Will Bitcoin Ever Become a Legal Tender in Many Countries?
Introduction
There is no doubt cryptocurrencies have gained prominence in the last couple of years as more and more investors add cryptocurrencies to their portfolios (Furneaux, 2019). These alternative currencies have been on many occasions prophesized to become adopted among mainstream users, and although such mainstream adoption may not actually occur on the short-term horizon, a comprehensive understanding of digital cash in 2021 is paramount to discuss how financial systems will evolve in the next decades and whether cryptocurrencies shall be of concern of investors, regulators and customers alike (Furneaux, 2019). The essay is structured into different sections, commencing with a brief introduction of the concept of cryptocurrencies as well as the potential advantages and benefits of using cryptocurrencies for payments. Finally, the essay introduces the case of El Salvador, where the government has attempted to launch Bitcoin (BTC) as a parallel legal tender to the national currency.
What is a Cryptocurrency?
Although it may appear that cryptocurrencies were developed in the very recent past, this is certainly not true (Daskalakis and Georgitseas, 2020). The earliest mentions of a non-traceable, fully anonymous currency are dated to the early 1980s, but indeed before the turn of the Millennium (the 2000s), many cryptocurrencies have remained in the conceptual phase. Ten years forward, the first modern cryptocurrencies were launched (including BTC) yet demand for these have remained relatively weak until the last few years (Daskalakis and Georgitseas, 2020). Nevertheless, some key cryptocurrencies have registered an astronomical rise in their value over a relatively short amount of time (in the range of 1000s percentage increases) (Hosp, 2017).
The fundamentals behind cryptocurrencies are relatively simple. As opposed to a centrally coordinated monetary system (with a central bank enacting decisions on the supply of money to fulfil fiscal policy goals), cryptocurrencies are entirely decentralised and rely on blockchain technology (Furneaux, 2019). In essence, Blockchain technology is an immutable ledger holding all transaction data, meaning that no one can modify it and therefore payment risks are essentially nullified. What is more, sellers and buyers using cryptocurrencies remain entirely anonymous, something that has attracted even more significant attention from crypto users (Furneaux, 2019). As of 2021, there are over 10,000 tradable cryptocurrencies in circulation (Statista, 2021). The risks and hazards associated with fully anonymous, decentralised payment systems are analysed in more detail in the following paragraphs of the essay.
The Pros and Cons of Using a Cryptocurrency
The first and most attractive feature of cryptocurrencies involves the lack of opportunity to tamper with payment details, a feature that can be particularly attractive for international traders. What is more, if cryptocurrencies become the preferred medium of exchange at some point in the future, the fees and administrative burdens associated with ordinary money transfers can be almost entirely eliminated (Hosp, 2017). Even if traditional banking systems enable a fairly fast transaction procedure, cryptocurrency transactions are executed without any delay on a peer-to-peer (P2P) basis. For some cryptocurrencies, there is often a fixed number of currencies in circulation – for BTC, this is 21 coins. This set volume (or supply of money) guarantees protection against inflation, meaning that not a single authority is in a position to control the money supply (Hosp, 2017).
Based on the above enlistment of the benefits, it may indeed appear that many cryptocurrencies could at some point replace centrally coordinated legal tenders. Nonetheless, there are a couple of issues worthy of consideration. First, almost all cryptocurrencies have exhibited strong volatility, meaning that double-digit changes in the currency values are not extraordinary events (Connor, 2018). Since cryptocurrencies are not centrally coordinated, high volatility is a risk factors only the most versed and non-risk-averse investors are willing to accept. Second to this, the entire cryptocurrency system is fully anonymous. Unless such currencies are used to pay for legal services, there is no apparent problem. However, studies have shown that a surprisingly high proportion of cryptocurrency transactions were linked to illegal activities (e.g. buying/selling controlled substances, arms, money laundering…etc.) (Wilson, 2021). Third, using cryptocurrencies may be difficult for the average consumer, and in those countries with a low internet penetration rate and problematic access to basic financial services, cryptocurrencies may not be viable solutions. Fourth, there may be some trust issues towards cryptocurrencies, and as long there is no supranational body ensuring safe cryptocurrency transactions, mainstream adoption is unlikely to occur.
