What are the challenges of adopting crypto as a legal tender?

Cryptocurrencies had an interesting transformation over the years, as they went from being an obscure term to a worldwide phenomenon. Bitcoin is the first digital currency ever created, which has taken the world by storm, by adding a decentralized platform into the world and offering people all the details on how to buy Bitcoin. But can Bitcoin become a legal tender?

Currently, only a few countries have adopted virtual coins as legal tender, including El Salvador and the Central African Republic (CAR). Making cryptocurrencies a legal tender has numerous advantages, but it can present challenges as well. For example, both of the countries mentioned above have faced implementation hurdles, which have threatened to undermine their economic benefits and the countries’ objectives.

As more nations have become interested in integrating cryptocurrencies into their financial systems, countries need to understand both the disadvantages and challenges of doing so. Adopting Bitcoin or any other digital currency necessitates a level of preparedness, including public education, appropriate infrastructure and significant financial crime prevention measures.

In this article, we will explore more about adopting cryptocurrency as a legal tender, focusing primarily on the examples of CAR and El Salvador.

The two routes of adopting cryptocurrencies

CAR and El Salvador adopted cryptocurrencies as legal tender for similar reasons, but their experiences have been quite distinct. El Salvador integrated Bitcoin as a legal tender back in 2021 with the purpose of assisting citizens and increasing investment for those who lacked access to regular financial services. To be able to integrate Bitcoin as part of its economy, third-party enterprises helped El Salvador to develop crypto ATMs and centralized cryptocurrency wallets, generally known under the name of “ Chivo Wallets.” This project, which the Government funded, offered the possibility for citizens to transfer funds without commission fees with the help of the “ lighting network,” which was a good option because it increased the speed of all Bitcoin transactions.

The CAR adopted Bitcoin in April 2022, but after this, it went through various changes. For example, after a month, the Constitutional Court reversed the decision, declaring that the proposal was unlawful. After this event, the Government took different measures and launched the Sango Coin, a partially Bitcoin-backed digital currency. The Sango Coin was introduced in phases. In the first phase, the public had the chance to buy the crypto-backed currency, and the following phases allowed the use of the cryptocurrency for different government services, like purchasing e-residency, citizenship and land. CAR has also considered a scheme where foreign investors could acquire citizenship for $60,000 worth of Sango Coins. However, the Constitutional Court rejected the proposal for the reason that the residency needs a physical presence in the country and that nationality can’t be priced.

There was another project where the coin would promote the tokenization of natural resources in the nation. Although the project did not gain traction at first, in July 2023, CAR revisited the concept and created a law that recognized the tokenization of natural resources and land.

Why did the two countries have different outcomes?

Both CAR and El Salvador adopted cryptocurrency, as they believed that this was the best solution to poor revenue, economic stagnation, reliance on third-country-backed currencies, and foreign direct investment. For example, in CAR, the CFA Franc, the national currency is pegged to the Euro and backed by France, but has several restrictions in place, like keeping 50% of the foreign assets of the country with the French Treasury. This is why there have appeared opinions that CAR’s interest in crypto was a political move away from France.

Although the two countries had numerous benefits to adopting crypto, they also encountered several challenges. For example, 40% of the population in El Salvador lacks access to the Internet, which represents a significant factor in not letting the crypto industry flourish. Additionally, the unfamiliarity of the population with this new option also hinders a massive expansion. For instance, fewer than 60% of the people with mobile phones and internet access downloaded Chivo Wallet, and just 20% continued to use it.

Meanwhile, statistics showed that in CAR, only 11,4% percent of the population had access to the Internet in 2021. Still, access to the Internet in this country is not the only challenge, as their mobile phone usage is low, and the electricity supply is unreliable and patchy.

Cyber security safeguards and software reliability have also been issues for El Salvador. For instance, when the Bitcoin software was first online in the country, it couldn’t verify the identity of the participants. Then, the skepticism of the public increased even more when hackers appeared in the landscape. Additionally, transparency has also been a persistent problem, as the El Salvador president’s tweets have been the only source of information that offered the possibility for individuals to learn more about how cryptocurrencies are sold or bought.

In the case of CAR, there have also been allegations which believed that crypto will offer a convenient way for Russia to evade Western sanctions, because CAR has close ties with Russia.

Planning is an integral part of the future initiatives

What is clear from the CAR and El Salvador experiments is that adopting crypto as a legal tender means a certain degree of readiness in terms of transparency, digital infrastructure and accountability. Physical infrastructure is one of the most critical features, as countries must be prepared to make sure that the majority of the citizens have access to smartphones, the Internet and reliable electricity.

Additionally, transparency is another vital key, as if crypto becomes a legal tender, the general public needs to remain informed about advancements and other related topics via official channels. Also, this means that those countries must teach their citizens how to use crypto. El Salvador’s Ministry of Education wants to introduce a curriculum that will be centered around Bitcoin in school, which can be a good way to make the population more familiar with digital coins.

While adopting cryptocurrencies as a legal tender presents various benefits, if the country is not well prepared for this new event, it can hinder the objectives and the desired economic benefits of digital currencies.

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