Created in 1945, the CFA Franc is a fiat currency used by a combined population of 147.5 Million people across 14 countries in Western and Central Africa. The CFA Franc is under the direct stewardship of the BEAC and BCEAO, the central banks of Central and Western Africa respectively who are in turn tightly allied to the French treasury (Banque de France). As a result of the collaboration between the BEAC, the BCEAO and the Banque de France, the currency exchange rate is pegged to the Euro (1 Euro ≈ 656 FCFA) and the money is printed in France.
Over the past few years, the CFA Franc has been subject to increased criticism as a colonial currency and for being too rigidly administered to adequately respond to the needs of the African economies using it. Meanwhile, cryptocurrencies such as Bitcoin and Ethereum have become more popular in the past few years in across Western Europe, North America, Russia, China and Japan. The success of cryptocurrencies is partially derived from the growing distrust in the global banking system since the 2009 financial crisis. Part of the traction toward cryptocurrencies can also be explained by its technological merits (anonymity, limited intermediation, and decentralized control) and the recent increased involvement of financiers in its development.
Given the rampant skepticism surrounding the CFA Francs and the rise of cryptocurrencies, it is no longer illegitimate to question whether a state sponsored crypto currency could become a viable alternative to CFA Francs. More precisely, it is important to determine the extent to which such a crypto currency could can address issues raised by the current CFA Francs, while taking in consideration likely implementation challenges. Before diving into the heart of the topic, we needed to elaborate on the main characteristics of a crypto currency and recall the main reasons for the criticism of the CFA Francs.
Through our research, we have reached the conclusion that crypto currencies are viable alternatives to the CFA Francs to the extent that they transfer back monetary sovereignty to users and their exchange rate pricing system allows for smoother and more accurate adjustments to international trade dynamics. Nevertheless, they are not immune market speculation, they are difficult to regulate and there would be significant hurdles to implement them.
Problems with the CFA Francs
Lack of sovereignty is one major cause of criticism for the CFA Francs. Issues of sovereignty primarily stem from the fact that, through the Banque de France, France holds a veto right on both the BEAC and the BCEAO boards of directors, thereby effectively preventing the aforementioned African central banks to adopt any monetary measures that could go against French interests. Sovereignty is also undermined because CFA Francs bills and coins are produced solely on French soil, under the approval of the French treasury. Since monetary decision making and the supply of the CFA Francs are controlled by France, then the monetary sovereignty of the nations using the CFA Francs is compromised. Furthermore, under the premise that true independence of a country depends on the independence of the defense, politics, and monetary policies, one could easily argue that absence of monetary sovereignty, nation states using the CFA Francs (CFA states) are not truly decolonized from France.
Limited maneuverability of the CFA Francs is another important source of concern. All countries with the CFA Francs as a local currency are required to keep 50% of their currency reserves in the French treasury’s operations account; thus restricting CFA countries’ ability to fund their national budget through trade. It obliges such countries to compensate budget deficits through expensive sovereign bond issues. Another handicapping tenet is the exchange rate peg between the Euro and CFA Francs. Although some proponents of this policy claim that it guarantees the stability of the currency and limit inflation, it has the side effect of preventing the currency exchange rate to organically adjust through the market forces of supply and demand for the currency. This issue is further exacerbated by the fact that the Euro monetary policies (for developed EU countries) cannot adequately match that the monetary policies needed for the CFA states. Yet, the CFA Francs monetary policies rigorously aligns to the Euro’s. As a result of this mismatch, most economists believe the CFA Francs to be overvalued.
Consequently, the lack maneuverability and sovereignty of the CFA Francs are major causes of increased criticism.
The characteristics of crypto currency
A cryptocurrency is a virtual currency that uses encryption techniques to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Cryptocurrency systems function under a technology called blockchain[1]. Under a blockchain technology, the safety, integrity and balance of the ledgers are supported by a community of mutually distrustful parties referred to as miners[2]. The most successful cryptocurrencies to date are Bitcoin and Ethereum. The key characteristics of cryptocurrencies are decentralized control, incorruptible, pseudonymous and limited supply.
