Rome – The Central African Republic is the second country in the world after El Salvador to offer legal tender for cryptocurrencies and adopt one, in this case, bitcoin as the official currency along with the current official currency, the CFA franc. Indeed, according to President Faustin-Archange Touadéra, the National Assembly of the Central African State, one of the poorest countries in the world, with a very high infant mortality rate, a life expectancy of 51 years and the scene of at least three stages of civil war in the twentieth In the past years, the provision governing the introduction of cryptocurrencies, whose management is decentralized and freed from the control of the central bank, was unanimously approved. Therefore, it is a desperate attempt in many ways the desire to revive the fate of the disastrous economy in a very poor country torn by civil war, to try to ensure as many citizens as possible the possibility of conducting business transactions outside bank deposits. But the Internet penetration rate in the country is only 11% – about 550,000 people – only 14% have access to electricity and less than half use mobile phones.
Below is a comment on this topic by Professor Leonardo Piketty, Professor of Political Economy at Tor Vergata University.
With a digital wallet think of baking. The Central African Republic’s decision to follow the example of El Salvador four months ago to introduce a cryptocurrency in parallel with the official currency is another sign of the monetary competition between the physical universe (traditional currencies) and metaverses (digital currencies.) that actually started some time ago. As we teach students, coins should have three qualities. They must be units of account, means of exchange and money of value. Even before El Salvador or the Central African Republic adopted a cryptocurrency as a parallel currency, the liquidity of cryptocurrencies (being a medium of exchange) was actually guaranteed by the ability to buy or sell them at the current exchange rate online. If the local baker does not accept bitcoins, I can convert the coins I have in my digital wallet to local currency and go down to buy bread. Digital currency also has a small but significant advantage over traditional currencies: the ability to instantly move from one part of the world to another (from one digital wallet to another in another corner of the world) faster than with traditional currencies.
Bitcoin volatility hurts the poorest. As for the property of being a fund of value, what we require of a currency is the stability of its purchasing power (at risk due to exchange rate depreciation and inflation). Cryptocurrencies are far from stable. For example, due to a limited problem, bitcoins are actually comparable to highly speculative financial activity and have undergone massive fluctuations in values over time. Its release in expected limited quantities eventually prevailed, greatly increasing its value. These massive fluctuations in value certainly do not soothe the poor population of the above-mentioned countries and increase the risk that they will suffer trauma and end up in a poverty trap. Finally, cryptocurrencies pose serious problems in terms of recycling (they are an appetite for illicit trade, guarantee anonymity and tax-free) and environmental sustainability (the “mining” activity necessary to produce them is very influential).
Besides these serious problems, there are some advantages. A potential advantage for small emerging countries such as El Salvador or the Central African Republic, for example, is to direct the Migrant Remittance Service to channels other than traditional channels that yield significant commission savings. Digital currency in this case (but above all its channel of circulation) increases competition in this sector by reducing oligopolistic rents for organizations such as money transfer. Digital currencies create a major problem for the banking system by encouraging de-intermediary. In the event that traditional currency is generally deposited in the bank (except for the currency that we keep at home if not under the mattress), a direct relationship is established between the citizen and the issuer of the digital currency where the citizen who buys the cryptocurrency opens a digital wallet.
Central bank response. The competition between traditional currencies and cryptocurrencies prompted central banks to consider launching the digital version of traditional currencies (digital rimpi, digital euro). The digital version of traditional currencies has the advantage of having the same positive liquidity characteristics of cryptocurrencies while eliminating the problem of default and exchange rate risk. The value of a digital euro will be one-to-one with that of a traditional euro while the exchange rate between cryptocurrency and traditional currency is highly volatile and the default risk for the issuer is present.