The Central African Republic (CAR) wants to replace the CFA franc with the cryptocurrency Bitcoin. The audacious move could, however, destabilise a successful currency union involving the CAR and several other African countries. We look at why this is.
Capital News Africa: From the Trading Floor – Week 22-2022
The Central African Republic (CAR) wants to replace the established CFA franc with the cryptocurrency Bitcoin (ticker symbol: BTC) as legal tender in the country. It’s an audacious plan that bears huge risks for the economic stability of Africa. Why? Let’s cut to the chase and give two reasons:
First, the plan by CAR President Faustin-Archange Touadéra jeopardises the integrity of the CFA franc and with it a successful currency union involving a big portion of Africa.
Second, never before has an African country declared a crypto currency as legal tender. This could lead to other governments in the CFA franc zone following suit, and, in doing so, undermining the monetary regime in large parts of Africa.
But before we look more closely at these risks, we need to provide context: On May 20, the CAR’s National Assembly voted to adopt Bitcoins as legal tender. Four days after the vote, a jubilant Touadéra wrote on Twitter: “Following the unanimous adoption by the National Assembly of the #BTC legal tender status, we are pleased to showcase the first concrete initiative! It goes beyond politics & administration & has the potential to reshape #CAR’s financial system!”
Touadéra’s tweet was an understatement, as the consequences of his plan reach far beyond the CAR. If he succeeds, the CAR would be the second country after El Salvador to adopt Bitcoins as legal tender.
The CFA franc has been around since 1948 and comes in two types: The first is the West African CFA franc, which is issued and administered by the Central Bank of West African States (BCEAO) in Dakar, Senegal. Beyond Senegal, African countries that use this currency as legal tender are: Guinea-Bissau, Ivory Coast, Burkina Faso, Mali, Niger, Benin and Togo.
The other type is the Central African CFA franc, which is issued and administered by the Bank of Central African States (BEAC) in Yaoundé, Cameroon. Beyond the CAR, the African countries employing this currency as legal tender are: Cameroon, Chad, the Republic of the Congo, Equatorial Guinea and Gabon.
Both currencies maintain parity with one another and have a fixed exchange rate to the euro of 655.957 XAF.
In terms of stability, the CFA franc has succeeded. Inflation in the western and central African countries using it is lower and the stability of public finance higher than in other parts of Africa. Yet despite this, there is opposition to the currency, as its member countries are required to store at least half of their foreign assets with the French treasury. Critics claim that the CFA franc hinders the economic and financial sovereignty of the governments submitted to the CFA franc regime.
As a result, the governments participating in the West African CFA franc have decided to abandon it and replace it with a new currency called “eco.” While we understand why these nations may want to give up this relic of French colonialism, we would like to point out that the replacement will only be a success if it can be as stable as the CFA franc. That won’t be easy.
Countries using the CFA franc in central Africa have not joined the effort in the west. However, the CAR now wants to break with the central African nations by embracing Bitcoins. Says Benjamin Chabert, a journalist for the French newspaper Ouest France: “It is a clever double blow from Faustin-Archange Touadéra, which revives the ire against the CFA franc and France.”
Whether Touadéra will succeed is unclear. Soon after his tweet, officials at the World Bank, the International Monetary Fund (IMF) and the Bank of Central African States (BEAC) spoke out against his move (see our Newsletter). And rightly so, as the replacement of the CFA franc with Bitcoin in the CAR could seriously undermine an established (and successful) currency union. These institutions question the wisdom of such a move, given that the CAR is one of the poorest countries in the world and that much of its population does not even have access to the internet to use Bitcoin.
There is also a serious issue with Bitcoin itself, and that is its extreme volatility. Consider that just in the last six months, Bitcoin has lost in just a couple of months more than half of its value. On 27 May, it was trading at USD 28,986 a piece, down from USD 67,640 on 8 November.
Finally, Bitcoin is problematic due to the decentralised technology that is based on. Since Bitcoins can be passed from just one computer to another, they do not fall under the supervision of governments or central banks. If Bitcoin were therefore accepted as legal tender, this could promote more corruption and money laundering.
That’s an important point, and it leads us directly to Russia. According to the Financial Times and the US financial channel CNBC, close ties have emerged between the CAR and Russia recently. CNBC reports that “many Western governments have raised the alarm about the potential use of cryptocurrencies by Russia to evade sanctions amid the country’s invasion of Ukraine.”
Yet regardless of whether Touadéra’s plan succeeds, it’s clear that crypto currencies will play a more important role in Africa’s economy. Several of the continent’s central banks are trying to manage this trend by launching their own central bank digital currencies. These include Ghana, Morocco, Egypt, Kenya, and South Africa.
Remarks Co-Pierre Georg, associate professor at the University of Cape Town: “Africa should take the lead in disrupting the global financial services system through the instrument, as the continent has a significant remittance market and is primed for more fintech investment“.
Large parts of the African population do not have access to digital money or credit cards as they do not have a bank account. For these hundreds of millions of Africans crypto currencies offer an attractive access to digital payments. Therefore, crypto currencies will make their way in Africa. It's just a matter of politicians accompanying this trend wisely and innovatively.