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Senegal’s eCFA: Four Years in Retrospect

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CFA
Image Credit: Issouf Sanogo/Afp via Getty Images/ Image was modified.

In 2016, Senegal became the second country in the world to launch a national digital currency, the eCFA, but there are many stories attached to the precious currency and its fiat predecessor, CFA.

History of CFA

The CFA franc was created in December 1945, when the French government ratified the Bretton Woods Agreement. It became the currency of les colonies françaises de l’Afrique or the CFA (“French Colonies of Africa”).

The CFA was later split into the Communauté Financière d’Afrique (“Financial Community of Africa”) which included the West African countries: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo, and the Communauté Financière de l’Afrique Centrale (“Financial Community of Central Africa”) including Cameroon, the Central African Republic, Chad, the Republic of the Congo, Equatorial Guinea, and Gabon.

The French Treasury guaranteed the currency under a fixed exchange rate on the account that the two central banks – the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC), deposit 50% of their foreign exchange reserves in a special French Treasury ‘operating account’.

25 Franc coin issued in 2003 by BCEAO
25 Franc coin issued in 2003 by BCEAO

The CFA Franc is the name of two effectively interchangeable currencies – the West African CFA Franc and the Central African CFA Franc – which are used by the fourteen African nations. 

CFA countries, in the last 50 year, have enjoyed a more stable economy and higher growth figures, compared to the rest of Sub-Saharan Africa; but the price they pay for it is essentially having no control over local interest rates or the money supply— the monetary policy couldn’t be used to influence the economy. There is no doubt that the French created the CFA as a neo-colonial measure to control the resources, economic structures and political systems of their former colonies.

There have been several controversial remarks around the French stronghold on CFA countries, an example is a provocative statement made by Luigi Di Maio, Italy’s former deputy prime minister and current minister of foreign affairs, whilst commenting on the role of the CFA franc on Africa’s development, saying “France is one of those countries that by printing money for 14 African states, prevents their economic development and contributes to the fact that the refugees leave and then die in the sea or arrive on our coasts.”

Eight francophone countries of the CFA: Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo joined the six English-speaking ECOWAS countries: Nigeria, Ghana, Gambia, Liberia, Sierra Leone and Guinea to form a monetary union. They made plans for an ECOWAS-wide currency called the Eco in 1999. Rather ambitiously, they aimed to launch it in 2000 but till date has not been executed yet.

The agreement says that all countries must meet certain requirements before the Eco is formed. Conditions include having less than 10% inflation and a budget deficit that is less than 3% of GDP, only Togo has met the criteria. 

The launch of eCFA

The media went on a frenzy when reports came out that Senegal, a West African nation, intended to launch its own national digital currency, the eCFA. The country was set to follow suit after Tunisia, which launched its Digital currency, the eDinar, on the blockchain.

Senegal’s digital currency ‘eCFA’ launched in December 2016 to co-exist as a legal tender alongside the recognized fiat currency, CFA Franc, whilst holding an equivalent value.

The launch of Senegal’s eCFA was a result of a collaboration by Banque Régionale de Marchés (BRM), a local Senegalese bank and eCurrency Mint Limited, a Dublin-based company that specializes in creating digital currencies for central banks to operate alongside notes and coins. BRM issued the eCFA, in compliance with e-money regulations of Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), the Central Bank of West African Economic and Monetary Union (WAEMU).

Basically, the issuance of the eCFA is totally controlled by the Central Bank, as they own the production through a digital currency production engine meant to be kept offline until when needed, as explained by Jonathan Dharmapalan, founder and CEO eCurrency Mint, at the Alliance for Financial Inclusion Global Policy Forum in the Mozambican capital, Maputo, in 2015.

Just like paper money has a watermark, serial number and governor’s signature, these security features can be translated to form a digital currency operating under the principles of an existing paper currency ’ said Jonathan.

However, it is quite unclear what kind of distributed ledger technology eCFA uses, as BRM revealed very little about the technical details of the digital currency. Skeptics criticized eCFA’s dependence on a centralized banking system, which defeats the purpose of decentralization of digital currencies.

The rise in the interest of Central Banks issuing e-currencies whilst using the technological features of cryptocurrencies is a calculated move to maintain their role as a sole issuer of national currencies, so as to not handover control to ungovernable blockchain currencies like Bitcoin before they gain popularity.

The feasibility of eCFA

Considering the low financial inclusion rate across Sub-Saharan African where less than 40% of the population have access to banking services, loans and savings, mobile money solutions have seen tremendous growth and acceptance over the last ten years, with the most successful one being the Mpesa in Kenya, which currently operates in over 10 countries.

Banks often demand a series of document requirements to open a bank account, which majority of the African population do not have. Mobile money instantly struck a chord with these set of people.

These mobile money solutions allow users mostly of marginalized demographics, to own a ‘virtual account’ pegged to their phone number, they can easily load their accounts at local mobile money agents with cash and enjoy seamless and cheap transactions without the need of an internet connection or a bank account but rather just dialling codes on their phones.

eCFA was termed as another opportunity for financial technology to help emerging markets leapfrog traditional banking systems and bring financial inclusion to more people.

