Author: Che Kohler Translated by: Cointime.com 237
Bitcoin has grown a lot in the past decade. Incredibly, in 2010, one Bitcoin was worth only a few cents, and in 2017, the price was over $20,000. In 2021, it reached its all-time high of over $68,000, and today, it costs about $30,000 per coin.
What started as a small internet network with a few hobbyists mining on their laptops and supporting it as an alternative network and payment method has now grown into an internal exchange and settlement network.
Today, Bitcoin settles billions of dollars in transactions every day, and several factors have contributed to its growth.
These include:
1. Growing attention from investors. Bitcoin has attracted the attention of many investors in recent years. This has pushed up the price of Bitcoin as investors compete to raise the price in an attempt to get a piece of the pie.
2. Increased corporate acceptance. More and more businesses are beginning to accept Bitcoin as a payment method. This makes Bitcoin more valuable as a currency and drives up the price.
3. Extensive media coverage. Bitcoin has received a lot of attention in the media in recent years. This has helped to increase awareness of Bitcoin and make it more accessible to new users.
Bitcoin was initially popular only among technologists, then early adopters, retail investors and businesses. Now we are entering the phase where large institutional investors and countries are beginning to take an interest in the asset.
One way for a country to gain exposure from the Bitcoin network is to hold Bitcoin, but a more proactive approach is to promote its adoption within its borders through legal tender laws.
What is fiat currency?
Legal tender is money that a government recognizes as a valid form of payment and can be used to purchase goods, services, and pay other financial obligations such as debts, securities, and taxes. When a currency is granted legal tender status, it means that businesses in that country are legally obligated to accept it as a form of payment when a customer chooses to settle in that currency.
In most countries, the national currency is the only legal tender, while some countries may adopt another country's currency, such as dollarized countries.
In some rare cases, when the local currency "fails" or when two countries have close relations, these countries may create dual legal tender laws to support a currency other than the local currency. Countries create legal tender for many reasons. One of the reasons is to provide a stable and reliable form of money that can be used to facilitate trade and commerce. As legal tender, the currency will become the most liquid market in the country, allowing individuals to settle goods, services, wages and salaries in this unit.
Fiat money is also used to settle financial contracts such as stocks, bonds and taxes, and all pricing is done in this unit.
Another reason is to give the government control over the money supply and the balance of payments (such as imports and exports).
But the most important reason for fiat currency is to retain ownership of the value created to the country’s citizens. By issuing fiat currency, governments can influence inflation and economic growth in ways they wouldn’t be able to if they were using money they didn’t create.
How did Bitcoin become legal tender?
For Bitcoin to become legal tender, a country's government must pass a law recognizing it as a valid form of payment. This law dictates the terms under which Bitcoin can be used, such as the amount of tax that should be paid on Bitcoin transactions.
The pros and cons of Bitcoin as legal tender
There are both advantages and disadvantages to Bitcoin becoming legal tender.
Some of these advantages include:
1. Bitcoin is a decentralized currency, meaning it is not controlled by the government. This may make it an attractive option for countries that are experiencing high inflation or economic instability.
2. Bitcoin is a digital currency that can be easily transferred across borders. This may make it a more efficient payment method for international trade.
3. Bitcoin as a currency will be exempt from capital gains taxes because it is considered a financial asset that does not need to be sold.
4. There is no need to convert Bitcoin into the currency needed to purchase goods and services.
Some of the disadvantages of Bitcoin as a legal tender include:
1. Bitcoin is a highly volatile currency, and its value can fluctuate dramatically. This can make it a riskier payment method for businesses and consumers.
2. Bitcoin is still a relatively new and untested technology. This means that there are still some risks when using it, such as the possibility of fraud or theft.
3. Bitcoin education is not yet widespread, and the learning curve for using it in a non-custodial manner is relatively steep.
4. Bitcoin is a voluntary network; individuals should not be forced to use it, and merchants should not be forced by law to accept it as settlement.
5. Bitcoin funds are difficult to recover if lost or stolen, and people who are not inclined towards personal responsibility may not be interested in the reality of holding their own keys.
6. Bitcoin is not recognized as a currency by other countries, which may cause friction with countries that are unfriendly to Bitcoin.
As of now, Bitcoin doesn’t have much practical relevance as legal tender; we only have one example of Bitcoin legal tender, and it’s been in circulation for nearly two years. In September 2021, El Salvador became the first country to make Bitcoin legal tender, requiring all businesses to accept Bitcoin as a form of payment.
In order to promote the adoption of Bitcoin in the country, the Salvadoran government offers financial incentives to citizens to download a national crypto wallet app called Chivo Wallet. This custodial wallet allows users to receive a one-time payment after KYC verification using a national ID card.
However, two years and a one-time handout haven’t quite convinced everyone in the country to use Bitcoin for transactions or holding funds, and the U.S. dollar remains the choice for those who aren’t convinced.
El Salvador has seen a rise in interest in the country, with Bitcoin companies establishing headquarters in the region and wealthy Bitcoin holders traveling to the country, buying vacation properties, and even moving there to live on Bitcoin as a standard.
Top Candidate Countries for Bitcoin Legal Currency
In theory, a developing country like El Salvador is ideal for Bitcoin adoption.
1. In a country where citizens rely entirely on cash rather than credit or debit cards and where banking infrastructure is weak.
2. If the household does not have a bank account and does not have access to other neo-bank or mobile payment solutions.
3. If the local currency is more volatile than Bitcoin.
4. If the local currency begins to depreciate rapidly.
5. If the local currency is sanctioned.
In this context, digital payment platforms such as Bitcoin can be a way to make the economy more inclusive and accessible. Bitcoin can provide a ready-made solution due to its following characteristics:
1. Bitcoin already has a global payment system and is connected to many international markets.
2. Bitcoin is accepted worldwide, and there is almost no place where it cannot be exchanged for local currency.
3. Bitcoin can be transferred instantly to anywhere in the world.
4. All banking infrastructure is open source and you have access to multiple software solutions.
However, governments would need to give up the ability to control user funds and devalue the currency through inflation, a temptation that few can resist and a major barrier to Bitcoin adoption.
It is not certain whether Bitcoin will ever become a universally accepted legal tender. However, several countries are considering establishing it as legal tender, and the technology is still under development.
As Bitcoin attracts more new users every day, and its market size increases and liquidity improves, Bitcoin may become a more mainstream payment method in the future.