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Cryptocurrency as Legal Tender

Fatima Alsancak | 2023.12.04

What can countries learn from recent experiments in adopting cryptocurrency as a legal tender?

Currently, only a handful of countries have decided to adopt cryptocurrency as a legal tender, most prominently among them El Salvador and the Central African Republic (CAR). While attracted by the potential economic and monetary incentives that this move has to offer, both countries have faced significant implementation challenges, threatening to undermine their objectives and any foreseeable economic benefits.

As more countries – and developing economies in particular – have begun to consider integrating cryptocurrency into their national financial systems, these experiments highlight that adopting cryptocurrency as a national legal tender necessitates a certain level of preparedness, including appropriate infrastructure, public education, building trust and – last but not least – the establishment of robust financial crime prevention measures.

Two Routes

While El Salvador and the CAR sought to adopt cryptocurrency for similar reasons, their national experiences have been quite different.

El Salvador took the step of adopting Bitcoin as legal tender in 2021, with the goal of increasing investment and assisting citizens that lack access to traditional financial services. Initially, to integrate Bitcoin into its economy, the country contracted third-party companies to develop centralised cryptocurrency wallets known as “Chivo Wallets” and cryptocurrency ATMs. This government-funded project allows citizens to transfer funds quickly through the use of the “lightning network” – a solution that increased the speed of Bitcoin transactions – and without commission fees.

The CAR moved to adopt Bitcoin in April 2022, but the government reversed its decision when the Constitutional Court declared the proposal unlawful a month after it was introduced. After this reversal, the government took a different route and created a partially Bitcoin-backed cryptocurrency, known as the Sango Coin, to be introduced in phases. The first phase would allow the public to buy into the crypto-backed currency, while the subsequent phases would allow the use of the currency for certain government services, like purchasing citizenship, e-residency and land. The CAR’s Constitutional Court ultimately rejected a scheme that would have allowed foreign investors to acquire citizenship for $60,000 worth of Sango Coins or a 250 square metre plot for $10,000 worth of Sango Coins, ruling that nationality cannot be priced in a market and that residency requires physical presence in the country.

At the onset of the project, the coin also promoted the tokenisation of natural resources within the country. Despite the project not initially gaining traction, as of July 2023, the CAR National Assembly revisited the concept and passed a law allowing the tokenisation of land and natural resources.

Same Motives, Different Challenges?

The countries’ respective political leaders generally cited the potential economic benefits as their underlying rationale for promoting cryptocurrency as a national legal tender. Both countries regard this as an innovative solution to economic stagnation, poor revenue and foreign direct investment, and a reliance on third country-backed currencies. In the CAR, for example, its national currency – the CFA Franc – is backed by France and pegged to the Euro, with several restrictions in place, such as keeping 50% of the CAR’s foreign assets with the French Treasury. Some saw the CAR’s interest in cryptocurrencies as a political move away from France in an effort to lessen reliance.

Both El Salvador and the Central African Republic suffer from a lack of appropriate infrastructure to fully realise the adoption of crypto

But in addition to these legitimate economic concerns, both El Salvador and the CAR faced stark challenges in adopting cryptocurrency as a legal tender.

Firstly, both countries suffer from a lack of appropriate infrastructure to fully realise the adoption of crypto. For instance, in El Salvador, 40% of the population lacks access to the internet, a critical factor for allowing the cryptocurrency industry to flourish. Fewer than 60% of those who had internet access and mobile phones downloaded Chivo Wallet, and only 20% continued to use it. Also, according to estimates, 40% of all downloads occurred when it was launched in September 2021, and virtually no downloads took place in 2022. Meanwhile, in the CAR, according to 2021 estimates, only 11.4% of the country’s population has internet access, the electricity supply is patchy and unreliable, and mobile phone usage is low.

Software reliability and cyber security safeguards have also become an issue for El Salvador. When the Bitcoin software first went online in the country, it struggled to verify the identity of its users. The public’s scepticism was exacerbated when hackers were able to create accounts and withdraw the $30 in Bitcoin that the country was offering to its citizens.

Secondly, transparency has been a persistent problem. The president of El Salvador’s tweets, for example, have been the only source of information enabling the public to know the amount of Bitcoin that the government has bought or sold. Similarly, the CAR declared that a Treasury-maintained partial Bitcoin reserve would support the Sango Coin, although little information about the related technicalities has been made available to the general public. Consequently, public trust in these initiatives has been low. There have also been allegations that in the case of the CAR, adopting cryptocurrency would provide a convenient avenue for Russia to evade Western sanctions, given its close ties with the country.

Thirdly, appropriate regulatory and legal regimes were not in place prior to the introduction of a government-sponsored cryptocurrency application. The lack of anti-financial crime measures, like Know Your Customer and transaction monitoring, presented a major risk of increased illicit financial flows, especially when converting cryptocurrency to fiat currency – a risk that could also spread beyond the country’s borders. In the CAR, experts conveyed their concerns over the increased risk of financial crime due to the adoption of Bitcoin, which would ultimately impact other countries in the region.

What is clear is that adopting cryptocurrency as legal tender requires a certain amount of readiness in terms of digital infrastructure, transparency and accountability

Finally, in addition to low transparency, the price volatility of Bitcoin has raised eyebrows as to whether or not these initiatives are truly worthwhile. Even though Bitcoin’s price volatility appears to be a better alternative for some countries than hyperinflation, El Salvador’s inflation rates are rather low, raising doubts about the effort. Besides, securing convertibility is a tough procedure with Bitcoin’s price fluctuation. Given that the adoption of Bitcoin as legal tender in El Salvador is entirely sponsored by public funds via a trust, there is a major risk that the trust’s resources will be drained if the price of Bitcoin declines. According to estimates of the reported amount of Bitcoin purchased by El Salvador, the country has lost approximately $56 million as of June 2022. The IMF has proposed that El Salvador should support the trust through new resources or debt issuance to ensure financial stability and convertibility.

Important Planning for Future Initiatives

What is clear from the El Salvador and CAR experiments is that adopting cryptocurrency as legal tender requires a certain amount of readiness in terms of digital infrastructure, transparency and accountability. The most fundamental requirement is physical infrastructure. Countries must be prepared to ensure that the majority of the population has access to reliable electricity, the internet and smartphones.

Firstly, transparency is key. There should be a continuous process of informing the public through official channels about advancements, Bitcoin reserves and other related topics. This should translate into teaching the public how to use crypto, as well as education on the financial risks that cryptocurrencies pose. One notable example is that El Salvador’s Ministry of Education intends to introduce a curriculum centred around Bitcoin in schools beginning in 2024.

Secondly, countries also need a robust regulatory framework in place to reduce the risk of financial crime. Without proper implementation of cyber security procedures and anti-money laundering (AML) measures around government-funded cryptocurrency applications, there is inherently a higher risk of criminal exploitation. There is already a steady threat of cryptocurrency businesses being hacked. When government funds are involved, this draws more attention from both regular users and criminals alike, and the threat only increases.

Ultimately, countries thinking about taking the same path would be remiss to ignore these lessons. While the adoption of cryptocurrency as legal tender may have advantages, problems such as a lack of trust, transparency and accountability, as well as the absence of appropriate infrastructure and robust financial crime prevention measures, may hinder the realisation of the desired economic benefits of cryptocurrency.


Fatima Alsancak is a Research Fellow at the Centre for Financial Crime and Security Studies at RUSI focusing on countering proliferation financing.

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