A. Executive Summary

Many African countries have experienced substantial benefits from leapfrogging using digital technologies and vibrant Fintech activities. Yet successful digital transformation requires a certain level of readiness in terms of digital infrastructure, education, legal frameworks, and institutions, on which the CAR faces substantial gaps. CAR’s initial steps in the form of the 2022 crypto law have created legal uncertainties at the CEMAC level and raised numerous concerns but some of the most controversial provisions have been recently revised. The authorities have proceeded with the launch of a digital coin named Sango and namesake platform-ecosystem with multifaceted features. While only a limited amount of coins have been issued and other elements of the project have not been launched, project Sango has attracted considerable interest as it can potentially bring opportunities through digitization, while also raising complex risks. These range from macro-fiscal and financial to financial integrity, governance, consumer protection and others. The Sango project appears too complex, creating interconnectedness between multiple sectors and private and public balance sheets in a manner which could raise systemic risks, pointing to the importance of reconsidering the existing blueprint.

B. Context

1. The last two decades have seen rapid development of a range of technological innovations worldwide. Financial services arise to meet user needs—to make payments, to save, to borrow to finance consumption and investment, to manage risks including around all these activities, and to get advice on how best to handle all these needs for services—and technological innovations have offered improvements in service provision. Figure 1 provides a stylized road map on how user needs for financial services have traditionally been provided, the key gaps that have been issues for finance, and the new fintech solutions on offer to potentially address these problems (see IMF (2019) Fintech—The Experience so Far).

2. Sub-Saharan Africa (SSA) has become the global leader in mobile money innovation, adoption, and usage. Starting with the early 2000s, the use of mobile phones to send money (mobile money) as the main form of digital banking, has expanded primarily in SSA. In 2012, of the 27 million global active mobile money accounts, 84 percent was in SSA (Figure 2, left panel). By 2021, SSA accounted for 52 percent of the 364 million mobile money accounts. As of 2021, it is estimated that 55 percent of adults in the region had an account, including 33 percent of adults who had a mobile money account - the largest share of any region in the world, (Dermirgur-Kunt et al, 2022). With advancements in technology, a deeper digital financial services ecosystem has emerged, and the focus has expanded to a broad range of services, including cross-border payments, remittances, savings, credit, insurance, etc. The rise of Fintech has been a major contributor to financial inclusion in SSA.

3. More recently, the adoption of crypto assets has also been increasing in many African countries, bringing with it substantially more risks. Between July 2020 and June 2021, Africa was the fastest growing crypto assets market in the world in terms of adoption, with an increase of 1,200 percent. Nigeria and Kenya are among the top twenty countries in the world in terms of crypto asset adoption according to the 2022 Global Crypto Adoption Index (with South Africa and Tanzania also ranking high). In addition to accessibility and cost which drove the adoption of mobile banking, the promise of crypto assets as hedge against weak domestic currencies has been an important factor in some countries. However, widespread adoption of inadequately regulated crypto assets, particularly in fragile and conflict-affected states, can give rise to new risks to macroeconomic and financial stability, financial integrity, legal and regulatory frameworks, corruption, consumer protection, cyber risks and others, if associated vulnerabilities are not well managed.

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Central African Republic: Evolution of Financial Services¹

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A001

Source: IMF Policy Paper. Fintech: The Experience So Far, June 2019.1 This figure maps users’ needs for financial services - explained in IMF (2017a) - to traditional solutions and emerging fintech solutions. In doing so, it flags the key gaps that technology seeks to fill, and which new technologies are applied in different services.2 In gaps, transparency encompasses search and matching frictions, while access encompasses product tailoring needs.3 AI/ML refers to Artificial Intelligence and Machine Learning algorithms applied to extract insights from large amounts of data. Data/Cloud Platforms are cloud-based technologies which facilitate B2B, C2B, C2C, and B2C exchange of data via Application Programming Interfaces (APIs), across fintech firms, financial institutions, customers, and governments. Access to digital platforms can be secured with digital identification technologies, such as biometrics. DLT/Crypto captures distributed ledgers, such as smart contracts and related decentralized technologies. Mobile refers to feature phones and smartphones running financial apps. The colors scheme reflects a judgement on whether the specific technology has a low (L), medium (M), or high (H) level of benefit for the corresponding fintech solutions. Scaling is purely illustrative.

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Central African Republic: Mobile Money Usage and Accounts Ownership

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A001

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4. Increasingly, many African countries have also shown interest in Central Bank Digital Currencies (CBDCs), partly in response to the risks posed by crypto assets. Nigeria was one of the first countries in the world to launch its live CBDC, the e-Naira, in 2021, while Ghana and South Africa are in pilot stages, and 8 other African countries are in early stages of research and conception. The interest in CBDCs is partly driven by the expectations that they can increase efficiency of payments, lower transaction costs, and improve financial inclusion; however, competition from crypto assets to fiat currencies has also been a driver.

