campaigners have claimed the operatives are mercenaries from the Wagner Group, which have received payment in the form of the country’s mineral wealth.
“The context, given systemic corruption and a Russian partner facing international sanctions, does encourage suspicion,” Thierry Vircoulon, a specialist on central Africa at think tank French Institute of International Relations, told news agency Agence France-Presse. “Russia’s search for ways to get around international sanctions is an invitation to be cautious.”
While such motives are impossible to prove, Mr Touadéra’s government may be hoping the move will invigorate the country’s beleaguered economy and attract additional international investment, in an echo of the hopes expressed by El Salvador.
“Neither El Salvador nor the CAR are major financial centres and are both largely-cash based economies. Both countries have limited banking sectors, with basic prudential regulations still being introduced,” says Monsur Hussain, head of financial institutions research at Fitch Ratings. “El Salvador introduced bitcoin to attract foreign investment flows and to reduce remittance costs, so it may be that the CAR has similar hopes.”
El Salvador’s experience
The launch of bitcoin as legal tender in El Salvador — replacing the US dollar — in September 2021 was the brainchild of the country’s cryptocurrency enthusiast president Nayib Bukele. The country has launched Chivo, a cryptowallet with a sign-up bonus of $30 to encourage take up, together with a network of bitcoin ATMs and subsidies for fuel purchases to encourage usage.
In addition to prompting criticism from the IMF, the introduction of bitcoin has proved unpopular with El Salvadorians, prompting demonstrations against the move in September. A study conducted by economists from Yale, University of Chicago and Penn State found that 61% of those that downloaded the Chivo app abandoned it after spending the initial $30, with dollar transactions dominating volumes thus far.
El Salvador’s poor experience with bitcoin thus far — in spite of an extensive government effort to encourage uptake — does not bode well for the CAR.
“Blindsiding your currency union’s central bank is never a good thing, and potentially indicates the government’s lack of preparedness when it launched the initiative,” says Mr Hussain. “The CAR is likely to experience similar issues to El Salvador, with lots of practical implementation and legal details that have yet to be fleshed out.”
Crypto in Africa
The CAR’s bitcoin gambit needs to be seen in the context of rapidly increasing cryptocurrency usage — much of it through informal channels — across Africa.
The continent’s cryptocurrency market grew by more than 1200% in the year to June 2021, albeit from a low base, with Kenya, Nigeria, South Africa and Tanzania all ranking in the top 20 for grassroots adoption in the world, according to research from blockchain data platform Chainalysis. Significantly, retail investors are driving transactions across the continent more than in other regions, with retail-sized transactions accounting for just over 7% of overall transaction volume, compared with a global average of 5.5%.
As well as its increasing popularity as an investment asset (notwithstanding a collapse in value since November 2021), cryptocurrencies are gaining in popularity for use in cross-border remittances and as a hedge against extreme currency volatility.
Perhaps most significant, however, is the rising use of cryptocurrency by businesses for cross-border and overseas purchases, according to Nvalaye Kourouma, chief digital officer at pan-African lender Ecobank Transnational Incorporated.
“If a business owner is making international purchases, they may not be able to use their local currency to make an online payment, but they can make it instead by using cryptocurrency, if accepted,” he says. “This is giving some users a sense of greater integration into the global economy, especially when it comes to e-commerce.”
Such trends have not gone unnoticed by the continent’s central banks; last year the Central Bank of Nigeria cracked down, instructing banks to close accounts transacting with or operating on crypto exchanges, with similar restrictions already in place in other countries. Such policies have had little impact on volumes, however, with trading concentrated instead in peer-to-peer (P2P) platforms and networks, many of which are run informally over WhatsApp or Telegram.
According to Chainalysis, “[P2P platforms] are non-custodial and let customers trade cash for cryptocurrency amongst themselves. From there, users can send cryptocurrency to centralised exchanges for more trading options, if they so choose.”
In recognition of the growing popularity of such decentralised channels, central banks are hoping to take back the initiative via CBDCs. In October, Nigeria became the first major economy to launch a CBDC, with central banks in countries including South Africa, Ghana, Kenya, Tanzania and Morocco all conducting feasibility studies about similar moves.
“The increasing use of private money channels is definitely accelerating regulators’ interest in CBDCs, as they don’t want to give away their control over the monetary system to private third parties,” says Mr Hussain. “Will the CAR’s actions accelerate those plans? Absolutely.”
While the e-Naira has had a shaky start so far, CBDCs, if designed properly, offer many of the benefits offered by cryptocurrencies with regard to international payments and remittances together with enhanced KYC and AML protections, while avoiding cryptocurrencies’ extreme price volatility.
Such CBDCs are unlikely to put an end to the use of decentralised cryptocurrency channels, and may actually encourage greater usage of them in the longer term, according to Ecobank’s Mr Kourouma.
“If we take the e-Naira as an example, the whole power of the Central Bank of Nigeria and the government is behind the initiative, meaning that large numbers of people are going to be introduced to the concept of digital currencies for the first time,” he notes. “This is very good for the digital economy. As the number of people who are familiar with this world increases, I think we’re going to see some of them also want to buy bitcoin and other non-centralised cryptocurrencies as well.”
