- El Salvador has become the first country to make bitcoin legal tender.
- To promote the cryptocurrency’s use, the El Salvadorian government has given $30 in free bitcoins to citizens who sign up for its national digital wallet.
- There is some confusion in, and outside of, El Salvador as to whether making Bitcoin legal tender would mean private businesses would have to accept it.
- Economist Jay L. Zagorsky explains what legal tender is, and what in means in the case of bitcoin and El Salvador.
The government even went a step further in promoting the cryptocurrency’s use by giving US$30 in free bitcoins to citizens who sign up for its national digital wallet, known as “Chivo,” or “cool” in English. Foreigners who invest three bitcoins in the country – currently about $140,000 – will be granted residency.
Panama is considering following El Salvador’s lead.
Does making bitcoin legal tender mean every store and merchant in El Salvador will now have to accept digital payments? If more countries do the same thing, what will this mean for consumers and businesses around the world?
What is legal tender?
Legal tender refers to money – typically coins and banknotes – that must be accepted if offered in payment of a debt.
The front of every U.S. banknote states “This note is legal tender for all debts public and private.” This statement has been enshrined in federal law in various forms since the late 1800s.
The greenback is not legal tender in just the U.S. El Salvador, for example, switched from the colon, its previous currency, to the U.S. dollar in 2001. Ecuador, Panama, East Timor and the Federated States of Micronesia also all use the dollar as legal tender.
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Do merchants have to accept legal tender?
But despite the definition above, legal tender doesn’t mean all businesses must accept it in payment for a good or service.
That requirement applies only to debts owed to creditors. The ability for a store to refuse cash or other legal tender is made explicit on the websites of both the U.S. Treasury, which is in charge of printing paper money and minting coins, and the Federal Reserve, which is in charge of distributing currency to the nation’s banks.
As the U.S. Treasury points out, there is “no federal statute mandating that a private business, a person or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise.”
And this would be no different if the U.S. made bitcoin legal tender. Private businesses would not be required to accept it.
There is clearly some confusion in El Salvador over the issue, however. Its original bitcoin law, passed in June 2021, states that “every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”
Why did El Salvador make bitcoin legal tender?
El Salvador is betting that being the first to open its doors completely to bitcoin will help boost its economy.
President Bukele said he believes this will encourage investors with cryptocurrency to spend more of it in his country. He even has a plan to have El Salvador’s state-run geothermal utility use energy from the country’s volcanoes to mine bitcoin.
The $30 given to every citizen who joins the cryptocurrency craze will temporarily stimulate the economy. However, the overall impact will likely be a short-term boost. The impact of similar payments in other countries, like COVID-19 stimulus payments, appear to end after people have spent the money. Moreover, it’s unclear El Salvador’s increasingly indebted government can even afford it.
Time will tell as to the benefits of bitcoin becoming legal tender in El Salvador, while there are well-known upfront costs. For instance, the Bukele administration has stated it plans to spend more than $200 million to support the rollout. We also saw Moody’s downgrade the country’s sovereign debt in part because of the activity, cited alongside other issues related to deterioration in El Salvador’s policy-making. Weaker sovereign debt rating translates to higher costs to taxpayers in supporting the country’s debt. It is unclear if El Salvador has the capacity to manage these costs.—Ashley Lannquist, Project Lead, Blockchain and Distributed Ledger Technology, World Economic Forum
What is the World Economic Forum doing about blockchain?
Blockchain is an early-stage technology that enables the decentralized and secure storage and transfer of information and value. Though the most well-known use case is cryptocurrencies such as bitcoin, which enable the electronic transfer of funds without banking networks, blockchain can be applied to a wider range of purposes. It has potential to be a powerful tool for tracking goods, data, documentation and transactions. The applications are seemingly limitless; it could cut out intermediaries, potentially reduce corruption, increase trust and empower users. In this way, blockchain could be relevant to numerous industries.
That said, blockchain also entails significant trade-offs with respect to efficiency and scalability, and numerous risks that are increasingly coming to the attention of policy-makers. These include the use of cryptocurrency in ransomware attacks, fraud and illicit activity, and the energy consumption and environmental footprint of some blockchain networks. Consumer protection is also an important and often overlooked issue, with cryptocurrency, so-called “stablecoins” and decentralized applications operating on blockchain technology posing risks to end-users of lost funds and also risks to broader financial stability depending on adoption levels.
Read more about the work we have launched on blockchain and distributed ledger technologies – to ensure the technology is deployed responsibly and for the benefit of all. We’re working on accelerating the most impactful blockchain use cases, ranging from making supply chains more inclusive to making governments more transparent, as well as supporting central banks in exploring digital currencies.
And the widespread adoption of bitcoin will likely take years. El Salvador has been installing 200 bitcoin ATMs to allow people to convert cryptocurrency into dollars.
Since just 30% of the Central American country’s population even has a bank account, I believe the U.S. dollar will still be used in El Salvador for a long time, even if its president wants to move toward bitcoin.