Crypto currencies transfers sovereignty back to its users
The blockchain technology supporting cryptocurrencies bears no central authority. On conventional fiat currencies such as the CFA Francs, central banks exert control over money supply and on interest rates which in turn influence inflation and exchange rates. With cryptocurrencies, the total amount of unit currency to be ever produced is determined at the inception of its system. As such, the supply of cryptocurrencies increases at a declining rate through miners who are in charge of verifying and validating transactions. Henceforth, the built-in decentralized control on cryptocurrencies’ blockchain infrastructure brings back control to its users, rather than a state let alone a foreign state as in the case of the CFA Francs.
Peer-to-peer nature of cryptocurrencies disintermediates trust. Banks at heart are trust agents because their promissory notes (originally considered a guarantee of deposit of gold into a bank vault) are widely accepted mediums of exchange. CFA countries comply with the French treasury’s operating account deposit requirements because it is believed to yield trust into the stability of their currency and monetary policy. Since transactions on cryptocurrencies are secured by a network of computers’ encryption, intermediation roles (and costs) usually undertaken by banks are substantially reduced. Therefore, under a crypto currency system, not only will there no longer be an obligation to store currency reserves into an intermediary’s (Banque de France) operations account, the role of banks will be greatly diminished and transaction efficacy shall improve significantly.
Thus, because the blockchain technology supporting cryptocurrencies has a built-in decentralized authority and the peer-to-peer nature of cryptocurrencies reduces the need for central bank intermediation, cryptocurrencies would not only solve sovereignty issues on the current CFA Francs monetary system, it would be largely controlled by its users rather than a central bank.
The currency’s value is determined by traditional market forces but with high volatility risks
Like a traditional fiat currency, a crypto currency exchange rate is determined by market forces. This could help improve competitiveness of local products and boost economic growth. For instance, the more people buy a crypto currency, the higher its exchange rate increases. Conversely, the more people transact using a given crypto currency, the more unit of that given crypto currency is produced through miners, which decreases its exchange rate. Just like any other currency, it is intertwined forces between the availability of the crypto currency and the uses for it that primarily determines its value. Ironically, the traditional pricing mechanism of a crypto currency could help reach an exchange rate equilibrium more accurately and smoothly than the current fixed exchange rate mechanism between the Euro and the CFA Francs and thus avoid being overvalued.
Even though a crypto currency pricing mechanism is directly driven by market forces, such a currency system is not immune to market speculation. For example, the Bitcoin exchange rate to US Dollars has increased by about a thousand times between January 2012 and July 2017 while transaction volumes have only increased 32 times within the same period.
Source : Aswath Damodaran, Musing Markets
A major cause of this disconnect are the speculative trading activities done on financial markets. Although, Bitcoins are not yet a widely accepted medium of exchange, many traders have taken long positions on Bitcoin, which has artificial increased its exchange rate with the US Dollars. Market speculation has the negative effect of overvaluing the Bitcoin as a currency and shifting its perception towards a speculative asset to be used (like Gold) as a store of value against exchange rate fluctuations on fiat currency. This trend creates a vicious cycle into which the Bitcoin is currently trapped.
Nevertheless, misvaluation of the currency could hypothetically be avoided if a state (or economic union of states) endorses a particular crypto currency as a medium of exchange. It would encourage quicker and wider acceptance of the crypto currency which could be used as a backdrop against market speculation.
Basically, the fact that a crypto currency valuation is driven by conventional market forces of supply and demand is in itself an improvement over exchange rate pegs on the Euro. However, more than a fiat currency, is a crypto currency vulnerable to market speculation as exemplified by Bitcoin case. Nonetheless, market speculation risk could be curbed through state sponsorship.
Crypto currencies are difficult to regulate
Taxation of cryptocurrencies is tricky. First, a crypto currency is hard to define within an established legal framework because by definition it is neither a company nor legal entity, but rather a global peer-to-peer network of a medium of exchange. In the absence of a legal framework we cannot know how to tax transactions. Even if a legal framework for crypto currencies were defined, virtual currencies bring some accounting challenges as there are no established tools to estimate taxes owed.
The pseudonymity of cryptocurrencies makes it harder to regulate against criminal uses. Since crypto currency accounts and transactions are not directly connected to real world identities, but rather on encrypted addresses (digital wallets), it is technically challenging to identify the transacting parties and what they are actually trading. For example, Silk Road, a deep web site that leveraged the anonymizing network Tor and Bitcoin to create a large digital marketplace, enabled its participants to trade illegal products and services such as drugs and forged identity documents. It took considerable concerted investigative and legal efforts of the US government agencies to shut the site down.
