Unless citizens can demonstrate that they do not have access to the necessary technology, they can use bitcoin as a form of payment if BTC is treated as legal tender in their respective jurisdiction.
A nation’s central banks and regulators usually decide what is legal tender in their economy. This means that any form of value they deem fit to be legal tender can be used to pay for goods in stores. For example, $10 bills and $0.50 coins are legal tender in the United States;
Making bitcoin (BTC) legal tender means that when someone wants to pay for a cup of coffee, they can use BTC to do so. Without a central bank declaring bitcoin legal tender, the risk of accepting BTC for goods sold would be borne by merchants. If the central bank has explicitly declared bitcoin to be legal tender, then it becomes an official form of value exchange within the economy.
The rise of bitcoin and a few other decentralized cryptocurrencies has also prompted several central banks to consider digital currencies as a more robust alternative to fiat currencies. As a result, many countries, including China, the UK, the US, and India, are all working on their central bank digital currencies (CBDCs);
For these countries, the raison d’être of digital currencies is to achieve better traceability and control of each monetary unit in the economy. This traceability will help them to calculate taxes more accurately and identify money launderers, but more importantly to spot any accumulation of wealth and develop policies to keep it within their economy.
Generally, there are macroeconomic factors that a country seeks to manage by adopting a currency as legal tender. For bitcoin to be legal tender, these factors must coincide with visionary leadership.
Despite this, central banks are getting into digital currencies. Some countries have more fundamental problems that a simple digital version of fiat currency cannot solve. For example, countries like Argentina and Venezuela have suffered from hyperinflation for years and need a form of currency whose value comes from many sources other than their own economy. There are also countries like El Salvador, Panama, Guatemala and Honduras, where a large percentage of GDP comes from remittances. This paves the way for a form of value exchange that is not limited by national borders. For example, 24.07% of El Salvador’s GDP in 2020 came from remittances
Another consideration for countries is the degree of financial inclusion in their economies. While the customer journey around cryptocurrencies is by no means user-friendly, it must be said that hyperlocal experiments in building an ecosystem on bitcoin in countries like El Salvador have seen some success. As remittances are a major contributor to the economy, digital currencies can not only promote financial inclusion, but also save money on remittance fees.
It should also be noted that the regimes that deploy bitcoin as legal tender claim to bring financial inclusion to their population. However, financial inclusion must often be preceded by the penetration of mobile telephony and the Internet. Without the digital infrastructure, a digital currency alone will not be able to solve the problem of financial inclusion.
So, which countries adopted bitcoin as legal tender and how did they do it? El Salvador is the first country to adopt bitcoin as legal tender. Apart from the macroeconomic factors described above, the country had a leader who was willing to experiment with bitcoin. Since then, he has been a loyal ambassador for cryptocurrency;
The second country to adopt bitcoin as legal tender is the Central African Republic (CAR). The CAR is rich in natural resources such as gold and diamonds and its economy amounts to 2.3 billion dollars. However, financial inclusion is quite low there and the country depends on remittances. Apart from adopting bitcoin, the country also disclosed that 20% of its public treasury will consist of Sango Coin (SANGO), a digital currency that will reflect the health of the country’s natural resources.
Countries rely on effective monetary policy as a key lever to manage their economy. They therefore need a credible currency and the ability to maneuver policies around that currency in the event of a crisis.
Both El Salvador and CAR have indicated that they want to make money transfers to the country cheaper. The President of El Salvador, Nayib Bukele, has predicted a savings of $400 million on remittances when the country switches to Bitcoin infrastructure. By using the bitcoin lightning network, payments could be cheaper than existing methods.
On a macroeconomic basis, the currencies of these countries have generally struggled to hold their value against the US dollar. El Salvador began using the dollar as its currency, but soon realized that most of its exports were destined for the United States and that the weakening dollar was doing more harm than good to its people. Unlike other Latin American economies, El Salvador did not have very high inflation before adopting the dollar
Moreover, they had no control over monetary policy around the dollar, which is controlled by a centralized entity in another country. Therefore, the country turned to BTC to solve its main problems related to remittances, without being affected by the fluctuations of the US dollar.
There are liquidity and regulatory risks around the crypto market that a country will assume when using it as legal tender. As the cryptocurrency market is highly correlated to US stock markets, Federal Reserve policy changes will impact cryptocurrency prices.
The reason cited by most of these countries for adopting bitcoin is to reduce the cost of sending remittances to a very unbanked population. This may be a superficial reason, as most of these countries have very low digital and mobile penetration. Therefore, unless they can set up bitcoin ATMs all over the country, it would not be practical for them to make bitcoin a default currency.
The other challenge is the volatile nature of the cryptocurrency market. As BTC fell more than 70% from its all-time high in November 2021, El Salvador made several purchases of the cryptocurrency. Yet the fall in bitcoin prices has been relentless and most of these positions are currently held at a loss. For a country’s treasury to have used citizens’ money in a volatile asset that can lose 70-80% of its value in six months, it cannot be known for sound economic policy. Due to its low cash position, the country’s ability to borrow more in international markets is also severely affected.
On the other hand, bitcoin regulations are largely determined by national regulators. Due to the decentralized nature of cryptocurrency, banning BTC in one national jurisdiction does not directly affect its legal status in another jurisdiction. Yet, when a country like the United States cracks down on cryptocurrencies through regulations, the market reacts. The resulting price action may affect any country that uses bitcoin as legal tender or as a reserve currency.
Banning a global technology and economic paradigm like BTC is not the best approach for governments to protect their citizens from the risks of this asset class. It is by supporting them throughout their journey, by educating them and by implementing the appropriate controls that the protection of individual customers can be ensured.
Several bans of BTC, other cryptocurrencies and cryptocurrency mining have taken place across the globe. China banned cryptocurrencies in 2021 in light of its central bank’s digital currency, and this has also affected Bitcoin mining. As a result, BTC’s hash rate plummeted in 2021. But the industry was revived by an increase in the number of bitcoin miners in the United States;
In 2022, India took a tough stance on cryptocurrencies. If history is to be believed, whenever this asset class is banned in one part of the world, another region seizes the opportunity. Therefore, until there is a coordinated ban on cryptocurrencies around the world, it will be extremely difficult to curb the growth of BTC and digital assets in general.
Be vigilant and consult your financial adviser before making any investment decision. Mirror-Mag cannot be held responsible in the event of bad investments. Before using any third-party service, you should do your own research.