Explained | Why countries like the Central African Republic are adopting cryptocurrencies as legal tender

A transition towards cryptocurrencies by the Central African Republic and El Salvador is spurred by the urge to circumvent inflationary pressures and move away from colonial currency mechanisms. However, prerequisites such as internet and financial digital literacy make a case for inclusivity cumbersome

The story so far: On April 27, the Central African Republic (CAR) became the second country after El Salvador to adopt Bitcoin as legal tender. President Faustin-Archange Touadera said the measure would enable “strong and inclusive growth” and place the African country on the “map of the most courageous and visionary countries in the world”. Having a population of 5 million, CAR is among the poorest and most economically fragile countries on the globe. As per World Bank estimates provided in July 2021, 71% of its population was living below the international poverty line of $1.90/day.

The International Monetary Fund (IMF) said adopting the unregulated asset as a legal tender posed major legal, transparency and economic policy challenges, Bloomberg reported. The global body in an e-mail response said, “IMF staff are assisting the regional and CAR’s authorities in addressing the concerns posed by the new law.” 

Recently, several countries have considered instituting laws that regulate the use of cryptocurrencies, particularly those not having well-devised currency mechanisms and experiencing prolonged inflation. IMF’s Managing Director Bo Li had said in April that the unregulated asset witnessed “substantial action” in Kenya, Nigeria, South Africa, Ghana and Tanzania.

Geopolitical currents and dependence on varied colonial-era currencies have further provided stimulus. 

Cryptocurrencies are highly volatile assets and have acquired popularity for their unregulated nature. At the time of writing, Bitcoin fell to its lowest level since July 2021 at $29,731. It was an all-time high of $68,000 in November 2021. This volatility has established concerns over the potential impact on a country’s macroeconomic stability, especially those with weak socio-economic fundamentals.

The two countries that regularised Bitcoin as a legal tender do not have a currency of their own.  

El Salvador uses U.S. dollar and CAR’s franc is the mutual currency for 14 African nations—Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo, Cameroon, Congo, Gabon, Equatorial Guinea and Chad. Together these countries—most of which were once French colonies—constitute the ‘Franc Zone’. Convertibility, that is the ability of a currency to be exchanged with other global currencies, is guaranteed by France. In other words, franc can be exchanged into foreign currencies via the exchange market of Paris, creating a dependency on the European country.