5. Fintech adoption in CAR is an opportunity to overcome important bottlenecks:

• Low socio-economic development. Repeated instability and violence over the years have kept the country at very low growth levels and at the bottom of global development rankings with a 70 percent poverty rate. Human capital and literacy are very low compared to regional peers (Figure 3). According to the CPIA 2022, the CAR’s policy and institutional assessment score is the lowest in SSA, in particular in the areas of public sector management and institutions.

• Logistic and infrastructure challenges. The CAR is a large land-locked country with low population density and poor physical infrastructure. Challenges include low access to electricity and the internet (slightly over 10 percent of the population), as well as limited mobile cellular subscription of around 40 percent, relative to the SSA average of 80 percent (see Figure 3). The country is among the few without fiber optic, though it should be installed in the near future.

• Low financial inclusion. A large proportion of the population lack access to basic financial services, which also constrains government services and exacerbates the inequality and poverty. Key inclusion metrics such as account ownership at a financial institution, ownership of debit or credit cards, or borrowing from a financial institution (Figure 4), are among the lowest in Africa, pointing to significant unmet potential which can be addressed by Fintech, if the right prerequisites are put into place.

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Central African Republic: Socio-Economic and Digital Infrastructure

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A001

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Central African Republic: Access to Financial Services in Select African Countries

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A001

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C. Overview of The Central African Republic’s Cryptographic Ambitions

Crypto Legislation

6. The CAR has embarked upon digitization by adopting a law initially providing legal tender status to crypto assets, though key elements of which have since been reversed. CAR adopted crypto assets as legal tender on 21st April 2022 - alongside the existing CFA Franc by virtue of the crypto law (Loi n°22.004 du 22 avril 2022 regissant la cryptomonnaie en Republique Centrafricaine). The main provisions of the law were as follows: all economic agents were required to accept crypto assets as a form of payment; taxes could be paid in crypto assets; the state would provide access to automatic and instant convertibility of crypto assets in the CAR currency through the creation of a trust fund; and the creation of a National Agency for Regulating Electronic Transactions (ANTE). CEMAC authorities expressed their concerns that CAR’s crypto currency law was inconsistent with CEMAC’s legal framework and created risks to macroeconomic and financial stability for the monetary union (April 29, 2022). Following feedback from CEMAC authorities, other CEMAC member countries and international partners, the authorities have agreed with BEAC to harmonize their crypto legislation with the monetary union framework on April 6, 2023—including by amending key articles of the crypto law pertaining to the legal tender status as well as the guaranteed convertibility provisions) law (Loi n°23.005 du 6 avril 2022 modifiant et completant certaines dispositions de la loi n°22.004, regissant la cryptomonnaie en Republique Centrafricaine).

7. The legal and regulatory framework for crypto assets in CAR remains incomplete and uncertain, and coordination with the CEMAC in strengthening and clarifying the framework is of paramount importance going forward. The regional banking regulator COBAC issued a regulation prohibiting its supervised institutions from engaging in transactions with crypto assets or holding crypto assets in their own accounts or third parties accounts, citing risks to financial stability (Decision D-2022/071 from May 6, 2022). On July 21, 2022, the financial market supervisor COSUMAF issued a regulation (01/22/CEMAC/UMAC/CM/COSUMAF) which extended the definition of market intermediaries to crypto assets service providers (Art 145) and is defining such services to include “buying and selling crypto assets with a legal tender currency or other crypto assets” (Art 160). Domestically, the Constitutional Court has declared key elements of Project Sango illegal, including the purchase of citizenship, e-residence, land, and natural resources for Sango coin (August 1, 2022). At a Summit held in Yaounde on March 17, 2023, CEMAC Head of States reaffirmed their attachment to the provisions of Article 6 of the Convention governing the Central African Monetary Union on the legal tender in the Community. It encouraged the BEAC, in collaboration with the other regional regulators, to continue the reflections already initiated, with a view to developing a legal and regulatory framework for activities relating to the issuance and management of crypto assets, as well as the regulation fintech and propose, if necessary, credible alternative solutions.

Sango Coin and Project Sango

8. CAR authorities launched Project Sango as an ambitious vision intended to spur development through cryptoization, spanning multiple areas of activity. The CAR launched Project Sango and started issuing Sango coin to investors worldwide on July 15, 2022. The project aims to reshape the country’s economy and “pave the way to a digital future of endless possibilities.” At the center of the project lies Sango coin (named after the country’s second official language), advertised as CAR’s “national digital currency”. Issued on the blockchain and backed by Bitcoin, the Sango coin platform would create a “new digital monetary system” for the country, including a “Digital National Bank” and “National Bitcoin Treasury”. The government reliance on the private sector to develop this project is akin to public-private partnership.

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Central African Republic: Sango Coin: Issuance Metrics

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A001

Source: Sango.org and IMF staff calculations

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9. The Sango initial coin offering has faced delays amidst low investor interest. According to the initial issuance calendar, the government plans to issue a total of 21 billion Sango coins over one year, half of which to be sold to investors with the goal of raising about $2.5 billion (around 100 percent of GDP), split between US$1 billion through Sango coins (4.2 bn tokens) and US$1.5 billion through other offerings, e.g., the sale of CAR citizenship, e-residency and land property (6.3 billion tokens). By January 15, 2023, less than US$2 million worth of Sango coin (0.2 percent of the total planned issuance) is estimated to have been purchased, despite the extension of the original time window, while the sale of CAR citizenship, e-residency and land property have been delayed by the Supreme Court decision (see above).

