Bitcoin has grown significantly over the last ten years. It’s unbelievable to think that in 2010, a single Bitcoin was just a few cents and by 2017, the price had reached over $20,000. While in 2021, it reached an all-time high of over $68,000, and today, it sits at around $30 000 per coin.
This little internet network that started with a few hobbyists mining it on their laptops and supporting it as an alternative network and form of payment has turned into an internal medium of exchange and settlement network.
Today Bitcoin settles Billions in transactions every day, and several factors have contributed to the growth of Bitcoin.
These include:
- Increased interest from investors. Bitcoin has attracted a lot of attention from investors in recent years. This has driven up the price of Bitcoin, as investors have bid up the price in an attempt to get a piece of the action.
- Growing acceptance by businesses. More and more businesses are starting to accept Bitcoin as payment. This makes Bitcoin more valuable as a currency and drives up the price.
- Increased media coverage. Bitcoin has been getting attention in the media in recent years. This has helped to raise awareness of Bitcoin and has made it more accessible to new users.
Bitcoin started on the fringes with technologists adopting it, then early adopting retail investors and businesses. Now we’re moving into the phase where large institutional investors and nation-states are starting to take an interest in the asset.
Taking a position in Bitcoin as a nation-state is one way to get exposure to this network, while a more aggressive approach would be to legally push the currencies’ adoption within your borders through legal tender laws.
What is legal tender?
Legal tender is a currency that a government recognises as a valid form of payment for goods, services and payment for other financial obligations like debt, securities and taxes. When a currency is granted status as legal tender, it means that businesses in that country are legally required to accept it as payment should customers wish to settle in it.
In most countries, the national currency is the only legal tender, while certain countries might adopt another nation’s currency as dollarised nations.
In certain rare cases where a local currency has “failed”, or relationships between two countries are strong, these countries could have dual legal tender laws to support more than only the local currency.
Why do countries have legal tender?
There are many reasons why countries have legal tender. One reason is to provide a stable and reliable form of currency that can be used to facilitate trade and commerce. As a legal tender, the currency will be the most liquid market in that particular country, allowing individuals to settle payment for goods, services, salaries, and wages in this unit of account.
A legal tender would also be used to settle financial contracts like stocks, bonds and taxes with all pricing set in this unit of account.
Another reason is to give the government control over the money supply and to regulate the balance of payments, such as imports and exports.
But the most crucial reason for legal tender is you retain ownership over the productivity of your country’s citizens. By issuing the legal tender, the government can influence inflation and economic growth, a power that would be out of their reach if they used a currency they did not create.
How can Bitcoin become legal tender?
For Bitcoin to become legal tender, a country’s government must pass a law recognising it as a valid form of payment. This law specifies the terms Bitcoin could use, such as the amount of taxes payable on Bitcoin transactions.
The pros and cons of Bitcoin as legal tender
There are both pros and cons to Bitcoin becoming a legal tender.
Some of the pros include:
- Bitcoin is a decentralised currency, meaning it is not subject to government control. This could make it an attractive option for countries that are experiencing high inflation or economic instability.
- Bitcoin is a digital currency that can be easily transferred across borders. This could make it a more efficient form of payment for international trade.
- Bitcoin would be exempt from capital gains tax because it’s a currency and not seen as a financial asset that needs to be sold for currency.
- No need to convert your Bitcoin to purchase goods and services.
Some of the cons of Bitcoin as legal tender include:
- Bitcoin is a volatile currency, meaning its value can fluctuate wildly. This could make it a risky form of payment for businesses and consumers.
- Bitcoin is still a relatively new and untested technology. This means that there are still some risks associated with using it, such as the possibility of fraud or theft.
- Bitcoin education is not widespread and there is a steep learning curve on how to use it non-custodially.
- Bitcoin is a voluntary network, individuals shouldn’t be forced to use it, and merchants should not be forced to accept it as a settlement by law.
- Bitcoin funds are hard to recover if the keys are lost or stolen, and those who don’t favour personal responsibility will not be encouraged by the reality of holding your own keys.
- Bitcoin is not treated as a currency by other countries, which can create friction with countries unfriendly to BTC.
What does Bitcoin Legal tender mean?
As of now, not much; we only have one example of a Bitcoin legal tender out in the wild, which is fast approaching its second year in circulation. In September 2021, El Salvador became the first country to make Bitcoin legal tender, requiring all businesses to accept the cryptocurrency.Â
In an attempt to bootstrap adoption in the country, the Salvadorian government gave citizens financial incentives to download a national cryptocurrency app known as the Chivo Wallet. This custodial wallet would provide users access to a one-time payment once they KYC’d with their national ID.
Two years and a one-time handout have not been enough to fully convince everyone in the country to use Bitcoin as a method of exchange or holding funds, and the US dollar remains an option for those who don’t believe in Bitcoin.
El Salvador has seen a rise in interest in the country, with Bitcoin companies establishing headquarters in the region and wealthy Bitcoiners visiting, purchasing a holiday property or even moving there altogether to live on a Bitcoin standard.
Prime candidates for Bitcoin legal tender
In theory, developing nations like El Salvador are the ideal candidates for Bitcoin adoption.
- In a country where citizens rely exclusively on cash rather than credit or debit cards and have poor banking infrastructure
- If households have no bank account and do not have access to alternative neobanks or mobile pay solutions.
- If the local currency is higher volatility than Bitcoin
- If the local currency starts to devalue rapidly
- If there are sanctions on your local currency
In situations like this, a digital payment platform like Bitcoin could be a way to make the economy more inclusive and accessible. Since Bitcoin offers you a ready-made solution with features like:
- Bitcoin already has a global payment rail and connection with many international markets.
- Bitcoin is accepted globally, and there are very few places in the world where you cannot liquidate it for local currency.
- Bitcoin can be transferred instantly anywhere in the world.
- All the banking infrastructure is open source, and you can access multiple software solutions.
Governments would need to give up their ability to control user funds and devalue the currency through inflation, which is a temptation that very few can resist and acts as a major deterrent from adopting Bitcoin.
The future of Bitcoin as a legal tender
It is too early to say whether Bitcoin will become universally accepted as legal tender. However, several countries are considering making it legal tender, and the technology is still evolving.
Bitcoin could become a more mainstream form of payment in the future as it gradually picks up new users every day, and the market gets bigger and settles large payments with more liquidity.
