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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.
Some poorer countries have adopted Bitcoin currency although financial instability risks remain
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. It is ravaged by a yearslong rebel conflict.
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.
Bitcoin is thought of as a digital currency because it exists only virtually, without any physical coins or notes. It resides in a decentralized, encrypted network that is independent of commercial or central banks. This allows Bitcoin to be exchanged under the same conditions all around the globe. It’s also a cryptocurrency, because it uses encryption to conceal users’ identities and activities.
The cryptocurrency was first publicly described in 2008 by an unknown person — or group of people — who used the name Satoshi Nakamoto. Its implementation began in January 2009, when it was released as open-source software.
There are three different ways to acquire Bitcoin: First, you can buy the cryptocurrency with legal tender (e.g. dollars and euros) at online exchanges such as Coinbase or Bitfinance. Second, you may accept Bitcoin as a payment in exchange for your products and services. And third, you can create your own Bitcoins in a process known as mining.
Before you can buy Bitcoin you have to install so-called wallet software onto your computer. It contains a public key (your address) as well as a private key that allows only the owner of the wallet to send or receive cryptocurrency. Smartphones, USB sticks or any other digital hardware or cloud-based data storage can serve as wallet. Without the digital wallet, no Bitcoin for you.
To see how the process of paying with Bitcoin works, let’s imagine Mr. X wants to buy a hat from Ms. Y. First thing Ms. Y needs to do is send Mr. X her public wallet address, which is like her Bitcoin bank account.
After Mr. X has received the public wallet address of Ms. Y, he signs off the transaction with his private key to verify that he is indeed the sender of the digital currency. The transaction is now stored on the Bitcoin blockchain with thousands of other transactions that are made with Bitcoin every day.
Now Mr. X’s transaction is broadcast to all other participants in the peer-to-peer blockchain network, which are also called nodes. Essentially, they are private computers, or “miners,” which verify the validity of his transaction. After that, the Bitcoin gets sent to Ms. Y’s public address, where she can now unlock the transfer with her private key.
Theoretically, everyone can become a “miner” in the blockchain network. But most of it is done in huge computer farms that boast the necessary computing power. Bitcoin processing keeps transactions secure by chronologically adding new transactions (or blocks) to the chain and keeping them in the queue.
The Bitcoin transaction between Mr. X and Ms. Y is finally included in a vast public ledger, the blockchain, where all confirmed transactions exist as blocks. As each block enters the system, all users are made aware of each transaction. Who has sent how many Bitcoins to whom, however, remains anonymous.Once confirmed, a transaction can’t be reversed — by anybody.
Miners generate new Bitcoins when they process transactions, which they do using special decryption software. Once solved, a new block is added to the chain and the miner is rewarded with Bitcoins. China is the biggest miner in the Bitcoin network. It’s cheap electricity from coal gives it a competitive edge over rival miners, mainly in the US, Russia, Iran and Malaysia.
Due to the massive computing power needed for crypto mining and processing, the Bitcoin network consumes vast amounts of energy — about 120 terrawatt hours of power per year. University of Cambridge’s Bitcoin Electricity Consumption index, has calculated the cryptocurrency requires more energy than each of the countries shown in blue on the map above. Graphics: Per Sander Text: Gudrun Haupt
Author: Gudrun Haupt
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.
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.
Introduced in 2009, Bitcoin was the world’s first decentralized digital currency. It quickly gained traction amid lingering uncertainty in the wake of financial crisis. Designed to be as rare as gold, Bitcoin was created to have a maximum of 21 million “coins.” Initially worth just a fraction of a cent, by February 2011 the currency had gained parity with the US dollar, then it really took off.
The name Satoshi Nakamoto is synonymous with Bitcoin. It is said to be the alias for an unknown IT whizz who invented the cryptocurrency. But despite claiming to be a 30-something Japanese national, it is generally thought that several computer science experts created the technology behind the digital coin. One rumor even suggested that Tesla chief Elon Musk is the real Satoshi, which he denied.
Instead of being printed like dollars and euros, each Bitcoin is created on a global network of computers and verified by the system rather than a bank. There are no transaction fees. The smallest amount you can buy is a “Satoshi” or one-hundred-millionth of a Bitcoin. Purchases can be made anonymously and even at digital currency ATMs. When you buy Bitcoin, it is often stored in a digital wallet.
To ensure that not too much Bitcoin comes into circulation, a process called mining was created where blocks of transactions could only be processed once a difficult math problem was solved by geeks. The puzzles are becoming so complex that bigger and bigger computers are being utilized to decipher them. That’s led to concerns about the amount of electricity used to handle Bitcoin transactions.
Due to its anonymous nature, Bitcoin’s success is likely being fueled by organized crime, including money laundering and the purchase of illegal goods. The currency is also being targeted by cybercriminals. A recent hack blamed on North Korea forced a South Korean digital currency exchange into bankruptcy. Reports suggest the “Islamic State” armed group used Bitcoin to receive funds to buy arms.
Bitcoin is the largest of all the cryptocurrencies and its incredible rise has spawned many imitators. Other large digital cash creators include Ethereum, Zcash, Bitcoin Cash, Ripple and Litecoin. As of November 2017, their number had swelled to 1,324. Hundreds of others have attempted and failed to launch their own digital coins. The market is now coming under increasing scrutiny by regulators.
2017 was a stratospheric year for Bitcoin. Worth close to $1,000 in January, some twelve months later it had scaled to an all-time high of $19,784. Despite much skepticism, the currency started to see serious interest from institutional investors. Two exchanges began Bitcoin futures trading, allowing speculators to punt on the incredible volatility in the value of the cryptocurrency.
From central banks to respected investors, almost the entire financial establishment warned of a massive Bitcoin bubble, which they said can only end in disaster for holders of the digital currency. Among them was Nobel prize-winning economist Joseph Stiglitz who said Bitcoin “ought to be outlawed.” Jamie Dimon, the CEO of JPMorgan Chase labeled those who buy the currency “stupid.”
Just before Christmas 2017, Bitcoin saw a dramatic rally, topping out at nearly $20,000 before losing a third of its value in just five days. More intense volatility followed early in the New Year, only to be reversed when it plummeted by almost half. Are we in for an even bigger rollercoaster ride if Wall Street adopts Bitcoin?
Author: Nik Martin
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 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 after he was reelected CAR president
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
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.
“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’s supply is capped at 21 million coins. Its value has seen wild swings since 2009
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 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 protester wearing a ‘No to Bitcoin’ T-shirt protests against El Salvador’s President Nayib Bukele
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.
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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