Youth groups protest against adoption of bitcoin as currency by Salvadoran government in San Salvador, El Salvador, 1 September| Photo: EFE/Rodrigo Sura
On September 7, 2021, El Salvador will become the first country to have bitcoin as currency.
The government even went a step further by promoting the use of cryptocurrency, offering $30 in bitcoins free of charge for citizens who sign up for the country’s national digital wallet, known as “Chivo” or “nice” in Portuguese. Foreigners who invest three bitcoins in the country – currently about US$ 140 thousand – will receive residence permits.
Panama is considering whether to follow El Salvador’s example.
Does making bitcoin currency mean that all stores and merchants in El Salvador will now have to accept digital payments? If more countries do the same thing, what will it mean for consumers and businesses around the world?
Like economist that studies wealth and money, I believe that briefly explaining what is “legal tender” currency will help answer these questions.
What is legal tender?
Legal tender refers to money – usually coins and bills – that must be accepted if offered as payment for a debt.
The front of each US dollar bill states: “This note is legal tender for all public and private debt.” This declaration was enshrined in the federal law of the USA in various forms since the end of the 19th century.
The dollar is not only legal tender in the US. El Salvador, for example, moved from colon, its former 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 merchants need to accept legal currency?
But despite the above definition, the existence of a legal tender does not mean that all businesses should accept it as payment for a good or service.
This requirement only applies to debts to creditors. The ability of a store to refuse cash or other legal tender currency is explained 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 currency to the nation’s banks.
That’s why many companies, such as airlines, accept payments exclusively by credit card, and many small retailers accept cash only.
How does the United States Treasury, there is “no federal statute providing that a private company, person or organization must accept currency as payment for goods or services. Private companies are free to develop their own policies on accepting money unless there is a state law that says otherwise.”
And that would be no different if the US made bitcoin a currency. Private companies would not be forced to accept it.
However, there is clearly confusion in El Salvador over the issue. THE Salvadoran original law for bitcoin, approved in June 2021, states that “every economic agent must accept bitcoin as payment when offered to it by whoever acquires a good or service”.
That generated protests and resulted in skepticism of economists and others. As a result, the President of El Salvador, Nayib Bukele, stated by Twitter in August that companies did not need to accept bitcoin.
Why did El Salvador make bitcoin currency?
El Salvador is betting that being the first nation to fully open its doors to bitcoin will help boost your economy.