How Could Bitcoin Become Legal Tender?

What Is Legal Tender?

Legal tender is any form of payment that businesses have to accept by law in a given area. For example, the dollar is legal tender in the US and several other countries, while most of Europe uses the euro, and Britain uses the pound.

However, practically nobody was even discussing using Bitcoin as legal tender until late last year, when El Salvador announced its plans to become the first country to use Bitcoin for this role. And now that the Central African Republic has done the same, it’s possible that more countries will follow.

But before we get into which country could be next, let’s quickly look at the difference between fiat currencies, like the dollar, and Bitcoin.

Bitcoin vs Fiat Currencies: What’s the Difference?

Fiat currencies are centralized and controlled by a government-run authority (normally a central bank) or, in the US, the Federal Reserve. This gives governments more control over their currency, as they can print more of it as and when they need to.

However, many people argue that central banks creating money out of thin air – which isn’t backed by any tangible assets – causes unnecessarily high inflation, bubbles, and even financial crises.

So if Bitcoin were globally adopted as legal tender overnight, central banks and financial regulators would have very little power or say in how we spent our money. Nevertheless, this freedom would come with a cost.

While Bitcoin can free people from having to use a currency that is regularly devalued, other people can use it to pay for illegal goods and services without the government knowing. This is why it is unlikely that any government will want to use Bitcoin as their sole currency, or legal tender.

However, there is no rule saying any country has to exclusively use Bitcoin. Some countries, like El Salvador, use Bitcoin and a fiat currency. Let’s take a look at how and why El Salvador became the first country to institutionalize Bitcoin.

How Did Bitcoin Become Legal Tender in El Salvador?

El Salvadoreans first trialed Bitcoin back in 2019, in a coastal village called El Zonte. The people who lived in the village bought products and paid their bills in crypto.

And on September 7th, 2021, El Salvador became the first country to officially make Bitcoin legal tender. The new Bitcoin law was announced by President Nayib Bukele at a Bitcoin conference in Miami in June of the same year.

Bukele argued it would help El Salvadoreans who do not have bank accounts to save more money from their jobs and on remittance payments sent from friends or family members who work abroad.

Given that remittances account for about a fifth of El Salvador’s GDP, it’s been estimated that El Salvadoreans could save about $400 million per year on commissions alone by using Bitcoin instead of companies like Western Union.

President Bukele also hopes that, as the country is getting more friendly towards crypto, entrepreneurs would be more inclined to set up new businesses in El Salvador, which would earn some additional tax revenue.

To boost adoption after the Bitcoin law took effect, Bukele’s government built and released an official digital called Chivo, which is Salvadoran slang for “cool,” and gave each citizen who used the wallet $30 in Bitcoin. So far, about 56% of El Salvadoreans have downloaded this app, which means more people now have Bitcoin wallets than bank accounts in the country.

Bukele has also shared plans for a Bitcoin City, where Bitcoin and other cryptos would be mined using geothermal energy from the Conchagua volcano.

Media pundits consider the small but plucky Central American nation to be an experiment of sorts, the outcome of which will influence whether other countries follow their lead. So far, only one country has done so: the Central African Republic. Let’s take a look at how and why they also chose to make Bitcoin legal tender.

How Does CAR Implement Bitcoin?

Like most other former French colonies in Africa, the Central African Republic uses the French-backed CFA Franc as its currency. But as of April this year, Bitcoin is accepted as well.

The BBC managed to get hold of a local economist called Yann Daworo, who explained that Bitcoin would enable regional and national businesses to grow faster and more easily trade with others. He said, "Businessmen will no longer have to walk around with suitcases of CFA francs that will have to be converted into dollars or any other currency to make purchases abroad."

So while Bitcoin is unlikely to lift millions of its citizens out of poverty overnight, it could provide a welcome boost to the Central African Republic’s economy.

Could Other Countries Follow El Salvador and CAR?

El Salvador’s adoption of Bitcoin does not cement its status as a fully-fledged currency, but it could inspire other countries to follow its example. So far, no other country besides the Central African Republic has publicly stated its intention to do so, but there are a few likely candidates for who could be next.

Panama

Panama is often touted as the most likely country to make Bitcoin a legal tender, probably because its politicians drafted legislation to do so the day after El Salvador’s historic move. But as of yet, Panama has not taken the plunge.

But the bill did not make Bitcoin legal tender, as in El Salvador and the CAR. This means that Panamanian businesses do not have to accept Bitcoin as payment for their products if they do not want to.

