2 Jul, 21

Bitcoin as legal tender: Meaning and implications

Bitcoin Legal Tender Implications
Victor Bastos

Content Marketing Specialist

On June 9th El Salvador passed an unprecedented bill, where 62 out of 84 congressional voters decided to make Bitcoin the country’s legal tender. It’s the first case in history of Bitcoin being used as a territory’s official currency, a feat that will bring long-lasting ramifications. 

In this article, we cover the different definitions of legal tender, how it benefits El Salvador, the local/worldwide implications of this move and its potential ramifications on crypto as its biggest case study yet. 

A legal tender is a form of payment that governments must accept for any debt settlement such as taxes, public or private charges and business dues. However, an asset being labelled as legal tender doesn’t necessarily mean that it can be exchanged for local goods and services in everyday life like coins and banknotes. That factor depends on each country’s understanding of their legal tender(s)  

The US legal tender definition applies to any currency issued by the Fed Reserve, but no seller is required to accept cash dollars as payment. Same for Australia; coins and banknotes are legal tenders but business owners are not obligated to accept them in trade. 

As for El Salvador, the country abandoned its own national currency for the US dollar in 2001, before recently adding Bitcoin. Both debt settlement and commercial services must accept legal tender transactions, meaning Salvadoran merchants must comply with Bitcoin as a form of payment. 

Advantages of Bitcoin for El Salvador      

By adopting Bitcoin as legal tender, President Nayib Bukele seeks to provide El Salvador with investment incentives, job opportunities and develop further financial inclusion. El Salvador is one of the smallest economies in Latin America with a population of 6.5 million, generating $27B in GDP. For investment incentives, the government is set to offer large Bitcoin holders immediate permanent residence to any individual who invests three BTC into the country, along with no capital gain taxes. El Salvador is also the only country in Latin America without property tax on any private land or buildings.   

On the financial inclusion side, roughly 70% of the Salvadoran population is unbanked, a much larger percentage compared to the global average of around 22% in 2017. As Bitcoin becomes legal tender, citizens will have access to digital wallets with limited transactional bureaucracy. It may also propel growth in overall P2P digital infrastructure, which has contributed substantially to financial inclusion. 

Kenyan P2P provider M-Pesa is an example; founded in 2007, it helped take the country from 14% to 83% formal finance access in 2019. Easily available P2P services also benefited Venezuelans, utilising US dollar-backed stablecoins in digital wallets for transactions while the nation’s bolívar currency went through hyperinflation. As El Salvador uses Bitcoin’s fully decentralised framework as legal tender, it’s yet to be seen how this unprecedented move in P2P usage will impact financial inclusion in the nation, but the outlook appears positive. Strike, a crypto payment provider, is now the most downloaded app in El Salvador.  

On a broader scale, there are also a number of implications that adoption might bring into the financial landscape as a whole, both nationally and globally.  

bitcoin as legal tender
El Salvadorans with bank accounts, percentage per age group. Source: WorldBank

During a June 10th meeting with the press, IMF Comms Director Gerry Rice stated that El Salvador adopting Bitcoin as legal tender presents “a number of macroeconomic, financial and legal issues that require very careful analysis.” Although further details on the bitcoin governance framework between the country and the IMF are still behind closed doors, there are a couple of main factors that will come into the discussion over the upcoming months.

Effect on international trade

The US is El Salvador’s largest trading partner, with 2019 exports into El Salvador amassing $3.4 billion while the Central American nation exported $2.5 billion to the United States. The fact that El Salvador has used the US dollar as its sole currency since 2001 benefits the ease of trading between the nations, which begs the question of how Bitcoin will play a part in future negotiations. Will the US adapt to the new regulations and accept bitcoin as a form of settlement? Unlikely at this stage.

The Central American nation also holds strong trading relations with China, its second-largest source of imports. Their recent crackdown on cryptocurrencies will most likely result in new legal frameworks to ensure that El Salvador sticks to the US dollar when dealing with the Asian superpower. However, El Salvador also has large trade flows with its neighbours Mexico, Guatemala and Panama, countries that have shown previous support towards crypto adoption and may now further advance into regulations as the new legal tender emerges in the region.