Significant implementation hurdles
Electricity power shortages could hinder a stable implementation. Electricity is needed to power the computing infrastructure supporting crypto currencies. Unfortunately, Africa has an electricity access rate of only 40%. Nigeria, the first economic power in sub-Saharan Africa, can face up to 260 hours of power outages per month. Cameroon, which is considered the most important energy contributor in Central Africa, needs an extra electricity production capacity of 100 MW per year, just to keep up with demand. Stabilizing electricity supply is key to success of crypto currencies as a single power outage has the potential to lose billions of dollars’ worth of transaction data stored on blockchains.
Similarly to electricity, limited internet access could jeopardize efficient uses of cryptocurrencies. The internet is indispensable to run a crypto currency system as it depends upon it as a communication vehicle to transfer data across miners’ networks. However, although it is estimated to be 281 million internet users in Africa, the average access rate of 23%[3]. In Cameroon, as a result of a lack of internet access only 6.4% of the population has ever used e-commerce according to PwC. Not only is internet access insufficient in Africa, it is also needs to improve cyber security. In 2013 alone, cyber criminality caused an estimated loss of 26 billion FCFA in Ivory Coast. Securing reliable and wider internet access is pivotal to the adoption of crypto currencies in CFA states because it is the principal communication technology through which participants transact in the crypto currency ecosystem.
As previously stated, the purpose of this article is to evaluate the suitability of state sponsored crypto currencies in CFA states. State sponsorship implies that the governments endorse, participate and to some extent regulate the use of crypto currencies. Government endorsements are important for ensuring that such currency system works for the common good of their economy and society. Yet, vested political interests may not favor adoption of crypto currencies. Keeping the CFA Francs still has some virtues such as maintaining low inflation rates (below 3%), sticking to a predictable exchange rate policy and avoiding potential massive capital exodus shall the current system changes radically. Also, patriotic considerations set aside, citizens are quite satisfied with the CFA as it is a stable store value and it can be used with ease throughout the CEMAC region. Moreover, switching to a state sponsored crypto currency would require colossal technological and administrative leaps. It could easily take a decade to prepare the general public for such a change, negotiate an exit from the CFA Francs with the BCEAO and Banque de France, and regulate the use of a crypto currency. Furthermore, historically most political leaders who have attempted to curtail the use of the CFA Francs have been ousted from power either through coup d’états or plain assassination. The most poignant case to date has been the assassination of former Togolese president Sylvanus Olympio in 1963, three days after having officially severed monetary ties with France. In light of all aforementioned considerations, political will for switching to a different monetary system (let alone crypto currency) could be mild.
Afterthought
Conclusively, a state sponsored adoption of a crypto currency as a substitute for the CFA Francs could be promising because it gives back monetary sovereignty to its users (due to the decentralized and the disintermediating nature of its underlying technology) and its floating exchange rate mechanism helps to avoid being overvalued more smoothly, improves trade competitiveness, and boost economic growth. However, high currency volatility risk could stifle its potential for wide adoption. It is difficult to regulate and tax crypto currencies because of its pseudonymous nature and its lack of legal framework. Significant infrastructure, technological and political hurdles make it particularly burdensome to implement. Nevertheless, crypto currency systems are still in development stages. Any realistic transition effort towards them would require a cautious, pragmatic and incremental approach. The advent of digital payment solutions such as Orange Money and MTN Money has proved that quick wide adoption of new technologies is possible in Central Africa provided they sensibly cater to the day to day needs of the masses. In light of its promises, the evolution of crypto currencies must be carefully monitored. China (a major trade partner to most African nations) has recently developed a prototype crypto currency to be used alongside the Yuan. Japan has accepted the use crypto currencies for shopping. Russia’s central bank has already deployed an Ethereum-based blockchain as a pilot project to process online payments and verify customer data with lenders. African states are also acknowledging and taking measures to accommodate its use in the near-term. The South African Reserve Bank (SARB) and other major financial institutions are beginning to develop smart contracts based on Ethereum’s blockchain for syndicated debt raising operations. The BCEAO is also preparing a digital currency called e-CFA.
By Arnold A. KAMANKE
[1] A blockchain is a decentralized and distributed digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network.
[2] members of the general public using their computers to help validate and timestamp transactions adding them to the ledger in accordance with a particular timestamping scheme.
[3] Internet Live Stats