Still, it is a step in the right direction, and Panama is probably closer than any other country to making Bitcoin legal tender.

Cuba

In 2020, the Trump administration banned Cuban immigrants from sending remittances through Western Union to their families in Cuba, which at the time was a multi-billion-dollar revenue stream for the nation.

This was during the height of the Covid-19 pandemic when people were locked down in their homes and desperate. Even before Trump’s ban, the US government’s sanctions had blocked the Cuban people from accessing everyday services like Amazon, PayPal, and Skype.

Cubans needed a way to receive remittances from their friends and family who worked abroad without any of the money going through American banks. And crypto turned out to be the perfect solution.

The Cuban government responded to the wave of Cuban crypto-mania by passing Resolution 215 in August last year, which officially recognized cryptos and promised regulation. Since then, businesses like cafes, restaurants, and shops have been accepting Bitcoin as a means of exchange.

However, similar to Panama, businesses do not have to accept Bitcoin if they do not want to, as it is not technically a legal tender.

What’s interesting about Cuba’s positive take on crypto is that you would not expect an authoritarian state to embrace a currency it does not control. Others, like China, have banned them entirely. Perhaps Cuba shows that with crypto, the benefits outweigh the costs!

Ukraine

The legislation also determined the legal status and classification of digital currencies and assets like Bitcoin, but it did not make Bitcoin legal tender.

Even before the framework passed, Ukraine was working hard to position itself as Europe’s leading crypto hub.

The Ukrainian government no doubt hoped that this regulation, and its friendly stance toward crypto businesses, would encourage entrepreneurs to start profitable, tax-paying companies there. However, few businesses are going to want to set up shop in Ukraine until the conflict with Russia comes to a close.

Still, given Ukraine’s friendly attitude towards crypto, and its determination to regulate it even with an ongoing war, you can see why it’s a likely contender for the next country to make Bitcoin a legal tender.

You might have noticed that the three countries we have looked at so far – Panama, Cuba, and Ukraine – are not high up on the GDP rankings, which leads us to our next topic: could a larger economy, like the US, adopt Bitcoin as legal tender?

Could Any Large Economy Adopt Bitcoin as Legal Tender?

The survey also revealed that younger Americans had a far more positive attitude towards crypto than older Americans, most of whom, by their own admission, do not really understand it. So if young people continue adopting Bitcoin at the rate they are now, we might eventually reach a point where more than half of Americans want Bitcoin as a legal tender.

However, the US government will probably always oppose Americans using Bitcoin alongside the dollar, because doing so could undermine the dollar’s status as the global reserve currency.

The status of a global reserve currency means that other countries hold in reserve in their central banks for international transactions. The US economy gains billions every year from the current state of affairs.

But if Bitcoin became legal tender in the US, that could change. And the Federal Reserve and the Treasury are unlikely to want to do anything to risk the dollar’s dominant status.

Still, it is possible that in years to come, the US government could allow American citizens to use Bitcoin to buy products within the US alongside the dollar, but again, it probably won’t become a legal tender.

The dollar potentially losing its global reserve currency status is one reason for America specifically to not change the role of Bitcoin. But there are other obstacles that might stop not only America but every other country from following in El Salvador’s footsteps as well.

Obstacles to Bitcoin Becoming Legal Tender

Before a bigger economy like the US even considers using Bitcoin as legal tender, its price will need to settle down, which could take a while. Over the past year, Bitcoin’s value has veered from highs of over $68,000 to lows of $26,000. Currently, it’s down more than 50% from its all-time high.

After price volatility, climate concerns are the second most commonly cited complaint about crypto, and one which could put a serious dent in Bitcoin’s chances of being used as legal tender in any large nation.

Perhaps rightly so, considering its mining process uses more energy per year than several countries combined. Global warming is at the forefront of most voters’ minds. This means very few politicians are willing to publicly support a technology that uses such vast quantities of energy, so even fewer would suggest we use it as legal tender.

Besides volatility and climate concerns, one last problem is that Bitcoin is difficult, if not impossible, to fully control. Financial regulators can only ban people from using it, they can’t influence Bitcoin directly. And what kind of regulator wants to allow a currency that it can’t control?

Governments face the same dilemma. Democratic countries might be forced to do so through referendums and popular votes, but almost nothing could convince an authoritarian regime like China to adopt Bitcoin, could it?

Well, if Cuba’s change of heart over crypto shows anything, it’s that even tightly controlled totalitarian countries can reach a position where they feel compelled to legalize crypto.