Some recent Cases Studies of Using Cryptocurrency as a Legal Tender – El Salvador
El Salvador (a small country in Central America) gained vast media attention after the government’s declaration of BTC as a legal tender (BBC, 2021). The decision was enacted in July 2021, and with a few months of a transition period, the law came into effect in September 2021. In practice, it means that all commercial entities in El Salvador must accept BTC payments, with the immediate option to convert such transactions into a more stable currency (i.e. the US dollar) (BBC, 2021). The intention of turning to cryptocurrencies included attempts to modernise the country’s financial system and attracting foreign investors. Upon the launch of BTC as a legal tender, opinions and early experiences have been at best mixed. Protests in key cities erupted, the IMF (International Monetary Fund) has fiercely criticised the decision, and the yield on long-term Salvadoran bonds (a kind of risk pricing mechanism) has risen to 11% from 8.5% (BBC, 2021). Correspondingly, there are more questions than answers pertaining to the capacity of BTC or any other cryptocurrency to substitute for centrally controlled and coordinated legal tenders (Sparkes, 2021). Surprisingly, the BTC investor community has also sent ambiguous signals – the value of the currency tumbled by 11% on the same day, further marking the inherent volatility of cryptocurrencies (Morris, 2021).
Conclusions
To conclude, cryptocurrencies do carry the potential to disrupt financial systems. However, it is too early to form any long-lasting predictions on cryptocurrencies, it is unlikely that many other countries will follow El Salvador’s example. A barrier to using cryptocurrencies as legal tenders were well reflected in the section discussing the limitations and disadvantages of these payment methods. Therefore, cryptocurrencies are likely to remain speculative investment assets.
Reference list
BBC (2021). Bitcoin protests in El Salvador against cryptocurrency as legal tender. BBC News. [online] 16 Sep. Available at: https://www.bbc.com/news/world-latin-america-58579415 [Accessed 6 Oct. 2021].
Connor, M. (2018). Cryptocurrency : master Bitcoin, Ethereum and cryptocurrency : ultimate beginner’s guide to trading, investing, mining in the world of cryptocurrencies. Createspace.
Daskalakis, N. and Georgitseas, P. (2020). An introduction to cryptocurrencies : the crypto market ecosystem. Abingdon: Routledge.
Furneaux, N. (2019). Investigating Cryptocurrencies: Understanding, Extracting, and Analyzing Blockchain Evidence. USA: Gildan Media.
Hosp, J. (2017). Crypto currencies : Bitcoin, ethereum, blockchain , ICO’s & co. simply explained. Milton Keynes: Lightning Source.
Morris, C. (2021). Bitcoin tumbles 11% after El Salvador’s adoption of the crypto as legal tender. [online] Fortune. Available at: https://fortune.com/2021/09/07/btc-price-why-is-bitcoin-dropping-chivo-wallet-el-salvador/ [Accessed 6 Oct. 2021].
Sparkes, M. (2021). Why has El Salvador officially adopted bitcoin as its currency? [online] New Scientist. Available at: https://www.newscientist.com/article/2289763-why-has-el-salvador-officially-adopted-bitcoin-as-its-currency/ [Accessed 6 Oct. 2021].
Statista (2021). Number of crypto coins 2013-2021. [online] Statista. Available at: https://www.statista.com/statistics/863917/number-crypto-coins-tokens/ [Accessed 6 Oct. 2021].
Wilson, L. (2021). Cryptocurrency transfer led to money laundering conviction, but experts say a boom in underworld use unlikely. [online] Stuff. Available at: https://www.stuff.co.nz/national/crime/125875753/cryptocurrency-transfer-led-to-money-laundering-conviction-but-experts-say-a-boom-in-underworld-use-unlikely [Accessed 6 Oct. 2021].