10. While most of the features remain to be developed, the blueprint for the Sango ecosystem is multidimensional, technically complex, and subject to significant legal uncertainty. Substantial uncertainty remains on key elements of the project, which have not been specified, amidst broader uncertainty triggered by a global decline in the crypto industry. Some of the key advertised features are as follows:²

• Citizenship, e-Residency, company registration, and land purchases will be available through the Sango platform for certain minimum investment with locking periods of up to 10 years for the equivalent Sango coin (see Table 1);

  ^{Table 1.}

  Central African Republic: Sango: Allocation and Release Schedule

  

  Source: Sango.org

  ^{Table 1.}

  Central African Republic: Sango: Allocation and Release Schedule

  Allocation Type	Allocation %	Total Tokens to be released	Release Schedule	Minimum Investment
  Country’s Treasury	20.0%	4,200,000,000	4 years cliff, 6 years linear unlock - yearly	N.A.
  Foundation funds	10.0%	2,100,000,000	2 years cliff, 8 years linear unlock - yearly	N.A.
  Rewards &Incentives	15.0%	3,150,000,000	2 years cliff, 8 years linear unlock - yearly	N.A.
  Liquidity	5.0%	1,050,000,000	16.67% at Public Launch, 16.67% every 6 months	N.A.
  Market Coins	20.0%	4,200,000,000	Genesis Cycle - Cycle 12	$500
  Land Offering	10.0%	2,100,000,000	Cycle 1 - Cycle 12	$10,000 10 years locking period
  Citizenship Offering	10.0%	2,100,000,000	Cycle 1 - Cycle 12	$60,000 5 years locking period
  e-Residence Offering	10.0%	2,100,000,000	Cycle 1 - Cycle 12	$6,000 3 years locking period
  Total	100.0%	21,000,000,000

  Source: Sango.org

  View Table

  ^{Table 1.}

  Central African Republic: Sango: Allocation and Release Schedule

  Allocation Type	Allocation %	Total Tokens to be released	Release Schedule	Minimum Investment
  Country’s Treasury	20.0%	4,200,000,000	4 years cliff, 6 years linear unlock - yearly	N.A.
  Foundation funds	10.0%	2,100,000,000	2 years cliff, 8 years linear unlock - yearly	N.A.
  Rewards &Incentives	15.0%	3,150,000,000	2 years cliff, 8 years linear unlock - yearly	N.A.
  Liquidity	5.0%	1,050,000,000	16.67% at Public Launch, 16.67% every 6 months	N.A.
  Market Coins	20.0%	4,200,000,000	Genesis Cycle - Cycle 12	$500
  Land Offering	10.0%	2,100,000,000	Cycle 1 - Cycle 12	$10,000 10 years locking period
  Citizenship Offering	10.0%	2,100,000,000	Cycle 1 - Cycle 12	$60,000 5 years locking period
  e-Residence Offering	10.0%	2,100,000,000	Cycle 1 - Cycle 12	$6,000 3 years locking period
  Total	100.0%	21,000,000,000

  Source: Sango.org

• Tokenization of the country’s abundant natural resources (gold, diamonds, iron ore, graphite, uranium, limestone, copper, cobalt etc.) will be available in the future “solely” via the Sango platform;

• Real estate: a ‘Crypto City’ would be developed on the ‘Crypto Island’, located in the capital Bangui and operated as a special economic zone;

• Institutional setup: a “crypto hub” to spearhead the country’s digitization projects, oversight responsibilities through the Agence Nationale de Regulation de Transaction Electronique (ANTE) and the creation of a “digital national bank“, Banque Nationale Digitale de la Republique Centrafricaine (BNDRC);

• Other expected benefits:

  • Tax advantages: crypto transactions will be exempted from tax, no income or corporate tax, tax payments to be performed through Sango.

  • Crowdfunding platform: access to government infrastructure projects (public-private partnerships) would be available through Sango.

  • Governance features: investors would be able to vote on the future development of the Sango ecosystem.

D. Roadmap to Improving Current Projects

Design Aspects: Sango Coin

11. The concept for Sango coin is complex and has an untested design. Sango coin is not easily classifiable, blending features of private and public digital money. While representing a means of payment promoted by the State, Sango coin does not satisfy the standard definition of a CBDC, since it is not a digital liability of the central bank. While it is supposed to be backed by Bitcoin, Sango coin cannot be classified as a stablecoin, due to high volatility of Bitcoin. Additionally, Sango Coin, as currently planned, falls within the FATF definition of virtual assets.³ Finally, the Sango coin can be used for transfer of value, governance, asset tokenization, digital identity, and ownership thus blending features of non-fungible tokens (NFT), utility tokens, security tokens, and governance tokens in a complex, untested design with substantial ambiguities.

