Twenty years ago El Salvador replaced its domestic currency, the colón, with the U.S. dollar. Now the country’s president, Nayib Bukele, wants to take what seems to be an equally drastic step with his nation’s money. He wants to declare bitcoin to be a legal tender along with the dollar.
But is it in fact a major step? The significance (or not) of Bukele’s adoption of bitcoin as legal tender depends on the meaning he is ascribing to the term.
Few things in monetary economics are more foggy than the concept of legal tender. Using the vernacular meaning of the term, Bukele’s announcement is A BIG DEAL. If something is legal tender in the popular sense, then it has been declared to be official money. Salvadoreans would be able to walk into any supermarket and see bitcoin-denominated prices, and insist on paying with bitcoin.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.
But the vernacular differs from the lawyer’s much narrower definition of legal tender (indeed, there are a couple of legal definitions). A lawyer would probably dismiss Bukele’s move as unimportant.
Legal tender according to a lawyer
The lawyer’s definition of legal tender is any item that a debtor can always depend on to discharge his or her debt. Say Jack borrows $20 from Charlie. The debt comes due. Legal tender is a government-approved list of instruments that Jack can always rely on to cancel his $20 debt.
In the U.S., banknotes and coins are legal tender. Importantly, not a single type of digital money makes it onto that list. So if Charlie asks Jack to pay him back the $20 with a Zelle or Venmo transfer, Jack can refuse. Instead, Jack can force Charlie to accept a $20 bill, or 80 quarters, or 400 nickels. Because these items are legal tender.
In Canada, Jack would not be able to force Charlie to accept 400 nickels. The government limits the amounts of coins that qualify as legal tender. Canadian nickels are only legal tender up to $5 dollars.
The lawyer's definition of legal tender has a much more restricted meaning than the layperson's definition.
Creditors and debtors can easily avoid legal tender requirements by negotiating the terms of a settlement ahead of time. If Jack and Charlie both agree at the outset that the debt will be settled in the future with a bank transfer, then Jack can’t subsequently force Charlie to accept legal tender cash.
As you can see, the lawyer’s definition of legal tender has a much more restricted meaning than the layperson’s definition. What makes the lawyer’s version even more niche is it doesn’t typically apply to purchases and sales. That’s why stores in Canada and the U.S. needn’t accept legal tender. The relationship between a shopper and merchant isn’t a debtor/creditor relationship, so merchants can ignore legal tender laws.
Shops in the U.K. needn’t accept legal tender either. As the Bank of England says, “Legal tender has a narrow technical meaning which has no use in everyday life.” Scotland doesn’t even have legal tender notes.
Europe’s legal tender laws are a bit more strict. According to a 2010 recommendation, stores can refuse to accept legal tender, but only if they provide a “legitimate excuse” such as security concerns about having too much cash in the store.
Legal tender laws are rarely invoked. Every day, millions of debtors and creditors settle billions of dollars worth of debts using non-legal tender such as bank deposits, Fedwire balances and other digital dollars. It’s almost unheard of for someone to trigger legal tender law because someone wants to default to settlement in legal tender.
So according to the lawyer’s definition of the term, Bukele’s desire to declare bitcoin as legal tender probably is more of a publicity stunt than a substantial change to its monetary status.
Bitcoinization
But what if he actually wants to bitcoinize?
It’s possible that Bukele doesn’t just have the lawyer’s version of legal tender in mind. Perhaps he is using the vernacular meaning of the word and wants to give bitcoin the full monetary treatment, enshrining it much like the U.S. dollar was enshrined 20 years ago.
A quick glance through El Salvador’s 2001 Monetary Integration Law illustrates how Bukele might go about this.
The Monetary Integration Law made a number of pronouncements on the dollar. Article 3 made the dollar legal tender along with colón banknotes and coins. (The colón is still legal tender to this day, but it has disappeared from circulation and the central bank doesn’t print it anymore.)
But this was just the first step. Article 7 made all salaries and fees payable in dollars or colons. Article 9 stipulated the entire financial sector (bank deposits, pensions, securities prices) was to be redenominated into U.S. dollars. And Article 10 specified that prices of goods and services were to be expressed in either colones or dollars.
If Bukele were to take all these extra steps with bitcoin, it would amount to a big upgrade in bitcoin’s monetary status. It’s not apparent yet how far he is willing to go.
But even if Bukele gives bitcoin the full money treatment, it doesn’t solve bitcoin’s core monetary problem. Given the choice between spending their bitcoin or not, bitcoiners will generally prefer to not spend it. That’s because the main motivation for owning bitcoin remains the dream of winning big. Paying away one’s stack of sats on a trivial expense like breakfast short-circuits this dream.
As for non-bitcoiners, bitcoin’s price is just too unpredictable to justify having some bitcoin on hand for making payments.
This has perverse implications. Say that Bukele goes all-out and declares bitcoin to not only be legal tender but also requires Salvadoran stores and markets to set prices in bitcoin and accept bitcoin as payment (along with dollars). No Salvadoran will choose to take advantage of this feature: bitcoiners for fear of missing out on a price rise, and non bitcoiners out of fear of bitcoin’s volatility.
To actually become full-blown money, bitcoin can’t depend on rule-makers like Bukele. The change has to come from bitcoin itself. It needs to stop being that thing that you make millions on into a boring object you are willing to part with.
But it’s not apparent whether this will ever happen.