Bitcoin Adoption: What Exactly is Legal Tender?
| — Legal tender is a nationally accepted medium of exchange issued by the national governments. Some nations with weaker economies and hyperinflation are forced to rely on and use currencies of other stronger economies.
— Some nations with weaker economies are considered alternatives to fiat currencies. As the first and most popular cryptocurrency, Bitcoin came into consideration.
— For these reasons, El Salvador adopted Bitcoin as legal tender, becoming the first nation worldwide to do so.
El Salvador has made Bitcoin legal tender – but what is legal tender?
For most of us from stable economies, losing a part or whole of the value of our life-long savings overnight can be an alien concept. It may sound strange to use some other country’s legal tender as our own. But that’s the fate millions of people from developing economies face. And hyperinflation is to blame.
Hyperinflation and the Need for a New Legal Tender
If you were a citizen of Zimbabwe around 2007-08, all your savings in Zimbabwean dollars would’ve lost 99.99% of its value by 2009 — courtesy of an inflation rate as high as five billion percent. The government just kept printing money, severely affecting its value.
This tale is all too familiar. Plenty of nations around the world use fiat currency from another country that isn’t subject to the same volatility. As the world’s reserve currency, many countries opt to accept the U.S. dollar, as legal tender. Today, El Salvador, Zimbabwe, Puerto Rico, and Panama accept the U.S. dollar as legal tender.
But cryptocurrencies such as Bitcoin are turning the tide. Governments of developing nations are considering adopting Bitcoin as legal tender instead of using the U.S. dollar or any other state-backed currency. For most people, this change begs the question: what makes Bitcoin a suitable legal tender for national economies?
We’ll dive into that, but first, let’s understand what legal tender is.
What Is Legal Tender?
Legal tender is anything that the governing body of a country legally accepts as a suitable medium of exchange for settling all kinds of transactions within the country. Besides, the law may also restrict citizens from using anything other than the specified legal tender as a medium of exchange within respective countries.
You wake up in the morning, go for a run, and on your way back, stop at Starbucks to grab your morning latte. Then you stop by the grocery store to buy some cereal, bread, and milk. What you use to settle these transactions depends on where you’re living. If you’re in the U.S., you use the U.S. dollar. Anywhere in the Euro Zone, you use the euro.
If you’re in El Salvador, then you have a couple of options; the US dollar or, in that case, Bitcoin. If the government accepts the currency as a medium of exchange it counts as Legal tender for that country.
The Problem With Existing Legal Tenders
The value of a traditional legal tender is governed by how well a government is performing. It is also about how effective its policies are, both domestically and internationally. If your government fails to perform well by international standards, the value of the currency can fall drastically. Causing high levels of inflation. Besides, fiat currencies as legal tender offer limited flexibility as they are centered around a central entity and are accepted only within specific geographic boundaries.
Unfortunately, countries that use currencies of other nations as their legal tender are then burdened with relying on another nation for their own country’s wealth. This often pushes them into a spiral of never-ending economic misery. To avoid handing over power to external nations, several countries have considered Bitcoin as a more flexible alternative.
What Makes Bitcoin an Effective Legal Tender?
1. Resistant to Inflation: Bitcoin has a fixed supply of 21 million coins and it cannot be printed like fiat currencies. This makes it resistant to inflation: there’s no centralized entity in control of Bitcoin that can choose to print more coins.
Bitcoin was the first cryptocurrency, and has continued to be the largest and most popular since its launch. Since then, it has been on a steady upward trajectory. Even with its periods of volatility, Bitcoin has maintained its value much more effectively than many fiat currencies around the world.
2. Efficient Unit of Account: By definition, a unit of account is meant to measure the value of something. In that regard, Bitcoin can be a suitable one. That’s because one Bitcoin equals 100,000,000 satoshis. And you can easily use satoshis to denominate the value of goods and services of the smallest scale.
3. Fast and Cheap Transactions: Speaking of transaction speed and costs, Bitcoin is much quicker than traditional financial institutions. A transaction on the Bitcoin network also costs much less than international banking services will charge, especially when reaching countries with economic instability.
The cost-effectiveness of Bitcoin transactions makes Bitcoin highly suitable for weaker economies with a substantial inflow of remittances. Using a Bitcoin wallet, anyone around the world can access funds without paying fees to middlemen.
4. Easily Accessible to All: According to the World Bank, more than 1.7 billion adults globally are devoid of traditional banking services. It’s no surprise that a majority of these unbanked people are from developing countries across Asia, Africa, and Latin America. Adopting Bitcoin as a legal tender can offer an easier alternative to opening bank accounts. Which can make banking services available to them. That’s because anyone with a smartphone can buy Bitcoin.
5. Transparent: If at all, Bitcoin transactions are pseudonymous. The details of every Bitcoin transaction, from sender and receiver wallet addresses to the amount paid, get listed on a transparent, public ledger.
While many accuse Bitcoin of being an anonymous currency for criminals, this is quite short-sighted. For someone seeking true anonymity of their transactions, cash would be a much better alternative as it leaves no trace.
Downsides of Bitcoin as Legal Tender
This is the second side of the coin to face, no matter how much anyone may like Bitcoin. Like any other currency or medium of exchange in existence, Bitcoin has its set of drawbacks.
The most commonly discussed drawback of Bitcoin is its volatility, but that’s subjective to the comparative nature in the short term with a fiat currency. What’s more critical is the technical understanding one must acquire before using Bitcoin as a mode of payment. While most people today can use a smartphone, using Bitcoin can still require some education. Further, one more considerable issue is Bitcoin’s reliance on the internet. This sets it a step behind cash as it cannot be used in regions with poor or no internet connectivity.
El Salvador and Cryptocurrency
Since El Salvador accepted Bitcoin as a legal tender, the arguments about Bitcoin’s effectiveness have grown.
Some believe that using Bitcoin as a medium of exchange is highly risky for common people due to short-term BTC price volatility. Others say that Bitcoin is not for everyone as not everyone can afford to pay its high transaction fees. Besides, the mainstream media has made it quite apparent that Bitcoin consumes electricity equivalent to some nation-states. Some also fear that Bitcoin’s anonymity will offer criminals a safe circle to exchange money and fund illegal activities.
To counteract their claims, data from a 2021 Chainalysis report showed that in 2019, only 2.1% of all cryptocurrency transactions represented criminal activity. In 2020, the percentage further dropped to just 0.34%. So although there are criminals on the blockchain, its transparency is quite impractical for committing crimes.
Can the Future Be Bitcoin?
Despite some challenges, people and governments have finally started seeing the true potential of Bitcoin. Whether all countries accept it as a legal tender in their country or not is still up for debate. Although the change is happening. After El Salvador made Bitcoin legal tender, countries across Latin America and beyond have started considering that possibility. On the list are Panama, Paraguay, and Mexico, with others expected to soon start publicly displaying their intent to adopt Bitcoin as legal tender.
All in all, Bitcoin is growing bigger and more popular by the day. What the future holds for it is surely going to be interesting. So, be ready for a roller coaster ride as the world transitions into this new age economy.
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