How does it impact a legal tender?
Unless the citizens can even demonstrate that they never have any access to the necessary technology, everybody can use BTC as a form of payment if BTC is readily treated as any legal tender for their respective jurisdiction.
Central banks and regulators of any nation decide whether it is legal tender within the economy. This eventually means that every form of value they deem fit as a legal tender is used to pay for different goods at shops.
Making BTC a legal tender eventually means that someone needs to pay for the cup of coffee, and BTC can be an option for it. Now, without the central bank declaring the BTC as legal tender, the risk of accepting BTC for goods that are even sold would be with the shopkeepers.
The rise of BTC and other decentralized cryptocurrencies has central banks that consider digital currencies and other alternatives to fiat currencies. Hence, countries including china, the UK, US and India, are working together with the central bank digital currencies(CBDC)
Embracing digital currencies aims to achieve better traceability and control of the unit of money in the economy. This helps in calculating the taxes more accurately.
What factors catalyze any country’s adoption of BTC as a legal tender?
There are various macroeconomic factors that manage through the adoption of the currency as a legal tender. There are certain factors that must coincide with leadership capabilities.
The central banks are getting into digital currencies. Hence, the fundamental problem with the digital version of the fiat currency may not be resolved for countries like Argentina and Venezuela, which have suffered from hyperinflation for many years. Several countries like El Salvador, Panama, Guatemala, and others have a great percentage of GDP that is contributed by remittances and paves the way for a massive value exchange that is never restricted by the national borders.
Financial inclusion in the economy is never user-friendly. Hence, remittances contributing to the BTC countries like El Salvador have seen great success here. Furthermore, rolling out BTC as a legal tender has brought about a great financial inclusion to the population followed by mobile and internet penetration.
El Salvador is the first country to adopt BTC as its legal tender, followed by the Central African Republic (CAR). The CAR is rich in natural resources like gold and diamond worth $2.3 billion or even higher. Financial inclusion is significantly low and relies on remittances.
What can the countries achieve by accepting BTC as the legal tender?
These countries have relative monetary policies that leverage to manage the economies. Hence, the end for credible currency and manoeuvring the policies is essential in times of crisis.
Both El Salvador and CAR identified that they want to make money transfers to make the country cheaper. El Salvador’s president Nayib Bukele predicted a ruse in the $400 million saving on the remittances as the country proceeds with the Bitcoin infrastructure.
El Salvador switched to USD as its currency but later realized that most of the exports moved to the US, and the weakening dollars imposed more harm than good.
What are the prime challenges in adopting the BTC as a legal tender?
There are plenty of liquidity and regulatory risks around the crypto market that make it easy to assume that most of them use it as a legal tender. Since the crypto market is excessively correlated with the US equity markets, the Federal Reserve’s policy easily changes the impact on the crypto prices.
Another common challenge is the volatile nature of the crypto market. As the BTC market fell down to over a whopping 70% since 2021, El Salvador made countless buys in the cryptocurrency. The BTC prices went relentless, and the positions are currently at a loss. They have even used up the citizen’s money in the volatile asset and can even lose 70-80% of the value in 6 months.
Overall, the regulations revolve mostly around the national regulators due to the decentralized nature of the cryptocurrency after banning the BTC in the national jurisdiction.
Which countries currently banned BTC and other cryptocurrencies?
The global technology and the economic paradigm like BTC is never the best approach for every government to protect the citizens from different risks of the asset classes. There have been several bans on BTC and other cryptocurrencies and cryptocurrency mining in the world. China banned cryptocurrencies previously in 2021 as the central bank’s digital currency, and it has also affected Bitcoin mining. Hence, the BTC hash rate fell in 2021.
In 2022, even India took a harsh stance on the market. Based on the historical evidence, every time there is a ban imposed in the crypto market, another region eventually taps into this opportunity and creates a disruptive innovation in the world. Hence, it is extremely hard to curb the growth of BTC and other digital assets in general.
Countries that are about to ban cryptocurrencies always protect the citizens that are retail investors, and they are never likely to succeed. The approach should be more collaborative and democratic for a country to have a sustainable environment with cryptocurrency.