The transition to cryptocurrencies by the Central African Republic and El Salvador is driven by urges to bypass inflationary pressures and move away from the colonial monetary system. However, prerequisites such as the Internet and financial digital literacy make inclusivity cumbersome.
The transition to cryptocurrencies by the Central African Republic and El Salvador is driven by urges to bypass inflationary pressures and move away from the colonial monetary system. However, prerequisites such as the Internet and financial digital literacy make inclusivity cumbersome.
the story So Far: The Central African Republic (CAR) became the second country on 27 April After El Salvador to Adopt Bitcoin as Legal Tender, President Faustín-Arcanz Toudera said the measure would enable “robust and inclusive growth” and put the African country on the “map of the world’s most courageous and visionary countries”. With a population of 5 million, CAR is one of the poorest and economically weakest countries in the world. According to World Bank estimates provided in July 2021, 71 percent of its population was living below the international poverty line of $1.90 a day.
The International Monetary Fund (IMF) said the adoption of unregulated assets as legal tender poses major legal, transparency and economic policy challenges, bloomberg informed of. In an e-mailed response, the global body said, “IMF staff are assisting regional and CAR officials in addressing concerns raised by the new law.”
Recently, several countries have considered establishing laws that regulate the use of cryptocurrencies, especially those that do not have well-designed monetary mechanisms and experience prolonged inflation. IMF Managing Director Bo Lee said in April that unregulated assets had seen “substantial action” in Kenya, Nigeria, South Africa, Ghana and Tanzania.
The reliance on geopolitical currents and various colonial era currencies provided further impetus.
Cryptocurrencies are highly volatile assets and have gained popularity for their unregulated nature. At the time of writing, bitcoin has fallen to its lowest level since July 2021 at $29,731. It was an all-time high of $68,000 in November 2021. This instability has raised concerns over the potential impact on the country’s macroeconomic stability, particularly on weak socio-economic fundamentals.
How is this about geopolitics? Where’s the ‘colonial stuff’?
The two countries that regulate bitcoin as legal tender do not have their own currency.
El Salvador uses the US dollar and the CAR franc is reciprocal for 14 African countries—Benin, Burkina Faso, Cte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo, Cameroon, Congo, Gabon, Equatorial Guinea and Chad. is currency. Together these countries – most of which were once French colonies – constitute the ‘French Zone’. Convertibility, which is the ability to exchange currency with other global currencies, is guaranteed by France. In other words, the franc can be exchanged for foreign currencies through the Paris exchange market, creating a dependency on the European country.
Also, all coins and banknotes are printed under a manufacturer’s contract with the Bank of France, following the instructions of African central banks. A blogpost from the London School of Economics stated, “It is a colonial currency, used by France to promote economic integration between the colonies under its administration and thereby to control their resources, economic structures and political systems.” born out of necessity.” The blog states that the region’s two central banks, the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC), are required to deposit 50% of their foreign exchange reserves into a special French treasury ‘operating’ Is. account’. France’s Ministry of Europe and Foreign Affairs says the mechanism provides a stable economic framework for implementing economic policies in these regions. All countries are free to exit the system.
For some countries, the move towards regulating and allowing cryptocurrency was a means of bypassing the sanctions and restrictions imposed on them such as Cuba. As a result of the US-imposed blockade, Cubans are cut off from global financial systems and cannot obtain financial instruments in the form of debit or credit cards, in turn, struggling to move abroad and obtain materials and services from outside. Huh. The Caribbean country issued regulations in April for crypto providers to be licensed to continue providing crypto-related services.
Experts told bloomberg One possible explanation for Toudera’s announcement It may have links with Russia, In 2020, Putin sent paramilitary groups to defend Toudera against rebel groups in the country.
Can Cryptocurrency Reverse Economic Problems?
There is potentially a direct link between inflation and the countries allowing the use of cryptocurrencies. Cryptocurrencies have the potential to turn inflation-related headwinds from fiat currencies into tailwinds. For example, take the situation of an inflation-ridden economy where the price of flour has risen from $1/kg to $3/kg. The purchasing power of the dollar gets affected due to the increase in price. However, bitcoin, which it says is up 10% in the past day and is unaffected by local conditions, will give consumers more purchasing power and dodge inflation.
This potential direct relationship is particularly relevant to the CRA. According to the IMF, headline inflation in the country is expected to rise to 4% in 2022 due to rising food and fuel prices. Food, fuel and budget support shocks are also expected to weaken the country’s trade balance.
earlier this year, IMF urges El Salvador to limit the scope of unregulated assets, “They (the IMF’s Executive Board) stressed that there are significant risks associated with the use of bitcoin on financial stability, financial integrity and consumer protection, as well as the associated financial contingent liabilities,” their assessment read.
Despite a strong economy, El Salvador’s public debt remains consistently high. The fund had said, “This situation is unsustainable – it crowds out private investment and limits resources for social and infrastructure spending, all impediments to growth.” It said the country would inevitably need more private investment and healthier public finance.
In this case, and as such, with relevance to other economies, it becomes imperative to completely hedge the unregulated asset in order to safeguard it from uncertainties. Cybercrime and theft as well as risks related to price fluctuations raise the risk of losing large amounts of money for families and businesses.
For countries such as the CRA, when taxes are paid using crypto-assets but expenses remain in the local currency, the risks associated with paying taxes in cryptocurrencies will be exposed. For example, the government collects $100 worth of taxes using crypto denominations, but depreciating assets leave $40 available to spend.
Additionally, unlike equities or currencies, cryptocurrencies are not subject to a fixed mechanism and are speculative assets, therefore, central banks will have no reference point to formulate their interest rates according to their domestic requirements. The IMF argues that the anonymity inherent in crypto-transactions could create some data gaps for regulators. Blockchain can help trace transactions but not the parties involved. Therefore, it can potentially be used for money laundering, terrorist financing or other illegal activities.
Is there a case for financial inclusion?
Leadership in both El Salvador and CAR have maintained financial inclusion as the main argument for the status of bitcoin as legal tender.
The accessibility of the Internet has helped popularize unregulated properties. Increasing access to the Internet is also a central condition for mainstreaming unregulated wealth. Banknotes do not require any such condition and are therefore widely in circulation. According to the International Telecommunication Union, 29.5 million people in the African continent were using the Internet in 2020 – about 22.7% of the total population. According to the World Bank, barely 10% of the population had access to the Internet in CAR and 55% in El Salvador.
Another challenge to the stated objective is access to financial services and related literacy. About 70% of the people in El Salvador did not have access to banking services, while in CAR only 14% were part of the mainstream banking structure. Considering the low levels of financial and related digital literacy and the overall gender disparity in CAR, the issue of inclusion appears to be burdensome.