Bitcoin will soon be legal tender in El Salvador

Q REPORTS – On September 7, 2021, El Salvador will become the first country to make bitcoin legal tender. The government has even gone further in promoting the use of cryptocurrency by giving away US $ 30 in free bitcoins to citizens who sign up for its national digital wallet, known as “Chivo” or “cool ” in English.

Foreigners who invest three bitcoins in the country – currently around $ 140,000 – will be granted residency.

Panama plans to follow El Salvador’s example.

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Does making bitcoin legal tender mean that every store and merchant in El Salvador will now have to accept digital payments? If more countries are doing the same, what does it mean for consumers and businesses around the world?

As an economist who studies wealth and money, I think a brief explanation of what legal tender is will help answer these questions.

The $ 2 note may no longer be in circulation, but it is still legal tender. Douglas Sacha / Moment via Getty Images

What is legal tender?

Legal tender refers to money – usually coins and banknotes – that must be accepted if offered as payment for a debt.

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The front of every US bank note reads “This note is legal tender for all public and private debts.” This statement has been enshrined in federal law in various forms since the late 1800s.

The greenback is not legal tender only in the United States. El Salvador, for example, switched from the colon, its previous currency, to the US dollar in 2001. Ecuador, Panama, East Timor, and the Federated States of Micronesia also use the dollar as legal tender.

Do traders have to accept legal tender?

But despite the above definition, legal tender does not mean that all businesses must accept it as payment for a good or service.

This requirement only applies to debts owed to creditors. The ability for a store to refuse cash or other legal tender is explicitly stated on the websites of the US Treasury, which is responsible for printing paper money and minting coins, and the Federal Reserve, which is responsible for distributing the currency to the national banks.

This is why many businesses such as airlines accept payment exclusively by credit card, and many small retailers only accept cash.

As the US Treasury points out, there is “no federal law requiring any private business, person or organization to accept currency or coins as payment for goods or services. Private companies are free to develop their own policies on whether or not to accept cash, unless there is a state law that says otherwise. “

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And it wouldn’t be any different if the United States made bitcoin legal tender. Private companies would not have to accept it.

However, there is clearly some confusion in El Salvador on the issue. Its original bitcoin law, adopted in June 2021, stipulates that “every economic agent must accept bitcoin as a means of payment when offered to him by anyone who acquires a good or a service”.

This led to protests and aroused skepticism from economists and others. As a result, Salvadoran President Nayib Bukele tweeted in August that companies weren’t required to accept bitcoin.

A man in Tamanique, El Salvador, makes a purchase at the opening of a small store that has a sign that says he accepts bitcoin.
Is bitcoin going to spread to El Salvador? AP Photo / Salvador Melendez

Why did El Salvador make bitcoin legal tender?

El Salvador is betting that being the first to fully open its doors to bitcoin will help boost its economy.

President Bukele said he believes this will encourage investors with cryptocurrencies to spend more in his country. He even has a plan for El Salvador’s geothermal utility to use energy from the country’s volcanoes to mine bitcoin.

Creating or mining bitcoin takes a lot of energy, so mining only makes sense in places where electricity is cheap.

The $ 30 given to every citizen who joins the cryptocurrency craze will temporarily boost the economy. However, the overall impact will likely be a boost in the short term. The impact of similar payments in other countries, like the COVID-19 stimulus payments, seems to end once people have spent the money. Moreover, it is not clear that El Salvador’s increasingly indebted government can even afford it.

And the widespread adoption of bitcoin will likely take years. El Salvador has installed 200 Bitcoin ATMs to allow people to convert cryptocurrency into dollars.

Bitcoim vending machines in El Salvador

Given that only 30% of the population of the Central American country even has a bank account, I think the US dollar will still be used in El Salvador for a long time, even if its president wants to move towards bitcoin.The conversation

This article by Jay L. Zagorsky, Senior Lecturer, Questrom School of Business, Boston Universit, is republished from The Conversation under a Creative Commons license. Read the original article.

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