Why are countries like the Central African Republic adopting cryptocurrencies as legal tender?

A cryptocurrency is a digital currency that is represented by an encrypted data string. A peer-to-peer network known as a blockchain keeps track of it and acts as a secure record for transactions like buying, selling, and transferring. Anything recognised by law as a way of settling a public or private debt or meeting a financial obligation, such as tax payments, contracts, and legal fines or damages, is considered legal tender. Almost every country accepts the national currency as legal tender.

While cryptocurrency is growing in popularity among consumers around the world, numerous governments are still debating whether or not to legalise it. African countries, on the other hand, appear to be warming to the idea of digital currency, with the Central African Republic announcing the adoption of Bitcoin as its official currency late last month. It was the second country in the world to do so, and the first in Africa to do so. El Salvador is the only other country that accepts Bitcoin as legal money. Following in the footsteps of the Central African Republic, Uganda is considering a "central bank digital currency," indicating the continent's rising interest in cryptocurrency. While Uganda is still considering it, Nigeria's central bank banned local banks from dealing with cryptocurrency earlier this year. It moved on to create its own digital money instead. Nigeria became the first African government to adopt a digital currency, the eNaira, in October 2021.

Data also shows that African countries' interest in bitcoin has grown by over 1,200 percent in a year between 2020 and 2021. Furthermore, the survey noted that Africa has some of the greatest grassroots adoption rates in the world ranking in the top 20 of Global Crypto Adoption Index.

Bitcoin is a famously volatile asset, raising concerns about its utility as a payment method. On Saturday, it was trading at roughly $29,635 per share. Since November, when it reached an all-time high of around $68,000, the cryptocurrency has lost value.

El Salvador saw protests after enacting the Bitcoin Law, and the country was also chastised by the International Monetary Fund. The International Monetary Fund has encouraged El Salvador to abandon bitcoin as legal cash, citing worries about its impact on financial stability and consumer protection.

Many Western nations have expressed concern about Russia's possible use of cryptocurrencies to avoid sanctions in the aftermath of its invasion of Ukraine. According to the UN, CAR( Central African Republic) is a close ally of Russia, with Russian mercenaries providing direct help to the regime. The move, according to experts, might help small countries like the CAR reduce their reliance on the US dollar for international trade.

What are the benefits of legalising cryptocurrency? For many, cryptocurrency is an excellent inflation hedge – a problem that has resurfaced recently that the annual inflation rate in the United States has reached 7.9% for the first time since 1982. If a government adopts cryptocurrencies as legal cash, the cryptocurrency supply will expand steadily and predictably. Because the government can't boost the supply of BTC, ETH, and other cryptocurrencies like it can with paper currency, so there would be no more inflation caused by the government.

Many central banks have a history of debasing their currencies, particularly in developing countries. El Salvador, on the other hand, has no reason to accept bitcoin as legal cash. El Salvador adopted the US dollar as legal tender in 2001 in order to provide the monetary stability that the country's own currency, the colón, had previously failed to provide. The change worked: since the introduction of the dollar, the country's annual inflation rate, which had consistently topped 10% between 1977 and 1995, has dropped significantly. Since 2012, it has remained below 2%, and since 2015, it has been close to zero, a rarity in Latin America.

If the US's chronic budget and current-account deficits had resulted in a substantial long-term downward trend in the dollar's value, one could foresee individuals abandoning the greenback in favour of other currencies. However, this has not occurred, particularly during the period when cryptocurrency prices have surged. Inflation in the United States was also very low during the time (though lately it has risen in tandem with the economic recovery).

On paper, this theory appears to hold true, but can bitcoin adoption truly result in the "death of inflation" at the national level?

Reasons why cryptocurrency will not completely eliminate inflation - You can't rely only on cryptocurrency, Adoption resistance, Fraud and cyber threats.