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Bitcoin boom spikes amid perceived risks

Martina Schwikowski | Srinivas Mazumdaru
May 5, 2022

Central African Republic and El Salvador have made Bitcoin legal tender and Panama has approved a bill to regulate crypto assets. Experts warn that nations that adopt crypto currencies risk instability.

Bitcoin symbol on a coin
Some poorer countries have adopted Bitcoin currency although financial instability risks remainImage: Weber/Eibner-Pressefoto/picture alliance

Central African Republic (CAR) last week became the first country in Africa to adopt Bitcoin as its official currency. 

Central African President Faustin Archange Touadera's government justified the contentious move, saying that it would "improve the conditions of the nation's citizens" and put it "on the map of the world's boldest and most visionary countries."

Political observers and financial analysts have warned that adopting the cryptocurrency is not a solution to the nation's problems.

Despite its gold and diamond riches, CAR is one of the world's poorest and least-developed countries, and has been ravaged by a yearslong rebel conflict.

Bitcoin law passed in haste

The head of the International Monetary Fund's African department, Abebe Aemro Selassie, recently said that a "robust" payment system with financial transparency and a governance framework must be in place when adopting cryptocurrencies.

But Justin Gourna Zacko, CAR's digital economy minister, is in favor of Bitcoin. He told DW that cryptocurrencies eliminate central bank control. 

"You have your money, you send it to an investor for a business, you get it in any currency, you can dispose of it in dollars, euros, CFA francs or naira," Zacko said.

Central African Republic currently uses the French-backed CFA franc as its currency, along with most other former French colonies in Africa. Their common currency is pegged to the euro.

Some critics perceive the adoption of Bitcoin as an attempt to destabilize the CFA, as Russia and France vie for control over the resource-rich country.

Volatility is an issue

MP Rachelle Ngakola disagrees with the legislation. "We have asked them [the politicians] to surround themselves with all the guarantees before they pass such a law. People are in such a hurry — I don't support it," she told DW.

Civil society representatives are also concerned, according to Akandji Kombe, spokesman for the NGO Citoyen Debout et Solidaires Centrafrique (CDS-CA).

"This law on cryptocurrencies has been passed in haste, it is non-transparent and runs radically counter to national sovereignty, freedom and the interests of Central Africans," Kombe told DW.

The adoption of Bitcoin is a hot topic for debate in CAR's capital Bangui.

"In a country where the population doesn't have access to the internet, it's a joke to talk about digital money like cryptocurrency," one resident told DW. According to The World Bank, only about 10% of CAR residents have access to the internet.

While several internet users see cryptocurrency as a form of financial independence, others describe it as volatile.

Bitcoin's value has seen wild swings, soaring by 150% last year to reach a record $68,991 €65,399) before falling sharply in recent months. It was worth around $38,000 on Thursday (May 5, 2022).

Soldiers outside the party headquarters of Faustin Archange Touadera
Soldiers outside the party headquarters of Faustin Archange Touadera after he was reelected CAR president Image: Nacer Talel/AA/picture alliance

'Poorer countries' good candidates for Bitcoin

But proponents of the cryptocurrency say it is inclusive and useful to people in the developing world, especially as a safe asset in the event of hyperinflation.

One of them is Alex von Frankenberg, managing director of High-Tech Founder Fund.

"For Africa, this is a huge opportunity. It is important though, that everyone is taken along," he told DW. "The infrastructure has to improve though."

Von Frankenberg said that poorer countries in particular are good candidates for the parallel introduction of Bitcoin into the financial system. Wordwide, 2.3 billion people do not have access to bank accounts, especially in African and Central American countries.

Salvadoran President Bukele during a conference at the 2021 Latin Bitcoin Conference
Salvadoran President Bukele during a conference at the 2021 Latin Bitcoin Conference Image: Marvin Recinos/AFP

This is precisely where Bitcoin is ideal as a means of payment, he added. The key advantage over conventional currencies is that the cryptocurrency is limited to 21 million coins and no one can control it alone.

Money laundering?

"Bitcoin is sound, non-inflationary money. It allows billions of people to store their money, and therefore their work and life time, permanently for the future. I believe Bitcoin will significantly raise the standard of living, especially for the poorest countries," von Frankenberg said.

Bitcoin 'coins'
Bitcoin's supply is capped at 21 million coins. Its value has seen wild swings since 2009Image: Cigdem Simsek/Zoonar/picture alliance

Many people have raised concerns about the possibility of using the cryptocurrency for money laundering purposes.

"That can't be the primary motivation for Bitcoin," he suggested. Money could be laundered by countries with Bitcoin, but the percentage is lower than in other financial systems, the expert claimed.

According to von Frankenberg, all transactions in the Bitcoin blockchain are stored forever and are visible to everyone.

Bitcoin gains popularity

Bitcoin addresses are anonymous, but the moment you can associate a name or company with a Bitcoin address, it is fully transparent who is behind a transaction, explained Frankenberg. "That's why Bitcoin is completely unsuitable for money laundering, terrorist financing, and other things."

A person wearing a face mask and an anti-Bitcoin T-shirt
A protester wearing a 'No to Bitcoin' T-shirt protests against El Salvador's President Nayib BukeleImage: Jose Cabezas/REUTERS

El Salvador last year became the first country in the world to bring bitcoin under its umbrella of legal currencies. To promote the cryptocurrency's usage, El Salvador also launched an app — "Chivo Wallet" — which allows users to digitally trade both Bitcoin and US dollars without paying any transaction fees.

Risk of instability to financial system

Nevertheless, the decision drew criticism from the International Monetary Fund. The Washington-based financial institution called on the Salvadoran government to stop using the cryptocurrency as legal tender.

El Salvador was "risking the stability of its financial system," Christian Ambrosius, lecturer at the Institute for Latin America Studies at Berlin's Free University, told DW at the time.

Ambrosius also warned of misuse of the currency.

"You have the dollar and Bitcoin, that makes El Salvador an attractive place for money laundering," he said.

Ambrosius denied that Bitcoin would simplify and cheapen money transfers.

"You don't need a government to make bitcoin legal tender for that."

Jean-Fernand Koena in Bangui contributed to this report.

Edited by Keith Walker.

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