Bitcoin as Legal Tender: What’s Next?
In June 2021, El Salvador announced the law that adopted Bitcoin as legal tender from September 2021. This economic move by the president of El Salvador, Nayib Bekele, has caused ripple effects, as more countries plan to follow El Salvador’s lead.
A recent poll by YouGov, an international online research and data analytics firm, shows that 27% of 4,912 US residents surveyed support making Bitcoin legal tender in the United States. This shows the increasing popularity of Bitcoin and cryptocurrency.
In this blog post, we will share an overview of the current industry status of Bitcoin as legal tender.
Index
What is Legal Tender?
Cryptocurrencies as Financial Instruments
Countries Where Cryptocurrencies are legal
What is Bitcoin?
Why does Bitcoin have value?
How is the Monetary valuation of Bitcoin Calculated?
Bitcoin as Legal Tender
Pros of Bitcoin as Legal tender
Cons of Bitcoin as Legal Tender
El Salvador Adoption of Bitcoin as Legal Tender in 2021
The implications of Bitcoin Adoption to El Salvador’s Economy
Countries To Adopt Bitcoin as Legal Tender in 2022
Paraguay
Panama
Cuba
Ukraine
Other Governments and Their Bitcoin Policy
The U.S. Government Stand on Bitcoin
Russia and Bitcoin
China Ban and How It Affects Bitcoin
What is Legal Tender?
A legal tender is anything the law recognizes as a means of payment for financial transactions. It is the legally recognized money within a political area (country). Legal tenders can be used for the economic functions of money. So, you can use legal tenders to settle bills, pay taxes, and legal fines. The legal tender laws obligate a creditor to accept a legal tender and prevent using anything else as money in the country.
Legal tenders can also be used for additional functions like monetary policy-making and currency circulation. They also give the central bank the power to manipulate, devalue, and debase the currency for seigniorage and meet its trade needs.
Generally speaking, countries’ national currencies are automatically legal tender in that country. However, other currencies can also serve as legal tender. For example, El Salvador in 2001 legalized the U.S. Dollars as legal tender for monetary stability of the country’s national currency. The government further adopted Bitcoin as a legal tender in 2021, becoming the first country in the world to do so.
Therefore, both USD and Bitcoin are legal tenders that can be used for financial transactions in El Salvador. The Republic of Marshall also adopted a cryptocurrency, SOV (Sovereign), as a legal tender in 2018.
The world’s exponential shift to online-based transactions requires other alternative forms of currencies as legal tenders.
Cryptocurrencies as Financial Instruments
What are Cryptocurrencies?
Cryptocurrencies are virtual/digital currencies secured by cryptography. They are designed to work as a medium of exchange. Cryptocurrencies are encrypted and built on blockchains which makes them extremely difficult to counterfeit.
A blockchain is an open, distributed ledger that records all transactions as code stored as a block and linked to previous transactions. Think of the blockchain as a checkbook/transaction book distributed across many computers worldwide. The software records new transactions and updates all copies of the blockchain immediately.
Before any transaction is stored on a blockchain network, it must be validated through a Proof-of-Work or Proof-of-Stake consensus mechanism to prevent fraud. Unlike national currencies, cryptocurrencies are not controlled by any central authority. Therefore, they are technically immune to government interference or manipulation. Furthermore, they are not susceptible to single failure points that come with having a central body control monetary activity.
Cryptocurrencies as Financial Instruments
Cryptocurrencies represent a more convenient way of transferring funds and carrying out transactions. Transactions are carried out within a short period with lower transaction fees. You can also send money to other countries without a long processing period.
All these aspects combined with security and decentralization make cryptocurrencies excellent financial instruments. However, there is still an ongoing debate: Are cryptocurrencies legal?
The answer to that question depends on the jurisdiction. The legality of cryptocurrencies varies from one political jurisdiction to another. On some countries, the government has already legalized cryptocurrencies whereas on other countries, cryptocurrencies are totally banned (illegal).
Some governments allow cryptocurrencies, but they are not considered a payment method or there is a banking ban whereas other governments are still quite skeptical so there are no regulations on crypto yet. The scenario varies a lot depending on the jurisdiction.
Countries Where Cryptocurrencies Are Legal
Cryptocurrencies are legal in most countries in Europe, including the United Kingdom, France, Germany, Spain, Portugal, Sweden and Norway. The United Kingdom in particular, considers Bitcoin unregulated and treats it as a “foreign currency.”
Cryptocurrencies are legal in the United States. Bitcoin is classified by the U.S. Treasury as a convertible decentralized virtual currency. They are also legal in Mexico and Canada; however, there is a banking ban on cryptocurrencies in Canada.
