With recent rumors about Honduras possibly adopting Bitcoin as a Legal Tender (which later were dismissed by Honduras Central Bank), and the widely known Bitcoin Law that was passed in El Salvador almost turning one year old next June, we thought that it would be helpful to explain what is the current legal tender status, what does it mean for everyday citizens and why it is crucial for Crypto mass-adoption.
What is a “Legal Tender”?
A legal tender is anything recognized by law as a means to settle a public or private debt or meet a financial obligation, including tax payments, contracts, and legal fines or damages. Through their central banks or federal reserves, this status is granted by governments to their national currencies to allow citizens to satisfy legal obligations in their jurisdictions.
Legal tenders are tools used to settle economic obligations, but this does not imply that the merchant or debtor is obliged to accept the offered payment. If you contribute to fully paying off a debt to someone in a legal tender, they can’t sue you for failing to repay, as indicated by the Bank of England. When a currency acquires the legal tender status, citizens of said State can conduct formal operations with the financial or banking system, such as repay a mortgage using crypto; pay taxes, fines, and other government tariffs; or grant them bail in a judicial process.
Countries where Crypto is Legal Tender
Only one country in the world has officially recognized a cryptocurrency as legal tender. On June 9, 2021, the Legislative Assembly of El Salvador passed the well-known and revolutionary “Bitcoin Law,” which came into effect on September 7, 2021, granting the first crypto the category of legal tender and becoming the first country to do. This regulation sparked interest in the whole community, dragging more Countries to consider making Bitcoin a legal tender that happened including Panama, Paraguay, and, very recently, Ukraine. Although some of these countries have declined this possibility in the meantime, the conversation is on the table, and sooner or later, more States will get on board it officially. This decentralized payment network might allow its citizens to settle obligations and transactions.
On the opposite pole, we find other jurisdictions where we can hold, exchange, or use cryptocurrencies is entirely illegal and won’t allow transactions occurring with digital assets like Egypt, China, Nepal, or Bangladesh. According to Investopedia, there are 42 countries with implicit bans on specific cryptocurrencies and 9 with absolute prohibitions as of November 2021. Most of these restrictions are based on investor and consumer protection due to the highly volatile nature of digital assets or concerns about their use as money laundering or financing of terrorism tools. Still, they fail to comprehend that not all cryptos or blockchain-based projects are the same, and restricting their citizens from developing and participating in this new decentralized, permissionless, and censorship-resistance ecosystem could be more harmful than beneficial.
The legal tender status does not grant sacred permission to the bearer to settle his debts, but it is vital for crypto mass adoption. A shopkeeper can still refuse to accept a €100 note if you are going to buy a can of soda, and it is within his rights. But if you are going to pay €1,000 for your rent and the landlord refuses to accept it, the landlord cannot take any legal action by refusing to accept the money for settling your debt. This is what legal tender means. If cryptos are granted the category, it does not mean that all merchants or creditors are unconditionally obliged to accept them as a payment method. Instead, it offers an additional possibility to meet these obligations. The principle of the Pacta sunt servanda (“the contract is a law between the parties”) will always govern contractual relations. If the parties decide to accept dollars, euros, pesos, or crypto as a method of payment to settle their obligations, the law must be able to protect them during this transaction.