12. The legal treatment of Sango Coin is not clear from the crypto law, including whether it should be treated as debt or liability of the State. The documentation for the Sango project framework does not clarify whether Sango Coin is issued by the State or by another entity. If the legal design does not recognize the issuance as direct liabilities of the State, there are still important fiscal risks under consideration. For example, it is not clear whether (a) Sango Coin enjoys an explicit guarantee by the State (if so, this contingent liability should be properly reflected in CAR’s fiscal and financial reports); (b) the future revenue streams on natural resources be considered pledged for the purposes of the Sango coin issuance; and (c) Sango Coin enjoys considerations on implicit guarantees by the State. Having clarity on these issues seems to be an important precondition for an appropriate measurement of public debt.

13. The design of the Sango coin creates uncertainty regarding its valuation. Given that the Sango coin is issued on a sidechain to the Bitcoin blockchain, with a two-way peg mechanism enabling conversion from Sango to Bitcoin and vice versa, the Sango coin would inherit Bitcoin’s high volatility, making it a highly speculative asset. It is not clear (or not determined) whether the Sango Coin is fully or partially backed up by Bitcoin. In case Sango Coin would be pegged to Bitcoin while fractionally backed by it, Sango Coin will carry a risk of “de-peg/devaluation” vis-a-vis Bitcoin. However, another feature of Sango is that validation and consensus would be achieved by a quorum of nodes controlled by CAR’s institutions, implying that the valuation of the coin would also depend on the sovereign credibility.

Digitization through Project Sango: Potential Opportunities

Leveraging Blockchain Technologies

14. New infrastructure may increase efficiency, transparency, and traceability of transactions, but the architecture and specifications remain unclear. The Sango project is highly ambitious, creating a transversal infrastructure with many features and functions, based on a sidechain to the main Bitcoin blockchain. The espoused advantages of the sidechain are faster transfers at very low fees, at scale (allowing a higher number of transactions), and also enabling additional functionality through smart contracts. This technology could bring increased transparency and offer the basis to build different infrastructures that could modernize and strengthen CAR’s institutions (for instance, maintaining property registration records). Supported by a sound legal framework and effective enforcement, applications of blockchain could increase legal certainty, simplify administrative procedures, and ultimately help reducing corruption.

15. The potential benefits of using blockchains depend on the technological and governance design choices and on a robust regulatory and supervisory framework for financial stability. One of the advantages of a decentralized financial platform like the Sango blockchain is that it could lower costs and increase transactions speed, especially in cross-border payments (although this poses also risks at the level of the monetary union, more on it below). At the same time, blockchains could offer new supervisory and compliance possibilities: the information on ledgers could be used to identify suspicious illicit activities and transactions based on automated triggers through the deployment of Regtech and Suptech (regulatory and supervisory technology). However, whether such benefits materialize will depend on policy and technological design choices. Transactions on the Sango blockchain need to be secured by validators, which may contribute to transaction costs and require clear governance arrangements to ensure adequate functioning. In the case of Sango, design choices might undermine the benefits of decentralization as validations are centralized in the hands of a group of politically connected individuals, the “institutional quorum.”

16. Furthermore, building a blockchain infrastructure and tokenizing assets can bring financial opportunities and innovation if fundamental underlying problems are solved first. The CAR could potentially benefit from using distributed ledger technology (DLT) solutions in many areas, with economic impact beyond financial transactions. At the same time, DLT and the digital representation of assets (tokenization) are leapfrogging technologies that can help build new markets. Nonetheless, technology per se cannot solve pre-existent fundamental issues, such as security and access issues, weak infrastructure, or the lack of an adequate institutional framework. Tokenized natural resources need to be as accessible, prompt, and quantifiable as physical resources exchanged in traditional markets.

Financial Inclusion

17. Potential financial inclusion benefits from the Sango project require broad participation of the population. While the authorities hope that the Sango project would allow the population “instant access to financial services”, additional efforts are needed to achieve both fair access to the purported benefits of the project and financial inclusion. Accessing the Sango ecosystem through the Sango App requires smart phones and good connectivity. In the CAR, low educational attainment, low access to electricity, poor internet penetration, and low access to bandwidth raise substantial questions about the feasibility of access of the Sango ecosystem by the broader population. Minimum investment in the Sango project in the ICO phase is US$100 (US$500 in the now ended Genesis cycle), in a country with annual per capita income of just around US$800. The government’s “Young People Initiative” to provide young people with free smart phones seems to create discrimination against older citizens. The relative sophistication required to access the Sango platform raises concerns whether it will reinforce the digital divide and exclude the less educated, less affluent, elder, and less technologically savvy population.⁴

Overview of Potential Risks

Risk from a Legal Perspective

18. The original CAR crypto law provided legal tender status to crypto assets and was inconsistent with the monetary union’s legal framework. In the monetary union, BEAC has the exclusive right to issue banknotes and coins serving as legal tender in the member states, which made the crypto law fundamentally inconsistent with the foundations of the monetary union. In addition to financial, fiscal, and other risks discussed below, crypto assets in general are not suitable to become legal tender because the legal tender status requires that a means of payment be widely accessible by the public. However, internet access and the technology needed to transfer crypto assets, remain scarce in the CAR, raising issues about fairness and financial inclusion as noted above. Concerns remain as Sango Coin could potentially be perceived as de-facto currency in the CAR (e.g., a means of payment promoted by the State), and this can create various risks linked to a currency substitution effect. The abolition of legal tender status on April 6 reduces such risks.

