Boston University’s Prof Jay Zagorsky explains just what legal tender means and why bitcoin won’t replace the US dollar in El Salvador any time soon.
On 7 September 2021, El Salvador will become the first country to make bitcoin legal tender. Panama is considering following its lead.
The government of El Salvador is promoting the cryptocurrency’s use by giving $30 in free bitcoins to citizens who sign up for its national digital wallet, known as Chivo (or ‘cool’ in English). Foreigners who invest three bitcoins in the country – currently about $140,000 – will be granted residency.
Betting on bitcoin
El Salvador is betting that being the first to open its doors completely to bitcoin will help boost its economy.
President Nayib Bukele said he believes this will encourage investors with cryptocurrency to spend more of it in his country.
He even has a plan to have El Salvador’s state-run geothermal utility use energy from the country’s volcanoes to mine bitcoin. (Creating, or mining, bitcoin takes a lot of energy, so mining makes sense only in places with cheap electricity.)
The $30 given to every citizen who joins the cryptocurrency craze will temporarily stimulate the economy. However, the overall impact will likely be a short-term boost.
The impact of similar payments in other countries, such as Covid-19 stimulus payments, appear to end after people have spent the money. Moreover, it’s unclear El Salvador’s increasingly indebted government can even afford it.
The almighty dollar
But does making bitcoin legal tender mean every store and merchant in El Salvador will now have to accept digital payments?
Legal tender refers to money – typically coins and banknotes – that must be accepted if offered in payment of a debt.
The US dollar is not legal tender in just the US. El Salvador, for example, switched from the colon, its previous currency, to the US dollar in 2001. Ecuador, Panama, East Timor and the Federated States of Micronesia also all use the greenback as legal tender.
But despite the definition above, legal tender doesn’t mean all businesses must accept it in payment for a good or service. That requirement applies only to debts owed to creditors. This is why many companies such as airlines accept payments exclusively by credit card, and many small retailers take only cash.
There is clearly some confusion in El Salvador over the issue, however. Its original bitcoin law, passed in June 2021, states that “every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service”.
This led to protests and resulted in skeptcism from economists and others. As a result, Bukele tweeted in August that businesses did not in fact have to accept bitcoin.
Meanwhile, El Salvador has been installing 200 bitcoin ATMs to allow people to convert cryptocurrency into dollars.
The widespread adoption of bitcoin will likely take years. Since just 30pc of the Central American country’s population even has a bank account, I believe the US dollar will still be used in El Salvador for a long time, even if its president wants to move toward bitcoin.
Prof Jay Zagorsky is a senior lecturer on markets, public policy and law at the Questrom School of Business, Boston University. He is a cross-disciplinary researcher who has spent over two decades researching a wide variety of personal wealth topics.