While many countries in the world are shunning away from cryptocurrencies, banning them altogether or strictly limiting crypto opportunities, El Salvador and CAR have experimented with introducing Bitcoin as legal tender, and the small Caribbean nation of St. Maarten considered legalising TRON. Which approach is better and what are the benefits and drawbacks of adopting cryptocurrencies as legal tender? Let’s find out.
What Is Legal Tender?
Many countries allow people to trade cryptocurrencies at dedicated marketplaces and own them for investments. Some even introduce payment methods that convert crypto to fiat at the checkout, though cryptocurrencies and stablecoins are still used for less than half percent of the global e-commerce transaction value. Nevertheless, there are countries which welcomed crypto with eagerness and warmth, making it legal tender. What exactly does it mean?
Legal tender is a coin or currency that local merchants and institutions are obliged to accept as a means of payment for goods, services, and debt repayment. It’s possible some entities might also accept other currencies as a payment for something, but that’s entirely their own decision, not an obligation instilled by law.
Why Would Countries Embrace Crypto as Legal Tender?
Even those entities dealing with cryptocurrencies still issue warnings of inherent market volatility and existing risks of crypto investments. Nonetheless, both El Salvador and the Central African Republic (CAR) once decided Bitcoin has enough potential to outweigh risks with economic benefits.
CAR regretted its decision after a year and reversed monetary policies itself, while El Salvador has been remaining loyal to Bitcoin for over three years, up till this month when the IMF pushed the country to scale back its controversial Bitcoin policies in exchange for hefty financial assistance.
What do these two countries have in common that would prompt them to accept crypto as legal tender?
Economic Vulnerability Is Pressing for Change
In brief, both El Salvador and the CAR share certain characteristics of economic vulnerability, lack of financial inclusion, and limited control over monetary policy. Both countries struggle with poverty, inequality, and limited economic opportunities for their citizens.
In El Salvador, over 70% of the population lacked access to traditional banking services prior to Bitcoin adoption, while in CAR this share was even higher. Therefore, their large unbanked populations faced pressing issues such as limited access to credit, savings, and digital payment systems, which Bitcoin could potentially address.
If traditional systems don’t work well in the region, it is easier to try out an innovative approach, since there’s not much to substitute. In countries with strong and well-developed legacy banking systems, there’s neither much need nor much desire for such revolutionary revamps.
Innovation Attracts Investors and Boosts Economy
There are also countries which are not in dire economic circumstances but still consider introducing crypto as legal tender. One example is St Maarten, a small island-based country in the Kingdom of Netherlands, which announced plans to adopt TRON’s TRX as a legal tender in 2023.
It happened just a while after Tron tokens including TRX, BTT, NFT, USDT USDD, TUSD and JST were granted statutory status as authorised digital currency in the Commonwealth of Dominica – another island country of the Eastern Caribbean region. Additionally, as part of this initiative, Dominica announced plans to issue a national token, the Dominica Coin (DMC), on the TRON blockchain to promote the country’s natural heritage and tourist attractions through digital innovation leveraging blockchain technology.
As opposed to the approach of El Salvador, these TRON-based cryptocurrencies have been granted authorised status, but they were not classified as legal tender in the traditional sense, as local businesses were encouraged but not mandated to accept them.
In this case, small island developing countries of the Caribbean exemplify an innovative way of leveraging blockchain for economic modernisation and cultural promotion. They show willingness to experiment with emerging technologies, but in a more exploratory manner aimed at diversifying the financial system rather than remodelling it completely.
High Reliance on Remittance Favours Crypto
Many developing countries have started to use digital currencies, not as a legal tender but as a preferred payment method, due to the benefits they bring to the remittance market, including better accessibility, greater speed and lower transaction costs.
Traditional remittance methods are often costly and slow, with fees typically exceeding 7% of the transfer amount. Cryptocurrencies offer a more affordable and faster alternative. It boosts recipients’ disposable income and supports the economic growth of their home countries. Besides, crypto can be better to hold and use than some weak national currencies, especially in times of rising inflation.