19. The lack of clarity in the legal foundations for Sango Project could result in significant legal risks. In general, providing proper legal foundations for crypto ecosystems raises complex and novel legal issues, including: (a) the legal classification of the crypto assets under private, financial and tax law; (b) rights and obligations of the parties, including investors and the State; and (c) setting adequate regulatory rules to mitigate risks involved in transactions on the Sango platform. More broadly, CAR’s governance vulnerabilities related to the enforcement of contract and the protection of property rights would also affect this project. In addition, the decision made by the CAR’s Constitutional Court (see paragraph 7) adds uncertainties and questions the “rule of law” if the project were to proceed without further fundamental changes.

20. Tokenization of natural resources would require a sound legal framework. One of the key features of the Sango Project is expressed as the “democratization and tokenization of natural resources via blockchain, allowing unrestricted access for international investors,” which is designed to “omit intermediaries from processes and sustains the capacity to ensure ethicality and transparency in the supply chains.” However, designing a legal framework for the tokenization of natural resources raises significant legal complexities, including determining the legal nature of rights of the holders of crypto assets over the real-world assets (in this case the natural resources) or how the tokenization would be accounted in the State’s balance sheet (more detail on the risks of tokenization can be found below). Moreover, without an appropriate legal framework for governance and disclosures, there would be fundamental risks to international investor protection. Structural vulnerabilities related to the severity of corruption and to rule of law weaknesses -including the lack of protection of property rights, that have been hampering the exploitation of CAR’s resources, are equally relevant when building a blockchain infrastructure and tokenizing minerals. Similar risks such as safety, access, or lack of adequate framework issues, can arise for the prospective crypto crowdfunding for infrastructure projects on the Sango platform.

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Central African Republic: Historical Volatilities of Different Asset Classes

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A001

Source: Bloomberg and IMF staff calculationsNote: Volatility is calculated as the standard deviation of daily returns of the assets. The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across 24 EM countries and is considered a global benchmark to measure the financial performance of companies in fast growing emerging economies. Global treasuries is represented by the Bloomberg Global Agg Treasuries Total Return Index.

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Risks from a Monetary Perspective

21. Membership in the CEMAC monetary union has served the CAR well, and the Sango coin and Sango project should be fully aligned with its regulations. The CAR, as a member of CEMAC and UMAC, benefits from the stability of the CFA franc (pegged to the Euro) in particular, in terms of exchange rate predictability and low inflation. On the other hand, crypto assets do not serve well the fundamental functions of money, given their high volatility, relative to the stability of the current monetary framework (see Figure 6 and IMF (2023)).

22. Widespread use of crypto assets can pose threats to monetary sovereignty and the ability of the central bank to fulfil its mandate. The CAR’s promotion of Sango coin and Project Sango activities could incentivize crypto adoption in the CEMAC monetary union and potentially lead in the future to a weakening of monetary policy effectiveness, even if the Sango coin does not represent legal tender. Cryptoization can create instability in money demand and weaken the transmission of monetary policy, particularly if accompanied by banking disintermediation. Such effects, coupled with a loss of seignorage revenue, can complicate monetary policy in the monetary union.

23. Crypto assets pose the risk of weakening the effectiveness of capital controls in the monetary union. Crypto assets create the risk of untracked capital inflows and outflows due to their anonymity features and by generally circumventing regulated intermediaries (see He and others (2022)). Sango project allows customers to own a non-custodial wallet that supports both Bitcoin and Sango “enabling fast worldwide payments”. In the context of the CEMAC monetary union, convertibility between CFAF and crypto assets could create a risk for the accumulation of pooled reserves in the region, weakening existent capital controls that are needed to prevent capital flight. Shifts in the demand for CFAF because of moves in and out of crypto assets could affect CFAF liquidity conditions and the management of the CFAF peg. Mitigating options exist, using, for example, smart contracts to enforce capital controls and other measures (see paragraph 15). However, these smart contracts would require the setup of adequate such regulatory, supervisory, as well as monitoring capabilities.