Worldwide regulatory review

The Australian Taxation Office (ATO) does not define Bitcoin as a foreign currency, as it was not a “monetary unit recognised and adopted by the laws of any other sovereign State.” The US presents a similar definition, with the IRS classifying bitcoin as a digital representation of value that “does not have legal status in any jurisdiction.” These definitions no longer apply, as Bitcoin is the official currency of at least one nation, technically requiring updates on any guidelines that do not define it as such.  

If territories change their definitions of Bitcoin as an official currency, it opens opportunities for the digital asset to be accepted within a much larger range of monetary frameworks. Australia and the US, as an example, allow businesses to accept commercial transactions using foreign currencies. According to those terms, Bitcoin may also need to be accepted as a common form of payment for any business located in these countries. With both countries exporting a large percentage of their goods and services, an updated recognition of Bitcoin as a foreign currency may eventually pressure territories to accept the digital asset as settlement. 

el salvador
Exports of goods and services, by % of GDP. Source: WorldBank

Bitcoin’s definition may also enter a new category of its own, distinct from other cryptocurrencies. It’s a case-by-case situation, but one that will definitely form discussions from multiple stakeholders over the coming months.

The biggest crypto case study yet 

With El Salvador using the US dollar as its legal tender since 2001, the addition of Bitcoin will provide an interesting case study on how the cryptocurrency will be utilised alongside the nation’s US banknotes. Although a low GDP producing country like El Salvador diversifying from the US dollar won’t destabilise it, similar decisions from several nations could begin to shift the narrative around its emerging market’s function. 

Furthermore, territories like Russia, China and the EU have been gradually steering away from its sovereignty. The adoption of Bitcoin as an official currency may also put the dollar’s advantage to the test.

Central banks without monetary control

Bitcoin has a maximum supply of 21 million, a framework protected by the law of its code.For that reason, it is the first case of a national currency where its central bank has little authority over the money supply. 

Keeping track of how the Salvadoran Central Bank deals with Bitcoin will be a great study for future referencing on how the next legal tender adopters may utilise the legal tender. El Salvador has limited control over USD liquidity and supply, and therefore, deploying Bitcoin as legal tender is not as radical a step as countries whose central banks maintain their own currencies, yet still a great testing ground for this model.

Bitcoin applications beyond store of value

Bitcoin’s use in El Salvador will provide a solid use-case of what the digital asset’s daily use will be as opposed to the US dollar. Although Bitcoin is mostly used as a store of value, its November update, “Taproot”, will allow for dApps development and smart contracts, amplifying its usable properties. 

This update, the first in four years, opens the network for applications that lead towards BTC-based DeFi, NFTs, other financial services, extending as far as voting systems that could be integrated with centralised governance like central banks. Meanwhile, crypto startup Strike continues to build El Salvador’s bitcoin payment system

With Taproot’s update on the way and startups servicing the country, El Salvador is set to become the first, of potentially many, examples of how a population will choose to implement bitcoin into their daily lives as a national currency.

bitcoin as legal tender
USD money supply, in billions of dollars. Source: FRED.


Bitcoin becoming legal tender in El Salvador is another example of the asset’s accomplishments. In only 12 years of existence, a decentralised digital cash protocol created by an anonymous developer(s) became a country’s official currency. It is also the biggest advancement in crypto regulation yet, as there is no higher regulatory step for territories than to officially recognise it as their own currency. 

Whether other territories follow suit in the near future remains to be seen, but this move presents an optimal opportunity to test the practical qualities of Bitcoin on the economic, cultural and sociopolitical levels of an entire nation. El Salvador will certainly find resistance from other territories and regulatory entities from this unprecedented framework, no doubt forming legal debates that are set to form new paths Bitcoin is now not only a digital asset, but a national currency.

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