The Central African Republic has become the second country to adopt the cryptocurrency as legal tender, but experiences in El Salvador, the first nation to do so, point to a gloomy outlook
9 May 2022
The Central African Republic (CAR) has become the second country to make bitcoin legal tender, but economists say the project has little chance of succeeding.
As of 20 April, the cryptocurrency must be accepted as payment alongside the existing currency, the CFA franc, in a move that aims to put the war-torn nation’s economy “on the map of the world’s boldest and most visionary countries”, the CAR presidency said in a statement.
But if events in El Salvador – the first country to make bitcoin legal tender, in September 2021 – are anything to go by, the CAR’s experiment will probably flop.
El Salvador’s president Naybib Bukele introduced bitcoin with the promise it would boost the economy, help people without access to banking facilities and save money on remittances. But the roll-out of its national bitcoin app, Chivo, is failing, prompting the International Monetary Fund and leading economists to urge El Salvador to ditch the experiment as its debt grows.
Chivo has had “virtually no downloads” so far in 2022, according to a study by Fernando Alvarez at the University of Chicago and his colleagues. They found that the median app user only stores and transfers US dollars on Chivo, not bitcoin. And just 1.6 per cent of national remittances were received in digital wallets in February, says El Salvador’s Central Bank, suggesting usage is low.
This failure isn’t due to lack of commitment. No country has ever launched a secondary currency with such financial, legal and political backing and failed, says Alvarez.
New Chivo users receive a $30 bonus for signing up, which is equivalent to 0.7 per cent of the average annual income for people in El Salvador. The government also covered transaction fees and subsidised fuel purchases in bitcoin, but more than 60 per cent of those who downloaded the app abandoned it after withdrawing the sign-up incentive, the researchers found.
Bitcoin advocates often cite a lack of cryptocurrency uptake as the reason why it isn’t widely used, but El Salvador’s failing experiment suggests this is a fallacy, says Alvarez.
“Even with a big push, apparently bitcoin, given the limitations we have right now, is not such an effective means of payment,” says Alvarez.
CAR’s decision to adopt bitcoin rather than the more-favoured US dollar may mean there is more desire to swap state-backed currencies for cryptocurrencies, says Alvarez. But almost all development metrics — from education and poverty rates to technological infrastructure — suggest it will be harder for a new technology to stick in CAR than in El Salvador, says Billy Jack at Georgetown University in Washington DC.
“People are very, very poor,” says Jack. “So I’d be surprised if you could pull [off rolling out bitcoin in CAR].”
Other African nations have taken to digital payment systems. M-PESA, a simple mobile phone-based banking system that evolved out of people trading phone credit, is used by more than 90 per cent of people in Kenya to store and transfer local currency via SMS. It isn’t used in CAR, but is popular in many other African countries.
M-PESA’s success shows it is possible to bank the unbanked in Africa and lift people out of poverty, but the technology uses basic systems and existing infrastructure, not a new and evolving currency which few understand. “It’s a huge leap from cash to mobile money and it’s another huge leap from mobile money to bitcoin,” says Jack.
To take off, new technologies must hit a sweet spot between simplicity and incentive, says Alvarez.
If bitcoin is widely adopted in CAR, it will more likely be to line the pockets of criminals and warlords than to boost the country’s economy, says Benedict Manzin at the London-based risk-analysis firm Sibylline.
The CAR government is struggling to maintain authority outside the capital, Bangui, and is reportedly 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] becomes another way for people to get their money out of the country, so it will drive corruption and make abuses by mercenary groups more viable,” says Manzin.
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