Central African Republic Adopts Bitcoin Without Internet
The Central African Republic made cryptocurrencies legal tender. What does that mean if internet access is severely limited?
The Central African Republic (CAR) recently became the second country after El Salvador to make bitcoin legal tender. To their credit, the reform is quite modest. Unlike El Salvador, the Central African Republic hasn’t signaled it will buy bitcoin with taxpayer money, force businesses to accept bitcoin or roll out an expensive app with incentives for new users. They just made cryptocurrencies legal tender. In this post, I’ll unpack what that means.
For context, the Central African Republic has been ravaged by coups and civil war for decades. It’s a landlocked country of 5M people where about 70% of the population lives in extreme poverty (less than $1.90 per day1), where one in four people don’t have basic sanitation or even pit latrines to go to the bathroom and where one in twelve children die before age five. Its ranking in the Human Development Index2 is the second lowest in the world.
As with most low-income countries, agriculture plays an outsized role in the Central African Republic, employing 70% of all workers and totalling 30% of GDP. This is not high-tech, mechanized industrial agriculture like in the United States, Israel or Uruguay. It’s extremely low-productivity, smallholder agriculture like in Ethiopia and Liberia, where a bad harvest means months of hunger.
As the chart below shows, the Central African Republic (in red) has a GDP per capita of just under a thousand dollars. For reference, El Salvador’s GDP per capita (in green) is about eight times higher and the US’s GDP per capita (in blue) is about sixty-four times higher. These are staggering differences in living standards. Just 10%3 of the CAR’s population uses the internet on PC or mobile, one of the lowest ratios in the world, according to the International Telecommunications Union (ITU).
Without internet access, most people won’t be able to use or “adopt” bitcoin. This is true even if the ITU is underestimating internet access by a factor of two by undercounting mobile users. In this sense, the legalization of cryptocurrencies seems mostly irrelevant. So what does President Faustin-Archange Touadéra hope to achieve?
Honestly, it’s not clear. The country has a functional currency, the Central African Franc (CAF). The CAF is pegged to the Euro, does not fluctuate much in FX markets and is used and jointly managed by a group of six neighboring countries4. Inflation in the Central African Republic has been somewhat volatile, but that’s due to civil war and internal conflict, not monetary mismanagement. Annual price increases have stayed in or around the 2-4% range since 2015:
Wanting to replace the rigid regional currency with sovereign fiat money would be reasonable. It would give the domestic central bank control over monetary policy, an important tool in modern economic management. But legalizing cryptocurrencies that can’t be controlled by the government doesn’t seem to accomplish much from a macro policy perspective.
If I had to guess, there are at least two rationales at play. Most importantly, the president has been “orange pilled.” He is convinced that bitcoin and public blockchains are the future of money and thinks that drawing international attention to his country by legalizing cryptocurrencies like El Salvador can’t hurt. His tweets certainly suggest this:
Second, legalizing crypto may offer advantages for the small subset of urban internet users. Over time, the country might be able to use free crypto apps to offer basic financial services (like a digital wallet) that domestic banks don’t or can’t offer. To the extent that the country goes online, that may increase the share of people with access to savings vehicles. Of course, transaction fees will need to fall to the single cents per transfer for crypto payments to ever take off.
Needless to say, getting people into crypto is risky. The short term volatility of bitcoin (on the left below, in red) is extremely high and isn’t trending down. A normal daily movement for Bitcoin is 4-6%, compared to less than 1% for the Euro and the British Pound. Bitcoin’s long term price movements (in black on the right) are also extreme. Even though every tick on the y-axis doubles the price of bitcoin, the vertical movements are still wild.
Citizens encouraged to buy crypto by this reform might lose money like President Bukele of El Salvador, who is down $30M in taxpayer dollars on his $100M bitcoin investment. (To be clear, CAR’s authorities have not signaled they want to buy cryptocurrencies with public money). Encouraging the use of a fully backed Euro (or USD) stablecoin rather than bitcoin is probably a better idea.
From the outside, it seems like CAR should focus on managing domestic security threats, getting more external aid and crucially, increasing agricultural productivity. Legalizing crypto isn’t inconsistent with those goals, but I do worry that the President and legislature are spending their limited bandwidth on extraneous reform, rather than on security and policies to help people get better seeds, fertilizers, irrigation and paved roads to access markets.
While 80% or 90% of the population doesn’t have internet access, adopting cryptocurrencies as legal tender won’t have major effects. The reform put the Central African Republic in the spotlight and might give a small subset of the population new tools for saving, but there are big risks. I would hate for people in one of the poorest countries in the world to lose what little money they have if crypto prices drop again.
Constant 2011 US$ PPP
The ITU doesn’t gather primary data and survey representative samples of the population in each country to ask about internet use — that would be expensive! Instead, they extract information from standard household surveys that are already conducted by national statistical agencies. Every national statistical agency asks different questions with different wording about internet access, so mobile devices won’t be counted consistently across countries. As a result, the data probably understates internet access in developing countries.
Cameroon, Chad, Congo, Equatorial Guinea, Gabon and the Central African Republic