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What it Means to Make Bitcoin a Legal Tender
June 9, 2021, marks the first move that would make history in Bitcoin’s timeline. El Salvador passed a bill where 62 of 84 congressional voters would make Bitcoin a legal tender. Fast forward to September 7, and El Salvador became the first country to make Bitcoin a legal tender. In this article, we shall look into what it means for Bitcoin to be a legal tender in detail;
What is Legal Tender?
“This note is legal tender for all debts, public and private” will be the message on every U.S banknote. The government has enforced the statement in federal law in different forms since the 1800s.
Hence, legal tender refers to money, in coins and banknotes, acceptable if offered in debt payment. An asset classified as legal tender does not mean that citizens can use it for day-to-day uses. It depends from one country to another and how they define legal tender.
How it Affects Merchants
Legal tender, however, does not mean that merchants should accept it as a form of payment. The definition only encompasses debts that creditors have to pay. The U.S. treasury, which prints and mints coins, states so on its website. Even more, the Federal Reserve, which distributes currency to banks, confirms it on its site, too. Hence, you will find that a lot of companies such as airlines take credit card payments. On the other hand, small retailers only accept cash.
Any currency issued by the Fed Reserve is under the U.S. legal tender definition. Hence, no seller has the mandate to accept cash dollars as payment. The same applies to most countries where coins and banknotes are legal tenders.
Repercussions for the EU
In the EU, electronic money is not legal tender. Most states do not consider Bitcoin to be e-money. That’s why the new status as legal tender does not change this situation.
Still, there are anti-money laundering concerns. The AMLD5 defines virtual currencies as a digital representation of value, not issued by a central bank or public authority. They are not necessarily a currency. Instead, the people who use it as a means of exchange accept it as legal.
Initially, Bitcoin fulfilled all these elements of a virtual currency. However, since then, it has become a legal currency in the country. So, the question is whether that disqualifies Bitcoin and virtual currency under the AMLD5.
Regulation issues
In theory, Bitcoin exchanges and custodian wallet providers would no longer fall in the EU AML framework. If this is the case, other cryptocurrencies continue to exist under the legal framework. Also, regulators have done a lot about bitcoin anti-money laundering, and they are doubtful to let it all go away.
You should note that the legal tender definition only came later. Also, it still needs revisions to encompass Bitcoin as a legal tender. It would be wise to make an apparent distinction for virtual currencies as legal tender for regulatory purposes.
Low Remittance Fees
The United Nations and the G20 have made several appeals to cut remittance costs. However, the fees that migrants must pay to send their money home are still scandalously high.
The World Bank found the average worldwide sending cost of $200 is over $13. The amount is significantly more than the 3% over the Sustainable Development Goal target. However, in 2020, countries of low and middle incomes received $540 billion of remittances. It was just slightly less than the 2019 total of $548 billion.
On the other hand, it was much larger than foreign direct investment inflows ($259 billion in 2020). Also, it was more significant than development aid from overseas ($179 billion in 2020). Reducing the fees by only 2% could increase remittances by as much as $16 billion per year.
Coordinated cross-border measures are needed promptly to ensure that Bitcoin and its derivatives in developing nations cause more harm than benefit. Bitcoin and other low-cost alternatives to traditional banking will appeal increasingly to people. That’s because the centralized system lacks significant reform.
Taking Care of the Unbanked
However, the only problem is not hefty fees. Many migrants do not have bank accounts in their home nation. Also, their families may be among the world’s 1.7 billion without access to bank services. With Bitcoin, one only needs a digital device and internet connection to have a wallet.
In addition, some international migrants may have to send funds to nations that do not have access to banks. For instance, they cannot perform cross-border transfers to states like Syria or Cuba.
As Bitcoin becomes legal tender, citizens have access to digital wallets to carry out transactions. It can also boost the growth of P2P digital infrastructure overall, which has made a significant contribution to financial inclusion.
High Volatility May Destabilize the Economy
Having two tenders is a good idea for diversifying payment means in a given country. However, there’s a problem when one of them is a highly volatile currency that can change its value in just a minute.
Since citizens can use Bitcoin as a legal tender to pay debts, look at this scenario. When one owes a debt in bitcoin, there are several arising issues. Who decides how many bitcoins are under ownership by the end of a specific period? Will the decision be based on the Bitcoin price at the time of debt or time of repayment? Here, keeping in mind that just a few days could cause a massive difference in the price.
With this in mind, if the buyers expect the price to rise, the most obvious thing is to wait. If the prices were going to fall, merchants would not accept the payment. Hence, the U.S. dollar still applies in most transactions.
Conclusion
El Salvador is the first country to adopt Bitcoin as legal tender is a significant milestone for the cryptocurrency. It has taken crypto 12 years to become a country’s official currency, and that is impressive. Also, in terms of regulation, this is the furthest it has come.
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The question of whether other countries will follow the move remains unanswered. However, the movie is an opportunity to test out the practicability of bitcoin as a country’s currency. Of course, El Salvador has faced a lot of negativity. About two-thirds of its population is against the use of bitcoin as a legal tender. President Bukele is optimistic that he can boost the economy and encourage investors to spend crypto in his country. Well, time will tell.
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