Risks From the Fiscal Perspective

24. Exposure to crypto assets in the government’s balance sheet could lead to high volatility in revenue and spending, which would threaten the conduct of fiscal policy. The possibility to use Sango coin to discharge tax obligations could create room for tax arbitrage and tax evasion. Even without an automatic convertibility mechanism, government exposure to crypto assets in terms of both revenue and spending can lead to large shocks to fiscal balances, given the extremely high volatility of crypto assets. This could threaten the conduct of fiscal policy in an already very vulnerable country and endanger its economic, social, and political stability.⁵

25. Project Sango poses complex risks to the sound management of public finances. While Project Sango aims to raise a very substantial amount of capital through the sale of Sango coin, citizenship, residency, and land plots; the proceeds are to be paid in other major crypto assets (Bitcoin, Ethereum, Tether, etc.), increasing the exposure of the public balance sheet to crypto assets. It is not clear whether the government or extrabudgetary entities are involved in these transactions, which raises serious concerns regarding the management of these funds from the accountability, transparency, governance, and oversight perspective. Additionally, government spending may increase in order to finance different investment components of Project Sango (from infrastructures to real estate). Furthermore, contingent liabilities for the State may also arise from State-supported entities connected with Project Sango or from financial sector exposures to crypto assets, which could spill over to public finances. The tax incentives designed to attract investors (zero income tax for capital gains on crypto assets and zero corporate tax for corporate investors) create the risk of substantial loss of revenue for the State. Other incentives designed to foster adoption by the broad population (such as the free distribution of mobile phones), also raise concerns in the context of the paucity of fiscal space.

Risks from the Financial Stability Perspective

26. The widespread use of crypto assets in the economy can increase the risks of financial disintermediation. Project Sango aims to create a “new digital monetary system”, “without interference from the banking system.” If economic activity shifted towards the Sango ecosystem, financial resources would likely to be moved away from the traditional financial system. This could weaken core funding of banks, consisting of traditionally stable deposits and lead to a gradual process of financial disintermediation, which would negatively impact bank credit and thus the nondigital part of the economy. Abrupt shifts could potentially result in bank stresses and add to risks to the stability of the financial sector, which could spill-over to the monetary union’s financial system, given the high degree of financial market integration.

27. The Sango project and the infrastructure it entails could exposes CAR’s financial system to substantial financial stability risks if used by regulated institutions.⁶ Financial institutions may become directly or indirectly exposed to crypto asset volatility if they provide credit or other financial services to crypto asset trading platforms, wallet providers, institutional or retail investors in crypto assets, or if they accept crypto assets as collateral for lending. The following risks emerge in case of cryptoization of the economy - without proper regulatory and supervisory safeguards):⁷

• Legal risk. The application of CEMAC laws and regulations could render contracts executed under CAR crypto law provisions’ illegal or unenforceable. This risk also derives from contradictory or inconsistent regulations, such as the regulatory misalignments highlighted in the section on legal risks.

• Credit risk. The acceptance of crypto assets as collateral, with improperly designed legal protection and haircuts, can increase credit risk. Crypto asset’s volatility could give rise to adverse wealth effects to exposed corporate or household balance sheets’, which in turn could reduce repayment capacity and deteriorate bank assets quality through raising NPLs.

• Liquidity risk. In the case of CAR and CEMAC, banks’ holding and dealing with crypto assets could deteriorate banks’ liquidity, as crypto assets may not qualify as high-quality liquid assets. In addition, the Sango Project involves the deployment of a payment system and other market infrastructures that would act as central security depositories and securities settlement systems, for which liquidity risks may also materialize.

• Market risk. Potential direct or indirect bank exposures to extremely volatile crypto assets could increase market risk, with important spillovers across the monetary union.

• Operational risk. The Sango project involves complex infrastructure, and this translates in high operational risk. Deficiencies in information systems or internal processes, human errors, management failures, or disruptions from external events could result in the reduction, deterioration, or breakdown of services provided and even result in large losses of customer funds.

• Cyber risk. The Sango infrastructure proposes a model with centralized elements, which increases the risk of failure, in contrast to crypto assets issued on a decentralized public network with nodes and validators potentially spread around the world.

Risks to Financial Integrity, Governance, and Consumer Protection

28. Without effective anti-money laundering and combating the financing of terrorism (AML/CFT) measures, crypto assets can present significant risks to financial integrity. The crypto law does not provide for any measure to prevent, investigate, prosecute, and sanction the criminal misuse of crypto assets. In these circumstances, crypto assets can easily be misused to commit crimes such as fraud or sanctions’ evasion and/or be misused to conceal and launder the proceeds of crimes, including corruption. This is due to their pseudo-anonymous and decentralized nature, the speed at which transactions can be done, including in a cross-border context, and potential anonymity-enhancing features. Granting legal tender status to crypto assets (as authorities initially did and recently reversed) would compound those risks further, both domestically and in comparison to other countries (where crypto assets are not given an official status) because there is an expectation that these assets will be widely used.

29. Those risks are particularly acute in CAR because of the country’s weak institutional and administrative capacity. As a fragile and conflict-affected state and given its weak rule of law environment and institutional capacity gaps, concerns remain about the ability of CAR ‘s AML/CFT competent authorities to effectively detect, investigate, and prosecute financial crimes in particular when laundered through transactions involving crypto assets. In light of the systemic corruption, the absence of safeguards may also create an opportunity for rent seeking (e.g., in the context of the exchange of crypto assets to CFAF; and vice versa).

