Official currency
El Salvador has legalized and uses Bitcoin as its base currency and through payment but what does that mean? Can we all use Bitcoin at some point?
For most of us who use traditional currencies, where their price does not change so easily, the fact of losing a piece or all the value of our savings overnight is something unheard of to us. It may sound strange to use another country’s legal tender as our own. But this is the fate faced by millions of people from smaller, developing economies. Which, to be honest, is not good if we are overpopulated.
Overcrowding and the need for a new kind of money
If you had been a citizen of Zimbabwe around 2007-08, all your savings in Zimbabwean dollars would have lost 99.99% of their value by 2009 thanks to an inflation rate of up to five billion percent. So, while you would still have Zimbabwean $10 and $100 notes, the country would issue trillion-dollar notes.
Like Zimbabwe, the unstable economy of many developing countries pushes them to rely on one or more foreign currencies instead of their own. Very often, the obvious choice for them is to use the world reserve currency, the US dollar, as legal tender. Today, countries such as Zimbabwe, Puerto Rico and Panama officially use the US dollar as legal tender.
But cryptocurrencies like Bitcoin are a game changer. Governments of developing countries are considering adopting Bitcoin as legal tender instead of using the US dollar or any other state-backed currency. For most people, this change raises the question: what makes Bitcoin suitable as legal tender for international economies?
We will find out in this article, but first let’s understand what a legal kind of money exchange is.
A new kind of money
You wake up in the morning, go for a run and on your way back, stop at Starbucks to have your breakfast café. Then you go through the grocery store to buy cereals, bread, and milk.
What you use to settle these transactions depends on where you live. If you are in the US, you are using the US dollar. Anywhere in the European Union, you use the euro. Or, if you are in El Salvador, then you have a few options, the US dollar or in this case Bitcoin which is also the legal tender of your country.
To put it simply, legal tender is anything that is legally accepted by the administrative authorities of a country as an appropriate medium of exchange for settling all kinds of transactions within the country. In addition, the law can also restrict citizens from using any other except for the designated legal tender as a means of exchange within the respective countries.
However, a country may not always print its own legal tender, as is the case in economies that have been replaced with the dollar, such as that of El Salvador. In contrast, another country with a more stable economy like the U.S. can print and assign its currency to citizens so that they have a more stable medium of exchange.
The problem with existing legal kinds of money
The value of traditional legal tender is governed by how well a government performs and how effective its policies are, both domestically and internationally. If your government cannot cope according to international standards, the value of the currency may fall causing high levels of inflation. In addition, fiat currencies as legal tender offer limited flexibility, as they are centered around a central entity and are only accepted within certain geographical boundaries.
Moreover, countries that use other nations’ currencies as legal tender are only burdened with more economic pressure, pushing them into a spiral of endless economic impoverishment. This leads some countries to consider Bitcoin as a more flexible alternative. So, let’s look at what’s so appealing about Bitcoin.
Is Bitcoin suitable as a legitimate type of money?
Since El Salvador accepted Bitcoin as legal tender, arguments about Bitcoin’s effectiveness as legal tender have intensified.
Some believe that using Bitcoin as a medium of exchange is extremely risky for ordinary people due to its short-term price volatility. Others say that Bitcoin is not for everyone, as not everyone can afford to pay its high transaction fees. After all, the mainstream media have made it obvious that Bitcoin consumes electricity equivalent to some nation-states. Some also fear that Bitcoin’s anonymity will provide the criminals with a safe circle for exchanging money and funding illegal activities.
So, given these concerns, does it still make sense to use Bitcoin as legal tender?
There is no clear answer to this, but there are good reasons why Bitcoin can be an effective legal tender. But there are also disadvantages, here we will look at both.
What makes Bitcoin suitable as a legal tender
- Inflation-resistant: Bitcoin has a stable availability of 21 million coins and cannot be printed like fiat currencies. This makes it inflation-resistant, and the funds you hold in Bitcoin cannot be devalued by “printing money”.