Most countries in Africa don’t have any legislation regarding cryptocurrencies. It is legal in South Africa, Angola, and Mauritius. It is also legal in Nigeria and Namibia but with a banking ban.
Cryptocurrencies are legal in most Central American countries, including El Salvador, Nicaragua and Costa Rica. Costa Rica doesn’t consider them as currencies and they can’t be traded on its national payment system. Crypto assets are legal in some Caribbean and South American countries, including Jamaica, Argentina, Brazil, Chile and Venezuela. It is legal to certain extents in Ecuador and Colombia with a banking ban.
The legality of cryptocurrencies is mixed in Asia and the Middle East. It is fully legal in Japan, South Korea, Thailand, Singapore, Malaysia, Uzbekistan, the Philippines and Israel. Cryptocurrencies are legal but with a banking ban in countries like the United Arab Emirates, Qatar, Saudi Arabia, Indonesia, Jordan, Turkey and Taiwan.
There is a total ban on the use of cryptocurrencies in the following countries: China, Egypt, Nepal, Bangladesh, Morocco, Iraq and Bolivia.
What is Bitcoin?
Bitcoin is the first and largest cryptocurrency in the world. Bitcoin is a peer-to-peer decentralized network powered by its users without middlemen. It is also secured by cryptography.
Bitcoin transactions are verified on Bitcoin’s Blockchain – a transparent open-access ledger. New bitcoins are created through the “mining” process, also used to validate transactions. Miners race to solve mathematical puzzles to validate new transactions on the blockchain network and create new blocks linked to the previous transactions. The first miner to complete this problem is rewarded with bitcoin.
The computing power and electricity required to validate transactions and mine bitcoin makes it almost impossible to hack the network as you’d need to control 51% of the hashing power. The sheer amount of money, computing power and logistics involved in the hacking process makes it almost impossible though theoretically feasible. This makes Bitcoin a trustless protocol because you don’t have to trust a third party to validate transactions.
Why Does Bitcoin Have Value?
Currencies are valuable because they can act as a store of value and exchange units. But unlike fiat currency that generates its value because it is issued by a monetary authority and used widely along an economy, Bitcoin is decentralized and isn’t backed by any central authority. So, why is Bitcoin valuable?
The primary source of Bitcoin’s value lies in the restricted supply and increasing demand. Its value is a function of its scarcity. In simple terms, Bitcoin is valuable because people think it will become more valuable. The higher the demand, the higher the price.
Bitcoin also has limited supply; it was stipulated in the whitepaper that only 21 million Bitcoin will be in existence. Another theory for how Bitcoin gets its value is through the marginal cost of production. That is the cost it takes to mine a bitcoin. As the computing power and energy cost continue to increase, so does the price of Bitcoin.
How is the Monetary Valuation of Bitcoin Calculated?
Since Bitcoin is a decentralized network, it is not subject to fiat monetary policies. Instead, Bitcoin prices or the monetary valuation are affected by the following:
- The supply and market demand.
- Government regulations.
- Levels of adoption.
The market demand of Bitcoin continues to be a contributing factor to its price. All other factors eventually cause an increase or decrease in demand, affecting the Bitcoin price. For example, the China ban on cryptocurrencies caused a drop in the market price.
Bitcoin as a Legal Tender
As legal tender, Bitcoin can be used to settle any debt like taxes, public/private charges, and business dues. It can also be exchanged for its value in goods and services, i.e., you can use it to pay for services. However, that is not true in all cases. In many countries, business owners are not obligated to accept all forms of legal tender in trade.
Pros of Bitcoin as a Legal Tender
Resistant to Inflation
Unlike traditional currencies, Bitcoin is resistant to inflation. The fixed supply and controlled production of BTC makes it resistant to unexpected inflation rates. Governments and central banks can’t decide to print more BTC whenver needed triggering inflation afterwards.
No Censorship
Bitcoin is a peer-to-peer decentralized network. You don’t need to trust any third party before carrying out transactions. You have complete control and can execute payments directly from your wallet. Bitcoin is also ideal for cross-border transactions since there are no restrictions.
Transactions Are Fast & Cheap
Transactions only take minutes on the Bitcoin network, even if you’re doing cross-border transactions. The transaction fees are also cheap compared to banking fees. This makes Bitcoin a much more affordable way of remitting money and making cross-border payments.
Privacy and Transparency
The Bitcoin network is private but also transparent as everybody has access to the decentralized ledger. Nobody can identify users unless they reveal their wallet addresses and there are many ways to protect your privacy on Bitcoin.