30. The tokenizing of natural resources and other features of the Sango project raise further financial integrity concerns. Without an adequate AML/CFT framework, tokenizing natural resources would increase further the risk of ML/TF. In addition, other features of the Sango project, in particular, plans to grant a citizenship through an investment program - which the CAR’s Constitutional Court has declared illegal -, raise further risks to financial integrity. The ML/TF risks associated with citizenship through investment programs can be high if not properly managed. New citizenship can, for example, disguise higher risk profiles and/or facilitate the commission of crimes such as corruption, ML, and tax evasion. As a result, countries offering such programs can suffer significant damage, including reputational, affecting financial integrity and stability with potential spillovers to other countries.

31. Achieving good governance of the Sango project is essential for promoting appropriate projects and avoiding policy errors and associated fiscal costs. The public-private partnership nature of the Sango project raises important governance concerns. The conflict-of-interest aspect appears significant due to the lack of clarity on the organs of decision and on the apparent concentration of power (issuance, custody, and validation) in the hands of the so-called “institutional quorum”, constituted from public elected officials (Presidency, ministers and National Assembly). Additionally, the private sector partners involved in the creation, operation, and the administration of the platform may have different profit-maximizing incentives. Given the potentially significant capital the project is expected to raise, an unclear governance of this public-private partnership can give rise to conflicts of interest, absent organizational devices to ensure integrity, and lack of transparency and of prudent management of fiscal risks. In this regard, the political and institutional weakness in the CAR, as well as the high level of corruption, pose significant risks to the governance of the Sango ecosystem.

32. The governance of the Sango project raises additional equity concerns. The Sango coin has tokenized governance features and gives voting power to investors in the blockchain project. While the Sango project claims to provide a “voice for every citizen to share their future”, the requirement of a minimum investment of US$100 equivalent (to be paid in cryptocurrency) to participate in the ICO does not appear to encourage the participation of CAR’s population. The experience of El Salvador’s with Bitcoin as legal tender suggests that the broad population’s acceptance and usage of crypto assets may not increase quickly.⁸ The governance token feature raises the risk that actors that gain enough voting rights may impose policies that would favor their interests. In the context of the planned tokenization of CAR’s mineral wealth through the Sango platform, significant risks emerge in terms of the misappropriation of the country’s valuable resources.

33. Lack of clarity regarding key elements of Sango coin and project Sango point to increased consumer protection risks. These can arise when consumers and investors are unaware or do not fully comprehend the risks associated with activities related to the Sango ecosystem. The risks of crypto activities to users are even more significant in a country with very low levels of financial literacy like the CAR. Without the development of an adequate legal framework for the Sango project, risks to domestic and foreign investors from limited recourse, unclear benefits, understated risks, inadequate governance, poor oversight, or even outright fraud can occur.

Risks from Tokenization of Natural Resources and Infrastructure Projects

34. Tokenization of natural resources as part of the Sango ecosystem can give rise to novel risks. At least the following should be considered:

• Assets to be potentially involved in the tokenization project are natural resources in a jurisdiction with no guaranteed safe access. Tokenization does not solve fundamental issues which have rendered the valuation and exploitation of such resources difficult in the CAR.

• One of the purported benefits of tokenization in the Sango proposal is the democratization of resources and the possibility of making these available to the general public, due to fractionalization. However, the wider distribution to potentially unsophisticated investors raises additional consumer protections risks.

• The deployment of the project entails risks of contagion to the financial sector, to the extent that traditional financial sector entities would become involved in financing such projects and thus gain direct exposure to the high volatility of the crypto asset sector.

• Tokenizing natural resources creates new risks of double spending or “double selling”. The regulatory and supervisory framework needs to provide legal certainty on how to prevent that the same asset is sold on the blockchain and outside the blockchain.

• Given the currently deficient legal framework to address the ML/TF risks associated with mining, dealing in precious metals and precious stones, tokenizing CAR’s natural resources could increase the risks of ML/TF.

• Tokenized trading requires a combination of intermediaries’ actions, which bring new types of risk to tokenized transactions. These intermediaries are the technology providers that need to digitally represent these assets on the blockchain, the actors determining the value of the asset, the certifiers on on-going basis of the existence of the asset outside the blockchain, the registers of the property of such assets, and the range of actors that exploit the natural resources outside blockchain. These risks must be addressed by a robust regulatory and supervisory framework.

35. The physical infrastructure aspects of Project Sango are ambitious but entail substantial implementation risks. Project Sango has an important infrastructure component, providing for the creation of a crypto economic zone, which could serve to attract investment, innovation and growth. However, the plans, which include the development of a high-tech commercial and residential real estate project for the Crypto City and Crypto Island, would require substantial capital investment and recurrent outlays unmatched in the country. Even if Project Sango aims to raise a very substantial amount of capital which can finance such investments, fundamental questions remain as to the realism of the materialization of such projects at CAR’s current level of development.

E. Policy and Regulatory Options

36. The current Sango project is complex and overarching, raising questions about the criticality of certain features. The current vision creates interconnectedness between multiple activities and private and public balance sheets in a manner that could raise systemic risk. The elements of Sango project that should be pursued are those for which the required prerequisites in terms of infrastructure, institutions, legal and regulatory framework, capacity development, and others, can be realistically met.

