Bitcoin as legal tender
El Salvador, a small coastal country in Central America has become the first in the world to adopt Bitcoin, as legal tender.
Legal tender is the legally recognized money within a given political jurisdiction.
- Introduced in 2009, it is a type of Cryptocurrency that enables instant payments to anyone.
- Cryptocurrency is a specific type of virtual currency, which is decentralised and protected by cryptographic encryption techniques.
- Bitcoin, Ethereum, Ripple are a few notable examples of cryptocurrencies.
- Bitcoin is based on an open-source protocol and is not issued by any central authority.
- Originally, Bitcoin was intended to provide an alternative to fiat money and become a universally accepted medium of exchange directly between two involved parties.
- Fiat money is a government-issued currency that is not backed by a commodity such as gold.
Reason behind adopting Bitcoin, as legal tender:
- Loss on Remittances:
- El Salvador relies heavily on money sent back from workers abroad.
- Bitcoin adoption may make these remittances quicker and cheaper.
- Boost Financial Inclusion:
- It is also expected to boost financial inclusion in their country as the majority of the population does not have access to formal banking channels.
- In the absence of a central regulating authority, legalizing bitcoin will have potential for fraud and money laundering, high energy costs and extreme volatility.
Implications for the Crypto World:
- This could potentially encourage other smaller countries with weaker economies to open up to crypto as an alternative to fiat currencies, paving the way for mainstream future adoption worldwide.
- Already, Venezuela and many African countries have started using cryptocurrencies as a long term store of value, as their currencies are deflating quickly.