A fiat currency is a currency that has no inherent value and is recognized by the issuing authority only. It comes from Latin, which means “let it be done.” The Federal Reserve Board refers to this sort of money as fiat because it lacks inherent worth. Legal money in the United States includes $10 bills and $5 coins.
If Bitcoin is made legal currency, buyers may use it to pay for goods and services. The risk of accepting BTC for goods sold would be with the merchants if Bitcoin was not designated as legal tender by a central bank. If the country’s central bank has expressly declared Bitcoin to be legal money, it becomes an official means of value exchange in the economy.
Several central banks have begun to research digital currencies as a more viable option to fiat money, which has encouraged several governments, including China, the United Kingdom, the US and India, to work on their central bank digital currency (CBDC).
With these nations, the motivation for adopting digital currency is to have better tracking and management of each unit of money in the economy. This tracking will aid them in calculating taxes more accurately as well as identifying money launderers, but it will also allow them to identify any accumulation of wealth and devise policies to keep it within their borders.
Despite this, central banks are increasingly interested in digital currencies. Many countries have more basic issues than a digital replica of a fiat currency may address. For example, Argentina and Venezuela have suffered from hyperinflation for years and could benefit from a type of money that derives its value from factors beyond their own economies.
There are numerous countries where remittances make up a significant proportion of GDP, including El Salvador, Panama, Guatemala and Honduras. This opens the possibility for non-bounded value exchange. Remittance contributions accounted for 24.07% of El Salvador’s GDP in 2020.
Another issue to consider for countries is the degree of financial inclusion in their economy. While cryptocurrencies’ customer journey isn’t particularly user-friendly, it must be acknowledged that hyperlocal efforts to build an ecosystem around bitcoin in places like El Salvador have been successful. Digital currencies, especially when used with digital wallets, can not only assist economic inclusion but also save money on remittance costs because they allow people to send money directly home rather than having to go through a third party such as MoneyGram or Western Union.
It should also be mentioned that certain regimes that have adopted Bitcoin as legal tender have claimed to be increasing financial inclusion among their people. Financial inclusion, on the other hand, generally requires mobile and internet penetration before it can occur. A digital currency will not be able to solve the problem of financial inclusion on its own if there is no digital infrastructure.
So, which nations have legalized Bitcoin as a legal currency and how did they do it? El Salvador was the first country to legalize Bitcoin as legal tender. Apart from economic circumstances noted above, the nation had a leader who was open to experimenting with bitcoin. He has since acted as an enthusiastic advocate of bitcoin.
The Central African Republic (CAR) became the second country to legalize Bitcoin as money. The CAR is known for its valuable natural resources such as gold and diamonds, which have a combined value of $2.3 billion. However, financial inclusion is quite limited, and they rely on remittances for income. In addition to embracing Bitcoin, the nation also announced that 20% of their treasury will be invested in Sango Coin (SANGO), a digital currency that reflects the nation’s natural resources health.
El Salvador and CAR have both stated their intentions to make money transfers into the country more affordable. President Nayib Bukele of El Salvador said that remittances would save the nation $400 million if it switched to Bitcoin infrastructure. Payments via the Bitcoin lightning network might be less expensive than current options.
On a worldwide scale, the currencies of these countries have generally struggled to retain value against the US dollar. El Salvador switched to using the US dollar but quickly discovered that most of its exports were destined for the United States and that a declining dollar did more harm than good to its people. Unlike other Latin American nations, El Salvador had little inflation when it embraced the dollar.
The country’s central bank was also powerless to influence the monetary policy of the US dollar, which is governed by a centralized entity in another nation. As a result, while not being affected by USD fluctuation, the nation looked to BTC to cure its main problems with international remittances.
The notion that most of these countries want bitcoin to help with low remittance costs to a largely unbanked population may be a thin argument. Because most of these nations have little digital and mobile penetration, this might appear to be a superficial cause. In order for them to scale BTC as a preferred currency, they’ll need Bitcoin ATMs all over the country, which is unlikely.
The second major issue is the cryptocurrency market’s volatility. When Bitcoin dropped by over 70 percent from its all-time high in November 2021, El Salvador made several purchases of the cryptocurrency. However, BTC prices have been steadily declining and most of these bets are now held at a loss. It can’t be known for sound economic policy if a country’s treasury has spent citizens’ money on a volatile asset that may lose 70-80% of its value in six months because it utilized poor cash positions. The country’s capacity to borrow more from foreign lenders is also damaged due to weak cash situations.
On a different note, Bitcoin’s legal status is largely determined by national authorities. Because the cryptocurrency is decentralized, prohibiting it in one nation does not immediately change its legality in another. When a country like the United States makes harsh laws against cryptocurrencies, though, the market responds. The price changes that occur as a result of this might influence all countries that use Bitcoin as currency or as a reserve currency.
There have been numerous bans on Bitcoin and other crypto currencies around the world. In 2021, China banned cryptocurrencies in response to its central bank digital currency, which also impacted Bitcoin mining. As a result, the BTC hash rate fell in 2021 as a result of the ban. However, after an increase in Bitcoin miners in the United States, the sector was resurrected.
India’s stance on cryptocurrencies did harden in 2022. If history is any indication, when a cryptocurrency ban takes place anywhere in the world, another part of the globe benefits from it. As a result, curtailing BTC and other digital asset growth is difficult until there is a worldwide ban on cryptocurrencies.
To protect retail investors, nations that want to prohibit cryptocurrencies are unlikely to succeed. A more collaborative and democratic method will aid them in achieving their goal of safeguarding retail investors.
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