37. The priority is to ensure consistency with the CEMAC legal and regulatory framework. As a member of a currency union, it is important for the CAR to align with the existing dispositions in the UMAC Convention and the legal framework surrounding its application circulation of monetary assets as well as the harmonization of monetary, banking, and financial regulations. In coordination with regional institutions, especially BEAC, CAR recently revoked the legal tender status and guaranteed convertibility of bitcoin. The authorities should continue to cooperate with CEMAC authorities to ensure that legal and regulatory frameworks for crypto assets are coordinated and coherent, ensuring monetary stability, managing macroeconomic and financial stability risks, protecting consumers, and fostering compliance with the AML/CFT standards, while at the same time creating pace for legitimate innovation. The CAR authorities need to fully follow union-wide prudential requirements on regulated financial institutions (such as banks and insurers) concerning their exposure to, and engagement with, crypto assets.

38. The growing body of international expertise provides useful guidance in designing an effective policy framework for crypto assets in CAR. The FATF has amended its AML/CFT standards to address explicitly the mitigation of the ML/TF risks related to crypto assets.⁹ In addition, the IMF’s Executive Board has recently endorsed, nine core elements¹⁰ that can help inform a comprehensive, consistent, and coordinated policy framework for crypto assets (see Box 1). This guidance underpinned the staff advice regarding the removal of crypto assets’ legal tender status and guaranteed convertibility and can serve as the basis to build a sound framework around crypto assets after the Sango Project is reshaped to be compliant with CEMAC regulation. Although CAR’s circumstances and capacity constraints may condition the sequence of implementing the elements, putting in place a framework consistent with this guidance should be a pre-requisite to enable policy makers to address crypto assets’ risks while reaping the potential benefits from technological innovation.

39. Fiscal risks stemming from Project Sango need to be identified, monitored, and mitigated. At a minimum, fiscal risks emerging from Project Sango should be timely and properly quantified and monitored, in order to promote fiscal transparency. Government guarantees, including for convertibility of crypto assets into fiat legal tender, should be avoided. Moreover, the Sango project should be explicitly delinked from the public sector balance sheet. The tax treatment of crypto assets needs to be unambiguous and strike a balance between stimulating innovation and raising much-needed revenue. Following international best practices, such as the OECD (2022) new tax transparency framework for the reporting and automatic exchange of information in respect of crypto assets, is recommended.

40. A sound legal and regulatory AML/CFT framework, complemented by adequately skilled, and resourced, competent authorities is essential to address the financial integrity issues presented by the crypto law and the Sango project. The mitigation of the ML/TF risks related to crypto assets and to the Sango project features requires several steps, starting with a robust assessment of those risks and of their impact on CAR’s risk profile. The findings of the assessment should then guide the authorities in the design and implementation of appropriate tailored and effective mitigating measures. Finally, in light of the often cross-border nature of crypto assets -related activities, including criminal activities, extensive dialogue and cooperation with foreign AML/CFT counterparts is also required.

41. Clear and robust governance requirements are essential in the Sango Project. Governance should cover fit and proper senior management, management liabilities, and resources and control functions, as well as identifiable decision-making structures that promote safety and efficiency of the Sango infrastructure. This should include a clear policy on conflict-of-interest management and rules on prohibited activities. The CAR needs to develop comprehensive regulations and enforce prudential supervision and oversight requirements applying to all actors involved in the Sango ecosystem. Rules similar to the ones existing for financial service providers should apply to crypto asset service providers which fulfill functions such as storage, transfer, exchange, and custody of reserves and assets. Additional requirements to reflect the new business models may need to be designed, relying on global standards wherever relevant.

42. A multi-faceted infrastructure such as Sango requires a comprehensive and robust risk-management strategy and review processes. In addition to the mitigation of the ML/TF risks mentioned above, risk-control policies and practices should include, but not be limited to, legal, credit, liquidity, general business, and operational resilience, including outsourcing, fraud and cyber risk, risk of loss of data, and various nonfinancial risks (such as data integrity), operational resilience (i.e., operational reliability and capacity), and third-party risk management.

43. Increasing financial inclusion in CAR can arguably be better achieved through mobile money, a solution which has been successful in the region.¹¹ Mobile payments allow anyone with an unsophisticated mobile device and phone connectivity to engage in activities such as conducting payments, sending remittances, and making savings and investments. The CAR already has started to experience mobile money, with increased penetration (see Figure 4). Mobile money transfer services can then be followed by a full suite of mobile services.

44. The sound and appropriate exploitation of CAR’s natural resources can accelerate growth and should be pursued beyond the Sango project. Barriers¹² to sound exploitation need to be addressed, while considering various exploitation alternatives. Tokenization of assets, if thought to bring benefits compared to traditional investors, could be considered, however it does not need to depend on the Sango project infrastructure. This separation can bring some benefits as it will reduce some of the interconnectedness risks of the Sango infrastructure as defined in the current blueprint. Tokenization of natural resources would also require a legal framework consistent with the FATF standards to address the ML/TF risks associated with mining and dealing in precious metals and stones.