Moreover, Bitcoin has been around for more than 11 years now and has only had two years where the total annual change in its value fluctuated negatively. In contrast, the currencies of countries considering adopting Bitcoin faced severe inflation, causing a loss of livelihoods nationwide, which makes Bitcoin a much better alternative.
- Effective unit of account: By definition, a unit of account is intended to measure the value of a thing. In this regard, Bitcoin can be ideal. This is because one Bitcoin equals 100,000,000 Satoshi. And we can easily use Satoshi to name the value of goods and services of the smallest scale.
- Fast and cheap transactions: If we talk about speed and cost of transactions, Bitcoin is one of the fastest and cheapest ways to trade value anywhere in the world, thanks to the Lightning Network.
The efficiency of Bitcoin transactions on the LN (Lightning Network) makes Bitcoin extremely suitable for weaker economies with a significant influx of remittances. If citizens can receive Bitcoin payments from family members working abroad, hundreds of millions can be saved on fees paid to banks and financial service providers.
- Easy access for all: According to the World Bank, more than 1.7 billion adults worldwide are deprived of the possibility of traditional banking services. Unsurprisingly, most of these people who don’t have a bank account are from underdeveloped countries across Asia, Africa, and Latin America.
Adopting Bitcoin as legal tender can offer an easier alternative to opening bank accounts to make banking services available to them. This is because anyone with a smartphone can access and use Bitcoin-related services.
- In the process to become more environmentally friendly: Bitcoin consumes energy equivalent to a small country, and its energy demand is expected to increase only from here. But what is remarkable is that more Bitcoin supporters are starting to rely on renewable energy sources. If we want to trust some estimates, from 30% to 60% of the energy consumed by Bitcoin comes from renewable sources.
Even if the numbers are smaller, initiatives are being taken to make Bitcoin more environmentally friendly. For example, immediately after adopting Bitcoin as legal tender, El Salvador announced its plan to use the energy generated by its volcanoes to mine Bitcoin. We haven’t seen anything more eco-friendly than this, have we?
- Interoperability: Bitcoin transactions are pseudonymous. The details of each Bitcoin transaction, from the sender and recipient wallet addresses to the amount paid, are displayed in a transparent, public storage file. Therefore, it is practically wrong to accuse Bitcoin of being an anonymous currency for criminals. For someone seeking the true anonymity of their transactions, Cash would be a much better alternative, as it leaves no traces.
Even data from a 2021 Chain analysis report showed that in 2019, only 2.1% of all cryptocurrency transactions represented criminal activity. In 2020, the rate fell further to just 0.34%.
Disadvantages of Bitcoin as a new kind of money
Looking at the second side of the coin we must deal with no matter how much we might like Bitcoin. Like any other currency or medium of exchange that exists, Bitcoin has its drawbacks.
Bitcoin’s best-known drawback is its high volatility, but this is subjective to the fact that we compare it to a fiat currency in the short term. What is most critical is the technical understanding one needs to gain before using Bitcoin as a payment method. While most people today can use a smartphone, the use of Bitcoin still requires some knowledge. In addition, another important issue is Bitcoin’s dependence on the Internet, which puts it a step behind cash as it cannot be used in areas with poor or no internet connectivity.
Apart from these, what we mainly have are challenges, not disadvantages. Some of these are concerns about Bitcoin’s exposure to online threats, issues with its taxation, lack of widespread adoption, and so on.
Can Bitcoin dominate as a currency in the future?
Despite some challenges, people and governments have finally begun to see the true potential of Bitcoin. Whether all countries accept it as legal tender in their own country or not is still under discussion, but the change is happening. After El Salvador made Bitcoin legal tender, countries across Latin America and beyond have begun to consider this possibility. On the list are Panama, Paraguay, and Mexico, while other countries are expected to soon begin publicly declaring their intention to adopt Bitcoin as legal tender and their interest.
Overall, Bitcoin is becoming more and more popular day by day, and what the future holds for it will certainly be interesting.