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Game Over! Bitcoin as Legal and Illegal Tender - Crypto vs. Fiat Currencies

Bitcoin debuted in 2009. It has been through several bubbles, though it hit an all-time high in April of 2021. It has caused quite a bit of debate, too. Is it a currency, a commodity, an investment, or something else? Should it be legal or illegal? The answer to that last question depends on where you live.

What Is Legal Tender?
“Legal tender” is money that a vendor must accept as payment for goods and services. This is almost always the national currency. Money substitutes like checks and credit card numbers are used in place of cash, but vendors don’t have to accept them.

What is the opposite of legal tender?
Currencies may be used but not have legal protection. In the United States, you can find restaurants accepting Mexican pesos, but no one is forced to do so. And you could barter with gold coins or cigarettes, but the government won’t accept them as payment for speeding tickets or taxes.

Where Is Bitcoin Legal Tender?
In June of 2020, El Salvador became the first country on the planet to make Bitcoin legal tender. This means that businesses must be able and willing to do business with the cryptocurrency instead of merely having the choice to accept it as payment. The government is facilitating this by giving every citizen $30 in Bitcoin when they download the government app. Furthermore, the government will accept tax payments in Bitcoin.

Why Is El Salvador Bucking the Trend?
El Salvador has a history of being the exception when it comes to money. El Salvador adopted the United States dollar as its official currency in 2001 in something called “dollarization”. They got rid of the Colon currency and shifted to the American dollar. The goals were to slow inflation in the country after its destructive civil war and more tightly integrate El Salvador into the global economy. Adopting a benchmark currency like the U.S. dollar did all of this. A side benefit of adopting the dollar was that it essentially eliminated currency conversion fees on the several billion dollars in remittances immigrants from El Salvador sent back home. The downside is that it leaves El Salvador at the mercy of American economic policy.
De-dollarization would be difficult for El Salvador. While dollarization was unpopular, introducing a new national currency brings back the risk of rampant inflation. Adopting a second legal currency independent of American politics is one way to make that possible. Furthermore, it reduces the risk of rampant inflation in El Salvador because President Joe Biden is printing too much money. This is why El Salvador has adopted a second currency free of U.S. regulation but one widely used in the U.S. After all, El Salvador’s economy is closely linked to that of the United States. (Roughly forty percent of their exports go to the United States.) And that’s aside from the sheer number of people who go from El Salvador to the U.S.
Yet Bitcoin could be used to lower the cost of the two million Salvadorans in the United States sending money back to their home country. Remittances from high-income countries to low-income countries totaled 550 billion dollars in 2019. A World Bank study found that a $200 remittance can incur fees of anywhere from 5% to 9% depending on the destination. The fees for transferring money via Bitcoin are infinitesimal, but you’ll still have to deal with currency conversion fees. Reducing these fees will have a significant impact on El Salvador’s economy. This is because remittances account for nearly a quarter of El Salvador’s GDP. Reduce transaction fees from 7% to 2%, and the recipient gets 5% more money.
A side benefit of using cryptocurrencies for remittances is faster transactions.

Where Is Bitcoin Illegal?
Bitcoin has been banned in several countries. Why? There are fears that it could be used for illegal purposes such as money laundering or circumventing capital controls various governments have in place.
China essentially banned Bitcoin. All payment processors in the country are prohibited from transacting in it, and cryptocurrency exchanges are banned. Algeria, Nepal, Pakistan, Bolivia, Columbia, and Ecuador banned it.

What Is the Future of Cryptocurrencies?
Bitcoin bans are the exception, not the rule. Most countries are simply increasing regulation of cryptocurrencies. Nations like Lithuania, China, Singapore and Ecuador have their own cryptocurrencies. Yes, Ecuador banned Bitcoin while launching its own cryptocurrency back in 2015. This suggests that independent cryptocurrencies like Bitcoin will exist alongside digital national currencies, at least on the global market.

The real question is: will various nations continue to shutdown free market virtual currencies as they invent their own versions of it, or will they allow them to exist side by side?