Accessibility
The Bitcoin network is accessible to everyone with a wallet and an internet connection. There is no need to worry about meeting complex requirements before opening a wallet or making a payment. All you need is an internet connection.
Cons of Bitcoin as a Legal Tender
Price Volatility
Bitcoin price is quite unstable, so it is commonly referred to as a speculative asset. The price is affected by several things as previously discussed. Uncertain and volatile price movement can cause people to incur losses during transactions.
Lack of Regulation
A significant advantage of Bitcoin is its decentralization, making it difficult to regulate. This can also be a downside to Bitcoin’s function as legal tender for many countries.
El Salvador Adoption of Bitcoin as Legal Tender in 2021
In September 2021, El Salvador became the first country to adopt Bitcoin as legal tender. It was passed into law in June 2021 and took effect on September 2021. This law makes financial services more accessible to people in the country as only about 30% has a bank account and around 70% remain unbanked.
In less than three weeks after the adoption of BTC as legal tender, there were almost as many Bitcoin users as bank users. To encourage the widespread adoption of Bitcoin in the country, El Salvador took the following steps:
- Active purchases of bitcoins.
- Installation of 200 Bitcoin ATMs across the country.
- New virtual wallets with a $30 sign-up bonus.
- A plan to use the geothermal energy to mine BTC.
- Immediate permanent residence to anyone investing at least 3 BTC in the country.
The Implications of Bitcoin Adoption to El Salvador’s Economy
Since Bitcoin’s adoption, the country holds at least $1,801 bitcoins, worth about 2% of El Salvador’s listed reserves. Bitcoin adoption might just be what the country needs to move the economy as El Salvador depends on getting dollars by borrowing or earning them.
The government earns dollars via exporting & remittances. However, if these two sources don’t provide enough dollars to meet domestic needs, dollars must be borrowed from international markets and this has dire implications for the economy. Adopting Bitcoin as a second legal tender can help solve this problem:
- It is easier and faster for people to send remittances.
- People can pay for goods and services directly with BTC.
- The diversification Bitcoin brings to the economy, creates several opportunities to generate profit.
- The adoption of Bitcoin as a legal tender increases the country’s attractiveness for BTC endorsers.
- The government is also planning to release Bitcoin mutual bonds in March 2022.
El Salvador’s government can increase its reserves and GDP, reduce government costs and free up money for social welfare through Bitcoin adoption. However, there’s some backfire as usual with new technologies.
El Salvador has come under serious fire from monetary organizations like the IMF to remove Bitcoin as legal tender. The move has also muddied the government’s plan to borrow $1.3 billion from the IMF and has also affected the country’s credit rating as agencies continue to downgrade its credit score.
Countries To Adopt Bitcoin as Legal Tender in 2022
Paraguay
Following El Salvador’s adoption of Bitcoin as legal tender, Paraguay has moved to legalize Bitcoin. A member of Paraguay’s Chamber of Deputies, Carlitos Rejala, proposed a bill to regulate and legalize cryptocurrencies in the country. Carlitos is also set to run for the presidential election in 2023. One of his major agendas is the adoption of Bitcoin as the country’s official currency.
Panama
It’s no surprise that the country is moving to legalize Bitcoin as legal tender. Although no law has been passed yet, Panama is on its way to becoming the second country to adopt Bitcoin as legal tender.
Cuba
The Cuban government officially recognizes cryptocurrencies and regulates them. Their citizens can use cryptocurrencies to make money transfers and receive payments. The country is also taking steps to make Bitcoin legal tender. This came shortly after the tightening regulations by the U.S. on money transfers between the U.S. and Cuba.
Ukraine
Ukraine adopted a law to regulate and legalize cryptocurrency in September 2021. The country is positioning itself to become the crypto hub of the world through low taxes, many highly talented engineers and light paperwork.
Other Governments and Their Bitcoin Policy
The U.S. Government Stand on Bitcoin
The U.S. Department of Treasury defines Bitcoin as “convertible currency with an equivalent value in real currency or one that can act as a substitute for real currency.” The Department’s Financial Crimes Enforcement Network (FinCEN) has been issuing guidance on Bitcoin since 2013 and the IRS classifies Bitcoin as taxable property. The government is planning to regulate cryptocurrency amidst its rising popularity and Joe Biden is also preparing an executive order on cryptocurrencies to be released soon.
China Ban on Bitcoin
On the other hand, China imposed a complete ban on all cryptocurrency transactions, including mining, in September 2021. The People’s Bank of China cites the reason for this ban as the growing risk that cryptocurrencies represent to China’s financial system.