In El Salvador, for example, remittances have lately played a crucial role. They averaged $288 million from 1990 until 2024, and reached an all time high of almost $790 million in December of 2023, accounting for about 20% of the country’s GDP. Moreover, 2 out of every 10 families who receive remittances in El Salvador live in poverty. That makes them highly dependent on the remittance inflow for their survival. Remittances sent to El Salvador are nearly 40 times larger than the outgoing value, with 94% of remittances to El Salvador coming from the United States.
According to Mastercard statistics, formal remittance volume in Latin America and the Caribbean reached $146 billion in 2022, twice as much as a decade ago, illustrating a significant 25x growth over the past 30 years. It is the very same region that contributed to 9.1% of the global 2022 crypto transaction value, with remittances and high inflation being the highest drivers of adoption.
Pros and Cons of Crypto as Legal Tender
While we have already figured out the reasons which drive countries towards crypto adoption as legal tender, we shall consider their perceived benefits and disadvantages to see what prevails.
Advantages
Some of the benefits of using crypto for monetary exchange on a regular basis include:
- Bitcoin and other cryptocurrencies provide a way for people without access to traditional banking systems to participate in the economy.
- It can significantly reduce the fees associated with remittance transfers, which are often high through traditional services.
- Crypto may potentially increase foreign investment and boost Bitcoin enthusiasts’ tourism to such crypto-friendly destinations.
- Crypto adoption may position the country as a forward-thinking economy.
- Digital currencies reduce dependence on external monetary systems and on foreign-controlled currencies, and diversifies the national financial system.
- Lower transaction costs, especially for remittances, which make up large shares of the economy’s GDP.
- Bitcoin or stablecoins serve as a store of value compared to some traditional fiat currencies which are highly volatile in many emerging economies.
- Such an innovation attracts global investors’ attention, and lures blockchain developers, businesses, and crypto enthusiasts to the country.
Drawbacks
Despite all the positive potential, the introduction of any cryptocurrency as a legal tender has certain challenges and disadvantages.
- Bitcoin is volatile and can pose risks for the stability of savings and everyday transactions.
- Developing a full-fledged crypto-friendly infrastructure (e-wallets, crypto ATMs, upgraded financial education) may be complex and costly.
- Many citizens are unfamiliar with Bitcoin, don’t trust the crypto players and may prefer traditional fiat currencies, negating government efforts.
- The country might face criticism from international organisations like the IMF, which provide crucial financial assistance to them.
- Bitcoin adoption as a legal tender serves as a statement of political and economic sovereignty, signaling a break from reliance on traditional global financial institutions, but the country is not always truly ready for such independence and may face a painful exclusion from traditional financial systems.
- Reliance on the ‘wrong’ cryptocurrency might undermine already fragile economies instead of strengthening them.
- When a country has a stable financial system, adding a volatile component to it and becoming overdependent on it can negatively impact the whole economy.
- The global regulatory environment for cryptocurrencies and blockchain remains uncertain, which could pose risks for crypto adoption on a national scale.
- While some businesses may quickly adopt Bitcoin or other crypto, others may resist due to lack of technical knowledge, risks to their profitability or overall skepticism.
- Reliable internet and access to user-friendly Bitcoin wallets are essential for seamless transactions, which may be lacking in some regions.
Conclusion
In a present non crypto-friendly financial environment which lacks regulatory clarity, adopting crypto as a legal tender on a national level is a risky business. It can provide transformative benefits for some nations but also comes with a set of drawbacks and challenges, which currently outweigh the potential advantages.
At the same time, a cautious, incremental approach that prioritises regulatory frameworks, education, and technological readiness may balance the advantages of innovation with the need for economic stability. Therefore, countries eager to try out the new form of payment and make it mainstream can start with introducing crypto for specific use cases (e.g., remittances, tourism) before making it legal tender. One may explore using stablecoins pegged to fiat currencies to mitigate volatility risks or first make crypto an authorised payment method on a voluntary basis to see how it goes.
While testing the waters, governments must invest in public education and digital infrastructure to prepare citizens for crypto adoption, so that the gradual rollout comes more smoothly.
