What does it signify when Bitcoin is legal and accepted as tender?
The use of Bitcoin as legal tender is dependent on the citizen’s access to necessary technology, unless they can prove otherwise. In a jurisdiction, the central bank and regulators determine the legal tender to be used for paying goods and services. For instance, in the United States, $10 notes and $.50 coins are recognized as legal tender.
When Bitcoin is recognized as legal tender, it means that people can use it to pay for goods and services such as a cup of coffee. The declaration of Bitcoin as legal tender by the central bank takes away the risk of accepting BTC for goods sold from the shopkeepers.
The emergence of Bitcoin and other decentralized cryptocurrencies has stimulated central banks to consider developing their digital currencies. Notably, China, the U.K., the U.S., and India are actively exploring central bank digital currencies (CBDCs) as a more robust alternative to fiat currencies.
Adoption of digital currencies aims to enhance traceability and control of money in the economy. With accurate tracing, it will be possible to calculate taxes, identify money launderers, and identify any accumulation of wealth. Policymakers can use this information to develop policies to retain wealth within the economy.
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What are the usual factors that prompt a country to adopt Bitcoin as legal tender?
The adoption of a currency as legal tender by a country is typically driven by macroeconomic factors, which require visionary leadership for successful implementation. However, the trend towards digital currencies has resulted in central banks exploring digital versions of fiat currencies, though this may not solve fundamental economic problems in some countries. For example, hyperinflation-plagued countries like Argentina and Venezuela require a currency that derives value from beyond their own economies. Similarly, countries such as El Salvador, Panama, Guatemala and Honduras rely heavily on remittances, and require a form of value exchange that is not restricted by national borders. Financial inclusion is also a key consideration, and although the adoption of digital currencies can help achieve this, mobile and internet penetration is a prerequisite.
El Salvador and the Central African Republic are the first two countries to have adopted Bitcoin as legal tender, driven by factors such as financial inclusion, reliance on remittances, and a willingness to experiment with cryptocurrency. In the case of the CAR, the country plans to hold Sango Coin, a digital currency that reflects the health of its natural resources, in addition to Bitcoin.
What goals do countries aim to achieve by acknowledging BTC as legal tender?
Effective monetary policy is an important tool for countries to manage their economies. The credibility of a currency and the ability to adjust monetary policies during crises are key components in this effort.
Both El Salvador and CAR have recognized the need to lower the costs of money transfers into their countries. El Salvador’s president, Nayib Bukele, has estimated that the country could save up to $400 million in remittance fees by leveraging Bitcoin infrastructure. The Bitcoin lightning network, for example, has the potential to provide cheaper payment options compared to existing methods.
From a macroeconomic standpoint, the currencies of both countries have struggled to maintain their value against the U.S. dollar. El Salvador previously adopted the USD as its currency, but found that most of its exports were to the U.S. and that a weakening dollar was detrimental to its economy. Notably, unlike other Latin American countries, El Salvador did not experience high levels of inflation prior to adopting the USD.
Furthermore, by adopting the USD, El Salvador surrendered control over its monetary policy to a centralized entity in another country. As a result, the country has looked to BTC to address its key challenges related to remittances while mitigating the impact of U.S. dollar fluctuations.
What are the obstacles in implementing Bitcoin as legal tender?
Countries that adopt cryptocurrency as legal tender must be aware of the risks they are taking on, particularly with regards to liquidity and regulation. The crypto market is highly correlated with the U.S. equity markets, which means that changes in Federal Reserve policy can have a significant impact on crypto prices. This is a key consideration for countries that want to use cryptocurrency as legal tender, as they will be exposed to these risks.
While the lower cost of remittances is often cited as a reason for adopting cryptocurrency, it may not be a sufficient reason on its own. Many of these countries have low levels of digital and mobile penetration, which means that it may not be practical to scale BTC as a default currency unless there is a widespread network of Bitcoin ATMs.
Another challenge associated with adopting cryptocurrency as legal tender is the volatile nature of the crypto market. For instance, when Bitcoin fell by over 70% from its all-time high in November 2021, El Salvador made several purchases of the cryptocurrency. However, the fall in Bitcoin prices has been relentless, and most of these positions are currently held at a loss. This is not a sound economic policy for a country’s treasury to use citizens’ money to invest in a volatile asset that can lose 70-80% of its value in just six months. Furthermore, weak cash positions can impact a country’s ability to borrow from international markets.
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It is important to note that Bitcoin regulations are largely driven by national regulators, and banning BTC in one jurisdiction does not necessarily affect its legal status in another. However, when a country like the U.S. takes a hard line on cryptocurrencies through regulations, the market reacts accordingly. The resulting price action can impact all countries that use Bitcoin as legal tender or as a reserve currency. Countries must be prepared to navigate the regulatory landscape to ensure the stability of their economies when adopting cryptocurrency as legal tender.
Which countries have banned Bitcoin and other cryptocurrencies?
Governments seeking to safeguard their citizens from the risks associated with cryptocurrencies such as BTC should adopt an approach that involves educating and guiding them, while also implementing appropriate controls. Banning such a global technology and economic paradigm may not be the most effective method of achieving this goal.
Several jurisdictions have imposed bans on cryptocurrencies and cryptocurrency mining, such as China, which banned cryptocurrencies in 2021 due to its central bank digital currency, resulting in a decline in the BTC hash rate. However, the industry was revived by the emergence of Bitcoin miners in the United States. Similarly, India took a tough stance on cryptocurrencies in 2022, but as history shows, such bans tend to lead to increased cryptocurrency activity in other regions.
As such, until there is a coordinated global approach to ban cryptocurrencies, it is difficult to curb their growth. Attempts by countries to ban cryptocurrencies to protect retail investors are unlikely to succeed. A collaborative and democratic approach that emphasizes education and the implementation of appropriate controls will be more effective in achieving the goal of safeguarding retail investors.