In a joint statement, the BRM and eCurrency Mint stated that the “eCFA is a high-security digital instrument that can be held in all mobile money and e-money wallets. It will secure universal liquidity, enable interoperability, and provide transparency to the entire digital ecosystem in WAEMU (West African Economy and Money Union).

There are tons of Fintech solutions trying to bridge the financial inclusion gap with Mobile money solutions such as Mpesa, Airtel money, Orange etc. However, they all exist on different platforms, thereby, leaving no space of interoperability between them. An Mpesa user cannot send money to an Airtel money user.

The eCFA was designed to work with existing mobile money platforms, ticking it for a higher chance of success. The digital currency was regarded as an experiment using blockchain technology to show that Africa is a fertile ground for testing and deploying new Fintech solutions.

The proposed success of eCFA was planned to see the digital currency being used in most of Francophone West Africa – Cote d’Ivoire, Benin, Burkina Faso, Mali, Niger, Togo and Guinea Bissau.

Was the experiment a success?

In a report by Bloomberg, The Central Bank of West African States distanced itself from plans to introduce a digital currency in Senegal, saying it was not involved in the project and would not consider doing so.

The Central Bank, in a statement on its website, warned the issuing bank, BRM, against the use of the term: “eCFA”, in order “to prevent any kind of confusion with the legal currency” in the region. 

Although the exact reason for the decision was not given, the institution vehemently stated that it was not considering creating a digital currency in any of its member states. 

A deeper insight into the project reveals that it might have been a short-lived one, considering that digital currencies do not require its users to provide any personal information. Bitcoin, for example, only requires an internet connection and a smartphone for anyone to carry out transactions.

The eCFA, a Central Bank Digital Currency, would have come with the same regulatory headaches of traditional finance— the need for KYC procedures and documents, one of the limiting factors currently hindering the population from owning a bank account. 

Like most West African countries, where financial inclusion and access to banking services is still lagging, the eCFA could have a substantial impact on Senegal and beyond by providing them with a secure, reliable, and cost-efficient means of sending, receiving, and storing funds.

There has been no latest report on the development of the eCFA ever since the statement by The Central Bank of West African States.

Have all hopes been shattered?

Probably not. The eCFA might have not gained the desired traction but another project is keeping the hopes of a widely used digital currency in Senegal, alive.

Popular Senegalese American singer, Akon, is set to launch Akoin, a cryptocurrency that will be the local currency in Akon City, a $6 billion 2,000-acre wide city (currently under construction) in Senegal.

The singer had some problems exchanging CFA franc to the Euro at a currency exchange counter in France, despite the history of France and the CFA Franc. 

“We have to have our own currency”, he said.

Akoin is built to be a utility token (that is, one that has a specific use), not an investment tool; Karas, Co-founder of Akoin said.

However, irrespective of these numerous hurdles, Senegal still remains a major hotbed for the adoption of digital currency in Africa. 

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Crypto Assets

Crypto prices drop as global market fear increases

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Top cryptocurrency prices have fallen amidst a drop in stocks and fears over China’s Evergrande debt crisis. In the last 24hour, Bitcoin dropped from $47,772 to $42,630 shedding about 8.58%. this is the lowest in price since another bull run began on Sept 5 after the April crash.

El- Salvador’s President, Nayib Bukele sees the fall as an opportunity to invest more. Recall that the country adopted Bitcoin as a legal tender on September 7. Despite the adoption, the price of Bitcoin has fallen by almost 14% since then.

Other coins have experienced dramatic crashes within the last 24hours. Solana, a coin that has experienced 355% growth within the last 3 months fell from $162 to $130 shedding about 11.39% within the last 24hours. Solana’s fall may be categorized by the 17-hour outage which the founder, Anatoly Yakovenko said was caused by bots “flooding the networks”

Ethereum fell by 9.37% while Dogecoin and Axie Infinity fell by 11.22% and 14.14% respectively within the last 24hrs hours. While crypto experiences dark Monday, El-Salvador keeps investing more money in Bitcoin.

A look at the global market

The global market is experiencing fear due to the Evergrande debt crisis. A report published by the University of Michigan shows that consumer’s sentiment is beginning to decline. This trend alone may impact the crypto market as well.

On the other hand, the global market downturn must have been spurred by the Evergrande debt crisis. The company grew to be one of China’s biggest companies by borrowing more than $300bn. Last year, Beijing made rules to control the debt owed by big real estate developers. This led Evergrande to offer its properties at major discounts to raise more money to keep the business afloat. Right now, the company is struggling to meet the interest on payment of debts.

Why would it matter if Evergrande fails?

The collapse of the multi-million dollars company would affect the global market; including the crypto market. Many people bought properties from Evergrande and they expect to make gains. If Evergrande falls, crypto investors will be forced to withdraw more money to keep their business running without the means to invest more. When one business fails, the other gets affected indirectly. This also applies to other firms that do businesses with Evergrande.

