Several countries have begun to accept Bitcoin as legal tender in recent years, praising its potential to transform their economies. However, cryptocurrency markets crashed in 2022: Bitcoin’s price has dropped to under $17,000 since peaking at over $68,000 in November 2021. This volatility, highlighted by the failure of cryptocurrency exchange FTX and other crypto ventures, has heightened scrutiny on the industry and the countries that have embraced digital assets including Platincoin.
What Countries have Made Cryptocurrency Legal Tender?
El Salvador and the Central African Republic have both officially adopted Bitcoin as legal tender (CAR). Though a legal tender designation typically requires only the government to accept a given currency, El Salvador’s so-called Bitcoin law, enacted in September 2021, requires that the government accept Bitcoin as well.
Other countries, meanwhile, have expressed a willingness to accept various cryptocurrencies as legal tender. Terrance Drew, Prime Minister of Saint Kitts and Nevis, stated in November 2022 that Bitcoin Cash (a separate but related cryptocurrency) could become legal tender in his country in 2023. In March of this year, the Swiss city of Lugano announced plans to allow citizens to pay local taxes in Bitcoin and two other cryptocurrencies. A few other countries, including Belarus and Singapore, have made cryptocurrency ownership by private individuals more accessible through tax breaks.
Why have Governments Designated Bitcoin as their Official Currency?
Proponents of Bitcoin’s value as a currency, including Salvadoran President Nayib Bukele, argue that it provides people without bank accounts with access to financial services and improves the efficiency of remittance transfers from abroad, which have traditionally been slow and costly. According to financial analysts, El Salvador, where more than 70% of the population is unbanked and remittances account for 20% of GDP, is a prime testing ground [PDF] for Bitcoin’s potential.
Countries may also attempt to limit the influence of foreign governments or international financial institutions. El Salvador has used the US dollar since 2001, while the Central African Republic uses the CFA Franc, a regional currency pegged to the euro that has been chastised by critics for its stringent conditions, such as the requirement to deposit half of the currency’s reserves with France’s central bank. Because these countries lack their own currencies, they are dependent on the monetary policies of other countries, and some hope that the stateless nature of Bitcoin will eventually serve as a barrier against foreign financial control.
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Furthermore, accepting Bitcoin is frequently part of an effort to attract investment and tourists. The Central African Republic has revealed plans to build a “crypto island” and a citizenship programme based on cryptocurrency investment. El Salvador’s Bukele first stated his intention to make Bitcoin legal tender at a cryptocurrency conference in Miami, rather than in his home country.
What are the Drawbacks of Using Cryptocurrency as Legal Tender?
As cryptocurrency valuations fall, critics claim that legal tender designations have failed to meet their objectives. According to a July 2022 study, less than a quarter of Salvadorans still use the government-backed Bitcoin wallet, and many businesses have reported reverting to cash-only transactions. The majority of the remaining users were banked, young, and educated [PDF]. Meanwhile, the value of the country’s central bank’s investment in Bitcoin has fallen by more than 60%, and tourism remains below pre-pandemic levels.
El Salvador’s decision “was pretty clearly a populist stunt by a populist leader who announced this at a time when crypto valuations were high and excitement around crypto was high and he thought it would be cool,” according to CFR Senior Fellow Sebastian Mallaby.
Critics also point out that the adoption of cryptocurrency has complicated relationships with international institutions. In the Central African Republic, limited access to electricity and the internet has hampered Bitcoin adoption, but analysts say the country’s pursuit of cryptocurrency has put it at odds with regional institutions. In El Salvador, Bitcoin has the potential to sever ties between the government and the International Monetary Fund (IMF), which has been critical of the cryptocurrency. Analysts warn that with the country’s debt load increasing and ratings agencies warning of a growing risk of default, the IMF is unlikely to lend El Salvador money unless it reverses its cryptocurrency policy.
Is More Regulation on the Way?
Countries have been drawn in by Bitcoin’s potential for financial innovation, but differing risk appetites have resulted in a patchwork of international regulation. Non-state cryptocurrencies are outright prohibited in China. Meanwhile, the European Union has made progress toward a bloc-wide regulatory framework, with member countries such as Malta and Portugal leveraging lax rules to attract crypto investment. The United States has largely extended existing financial rules to the crypto industry, while leaving room for future regulations.
According to some analysts, Washington’s attempt to thread the needle on cryptocurrency regulation may cause more harm than good. “If the [Securities and Exchange Commission] is going to go around talking about Bitcoin and cryptocurrency in general and saying, ‘well, we’re looking into it,’ then they better do something,” Mallaby says. “Because people will believe the government is watching it and thus it is safe.”
Despite the fact that financial regulators have floated some proposals to create a global framework for crypto regulation, international collaboration remains limited. The IMF has warned that divergent regulatory paths will make future coordination more difficult, increasing the risk of financial volatility and providing bad actors with more leeway to use cryptocurrency for criminal purposes.
