On 7 September, El Salvador became the first country in the world to make bitcoin legal tender. Does this mean other countries will follow suit? And if so, who?
Why has El Salvador made bitcoin legal tender?
One of the key reasons for making bitcoin legal tender is to boost the country’s economy. The hope is that being an early adopter will encourage foreign investment.
In fact, so much hope is being pinned on foreign investors that the government is incentivising it. Anyone outside of El Salvador investing three or more bitcoins in the country will be given residency.
The move should also help Salvadoreans who work abroad to save money when they send cash back home. As it stands, Salvadoreans spend around $400 million (£289 million) a year in banking fees alone.
To help launch bitcoin as legal tender, the government is also giving US$30 (£21) in bitcoin to anyone signing up to Chivo – the national digital wallet.
But while El Salvador’s president has enthusiastically embraced the cryptocurrency, some are a little more sceptical. Protests have emerged, with Salvadoreans worried about the volatility of the currency and the impact on those without access to technology.
Does this mean bitcoin replaces cash?
Crucially, no. Legal tender is a bit of a confusing term. Although it refers to money, legal tender only applies to the settlement of debts owed to creditors.
Technically (and here’s the confusing bit) it doesn’t have to be accepted in exchange for goods and services. Payment for those is at the discretion of the shop or service provider. So, if a petrol station in the UK announced it would only accept homemade cakes in exchange for fuel, that would be perfectly ok.
Of course, in reality, banknotes and coins issued by the Bank of England are recognised as official payment for products in the UK, regardless of what the official definition of ‘legal tender’ is.
Back in El Salvador though, whoever drafted the bitcoin law forgot what legal tender actually means.
In their legislation, it stated that “every economic agent must accept bitcoin … by whomever acquires a good or service“. This sparked concern, so the president later clarified in a tweet that businesses don’t have to accept it as payment.
So, who else could make bitcoin legal tender?
Now that El Salvador has set the precedent, the suggestion is that other countries in the Americas could follow suit. This includes Paraguay, Panama, Mexico and Venezuela. Closer to home, Ukraine is also showing an interest in making bitcoin legal tender.
Nevertheless, until any official announcement, reports about other countries adopting bitcoin (or indeed any other cryptocurrency) are pure speculation.
What about the UK and the EU? Well, the European Central Bank (ECB) is toying with the idea of a digital Euro which isn’t quite the same as a cryptocurrency. Similarly, the Bank of England has also set up a task force to look into a digital pound.
The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.