The potential impact on China’s financial system is another effect of Evergrande’s fall. In his statement to BBC, Mattie Berkink, the Economist Intelligence Unit (EIU), said that “the financial fallout would be far-reaching. Evergrande reportedly owes money to around 171 domestic banks 121 other financial firms” if the company fails, other lenders or businesses may be forced to lend less. Thereby leading to a credit crunch- a situation where companies struggle to borrow money.

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Bitcoin in Africa

The rise of CBDC in African economies

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Many nations have taken cues from the world of crypto and its resounding successes over the last decade. In order to avoid getting left behind, governments worldwide are increasingly turning their attention towards implementing some form of digital currency, a CBDC which in full is Central Bank Digital Currency. Although inspired by cryptocurrencies, CBDC’s are quite different from traditional crypto platforms. The main differences are that CBDC’s are unlikely to be decentralized, the supply of this currency regulated by the host’s country’s central bank as the CBDC is designed to operate as a sovereign legal tender, the digitized form of the host country’s fiat currency. Thus, a central bank may issue digitized tokens of its currency of which their value is pegged to the fiat currency of the nation in question, making CBDC’s stablecoins.

Africa has seen a rise in the use of cryptocurrencies and it’s still pushing frontiers in this sector. Although the use of crypto in many African nations is becoming more and more pervasive by the day, the tone of governments in many of these countries toward the sector is cautious at best and threatening at worst. However, a few nations have voiced interests in creating digitized versions of their legal tender to function as a CBDC. Amongst these are Ghana, Nigeria, Morocco, Kenya and Tunisia.

Many of these projects are still in the research phase or developmental phase however. A good example is Ghana’s proposed CBDC, the E-cedi being developed in partnership with German company, Giesecke + Devrient. Nigeria’s CBDC project, the eNaira has been announced and according to Nigeria’s central bank, this CBDC will be launched sometime in 2021. To that end, the CBN has partnered with fintech company, Bitt Inc. to serve as the technical partner in the eNaira’s development. Reportedly, the CBN had made the decision to digitize the Nigerian Naira in 2017.

While the pursuance of digital currencies in African nations is a welcome development, implementation of these schemes isn’t without challenges. Chief among the issues countries in Africa face would be the already existing financial service inequality and poor penetration of internet access in the continent. These challenges must be tackled in order to allow for mainstream adoption of CBDCs and the subsequent provision of financial inclusion. The benefits largely depend on the peculiarities of the nation deploying them. For instance, a digital currency is thought to help Nigeria increase foreign remittances, it’s second largest source of forex after oil. Whatever the outcome of these projects, it is becoming apparent that CBDC’s have come to stay.

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Bitcoin trades above $51k ahead of El Salvador’s adoption

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Bitcoin growth

Bitcoin price has rallied above $51,000 ahead of El Salvador’s adoption. The immediate surge in price may be due to the social media campaign that everyone should buy sats of Bitcoin to support El Salvador’s plan to make the coin a legal tender or it may be due to the news of El Salvador’s adoption of the coin as a legal tender on September 7. Users of social media platforms like Twitter and Reddit are discussing how they will buy Bitcoin of $30 each to mark the new El Salvador Bitcoin law.

The surge in Bitcoin’s price began in the last 24hrs with the price rallying around $51,955 with a 3.37% increase. This is an all-time high after the April crash that brought the price of Bitcoin from $64k down to $28k. The move by El Salvador to be the first country that accepts Bitcoin as a legal tender and the social media campaign that leads to a surge in price ahead September 7 are a repetition of events that occurred late last year and early this year with regards to institutional investors and how the price of Bitcoin skyrocketed.

El Salvador, a country in Central America, has been preparing heavily to adopt Bitcoin by installing ATMs to allow citizens to convert the token into US dollars. Last week, the country’s Legislative Assembly passed a law to allow for the creation of a $150m Trust to support the conversion of Bitcoins to US dollars.

To promote the use of Bitcoin, the government states that it will give the adult population of El Salvador $30 in Bitcoin once they download “Chivo” the wallet issued by the government. This was confirmed by the Finance Minister, Alejandro Zelaya.

What this means for Bitcoin investors

Apart from the adoption by Salvadorians, on-chain analytics show that Bitcoin is in high demand. The fourth halving that occurred will make Bitcoin become a scarce token in the nearest future. Thereby increasing the price sporadically.

With El Salvador’s interest in Bitcoin, other countries are likely to follow suit- Panama is considering following El Salvador’s lead. History will repeat itself as this development will serve as another crypto rout that occurred early this year when Tesla and MicroStrategy announced their support for Bitcoin.

El Salvador’s new law allows the use of Bitcoin as a legal tender it can be used to buy goods, pay for taxes and bank loans. This means more demand for Bitcoin, with the fourth halving that occurred, it means less supply. A common rule of economics for demand and supply will apply. Prices are projected to keep rising. At the time of writing this report, Bitcoin is trading at $51,839 with a projection of $52k before the end of today and higher tomorrow when Salvadorians begin to use the token.

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