In the past few years, a few countries have legalized Bitcoin as an official monetary tool in their countries. This text will explore everything you need to know about countries legalizing Bitcoin and making it a legal tender.
The meaning of Bitcoin as a Legal Tender
In most cases, a country’s central banks and authorities choose what is accepted as legal money in its financial system. This implies that consumers can choose the easy way to earn litecoin (LTC) for store items using any legal method. For instance, in the U.S., $10 banknotes and $0.50 coins are accepted as legal payment methods.
When Bitcoin (BTC) is declared legal money, consumers can use it as payment for items like coffee. Shop owners would bear the risk of taking Bitcoin in exchange for products sold without a central bank recognizing it as legal money.
Bitcoin is lawful if the central bank explicitly declares it to be such. It becomes a recognized method of value exchange inside the economy.
A few central banks have begun to view digital currencies as a more reliable alternative to fiat currencies due to the growth of Bitcoin and a few other decentralized cryptocurrencies. As a result, numerous nations are developing their central banks’ digital currencies, including China, the United Kingdom, the United States, and India (CBDC).
The justification for adopting digital currencies in these nations is to improve the traceability and control of each unit of currency used in the economy. This traceability enables them to detect money launderers and compute taxes more precisely.
Still, more crucially, they will be able to recognize any wealth buildup and create policies to keep it inside their economies.
Factors of Bitcoin Adoption for a Country
A nation usually seeks to control macroeconomic conditions by making a legal currency tender. Visionary leadership must meet these conditions to establish Bitcoin as legal cash.
Despite this, central banks are embracing digital money. There are other nations with more severe issues that a simple digital replacement for fiat money would not be able to resolve.
For instance, countries like Argentina and Venezuela, which have experienced years of hyperinflation, may benefit from a type of money that has value outside their respective economies.
Additionally, there are nations like El Salvador, Panama, Guatemala, and Honduras where remittances significantly impact GDP. This opens the door for a type of value exchange that is unconstrained by geographical boundaries. For instance, remittances contributed 24.07% of El Salvador’s GDP in 2020.
Another factor to consider is the degree of financial inclusion in a country’s economy. Even if the user experience surrounding cryptocurrencies may be improved, hyperlocal initiatives to build a bitcoin ecosystem in nations like El Salvador have had some success.
Given how much remittances contribute to the economy, digital currencies can promote financial inclusion and reduce transfer expenses.
Additionally, it should be emphasized that governments who accept Bitcoin as legal money has made claims about bringing financial inclusion to their people. However, the widespread use of mobile and the internet frequently comes before financial inclusion.
A digital currency will address the issue of financial inclusion with the help of digital infrastructure.
What nations have done to legalize Bitcoin as money, and how have they done it? The first nation to accept Bitcoin as legal money is El Salvador.
In addition to the aforementioned macroeconomic considerations, the government had a leader open to experimenting with bitcoin. Since then, he has been a devoted advocate for cryptocurrencies.
The Central African Republic is the second nation to use bitcoin as legal money. The CAR has a $2.3 billion economy and is rich in natural resources like gold and diamonds. However, they have a low level of financial inclusion and rely heavily on remittances.
In addition to accepting Bitcoin, the nation disclosed that 20% of its treasury would be held by Sango Coin (SANGO). This digital currency will represent the condition of the nation’s natural resources.
What is the Intention Behind Legalizing Bitcoin?
Effective monetary policy is a crucial tool used by nations to control their economies. They thus require a trustworthy currency and the capacity to rewrite the rules to accommodate the money in an emergency.
El Salvador and CAR have said they intend to lower the cost of money transfers into the nation. As El Salvador transitions to Bitcoin infrastructure, president Nayib Bukele predicted that remittances would save the government $400 million. Payments made through the Bitcoin lightning network could be less expensive than other systems.
On a macroeconomic level, these nations’ currencies have often had trouble holding their value against the U.S. dollar. El Salvador switched to utilizing the USD as its currency. Still, it quickly recognized that most of its exports were to the U.S. and that a declining dollar did more harm to its people than benefit. Before adopting the dollar, El Salvador’s inflation rate wasn’t as high as other Latin American nations.
Additionally, they had no authority over the USD’s monetary policy, which was overseen by a central organization in a different nation. As a result, the country looked to BTC to resolve its pressing remittance-related problems without being impacted by changes in the value of the U.S. dollar.
The Challenges of Legalizing Bitcoin
A country bears some liquidity and regulatory risks associated with the cryptocurrency market when it adopts cryptocurrencies as legal tender. The price of cryptocurrencies will be impacted by changes in Federal Reserve policy since there is a significant link between the American stock market and the cryptocurrency market.
Most of these countries support bitcoin because it makes remittances to a significant unbanked population less expensive. This may be a tenuous explanation in light of the low digital and mobile penetration in most nations.
Therefore, scaling BTC as a default currency would only be feasible if they could set up Bitcoin ATMs all around the country.
The unstable nature of the cryptocurrency market is the other challenge. El Salvador bought many cryptocurrencies after Bitcoin’s price fell by more than 70% from its November 2021 peak. However, Bitcoin’s value has been progressively dropping, and most of these investments are currently in the red.
If a country’s treasury has put public money in a hazardous asset that might lose 70–80% of its value in just six months, it cannot be said to have a firm economic policy. The nation’s insufficient cash reserves also considerably limit its ability to borrow additional money from international markets.
Similarly, the law governing Bitcoin is shaped mainly by national authorities. Due to their decentralized nature, cryptocurrencies may not necessarily be prohibited in all federally recognized jurisdictions.
But the market reacts when a country like the U.S. uses legal means to combat cryptocurrencies. The upcoming price change might affect all nations using bitcoin as a reserve currency or legal tender.
We hope you are more familiarized with Bitcoin and its use case in the world economy as a legal tender. Will we see more countries following El Salvador and CAR? We have to wait and see.