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Twenty years ago, El Salvador replaced its national currency, the coln, with the US dollar. Now the country’s president, Nayib Bukele, wants to take what appears to be an equally drastic step with his country’s money. He wants to declare bitcoin to be legal tender with the dollar.
But is this in fact a major step? The importance (or not) of Bukele’s adoption of bitcoin as legal tender depends on the meaning he gives to the term.
Few things in monetary economics are more vague than the concept of legal tender. Using the vernacular sense of the term, Bukele’s announcement is A BIG DEAL. If something is legal tender in the popular sense, then it has been declared official currency. Salvadorans could walk into any supermarket and see the prices denominated in bitcoin, and insist on paying in bitcoin.
JP Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and financial writer at a major Canadian bank. He runs the popular Moneyness blog.
But the vernacular differs from the much narrower definition of legal tender advocate (indeed, there are a few legal definitions). A lawyer would likely dismiss Bukele’s decision as unimportant.
Legal tender according to a lawyer
The definition of legal tender advocate is anything that a debtor can always rely on to discharge their debt. Let’s say Jack borrows $ 20 from Charlie. The debt is due. Legal tender is a list of government approved instruments that Jack can always rely on to write off his $ 20 debt.
In the United States, banknotes and coins are legal tender. It is important to note that no type of digital currency is on this 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 articles are legal tender.
In Canada, Jack couldn’t force Charlie to accept 400 nickels. The government limits the quantities of parts that are legal tender. Canadian nickels are only legal tender up to $ 5.
The definition of legal tender advocate has a much narrower meaning than the definition of layman.
Creditors and debtors can easily avoid legal tender requirements by negotiating the terms of a settlement in advance. If Jack and Charlie both agree upfront that the debt will be settled in the future by wire transfer, then Jack cannot force Charlie to accept legal tender cash afterwards.
As you can see, the definition of legal tender lawyer has a much narrower meaning than the definition of layman. What makes the avocado version even more specialized is that it usually doesn’t apply to buying and selling. This is why stores in Canada and the United States do not need to accept legal tender. The relationship between a buyer and a trader is not a debtor / creditor relationship, so traders can ignore legal tender laws.
Stores in the UK also do not need to accept legal tender. As the Bank of England says, “Legal tender has a narrow technical meaning that is of no use in everyday life.” Scotland doesn’t even have legal tender notes.
European laws on legal tender are a little stricter. According to a 2010 recommendation, stores can refuse to accept legal tender, but only if they provide a “lawful excuse” such as security concerns about having too much money in the store.
Legal tender laws are rarely invoked. Every day, millions of debtors and creditors settle billions of dollars in debt using illegal courses 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 on legal tender.
So, according to the lawyer’s definition of the term, Bukele’s desire to declare bitcoin as legal tender is likely more of a publicity stunt than a substantial change in its monetary status.
Bitcoinization
But what if he really wants to bitcoin?
Bukele may not only have the lawyer’s version of legal tender in mind. Maybe he’s using the vernacular sense of the word and wants to give bitcoin the full monetary treatment, dedicating it much like the US dollar was 20 years ago.
A quick glance at El Salvador’s 2001 Monetary Integration Law illustrates how Bukele might go about it.
The Monetary Integration Law has made a number of statements about the dollar. Section 3 made the dollar legal tender with banknotes and coins. (Coln is still legal tender to this day, but it has disappeared from circulation and the central bank no longer prints it.)
But that was only the first step. Section 7 made all wages and fees payable in dollars or settlers. Article 9 stipulated that the entire financial sector (bank deposits, pensions, securities prices) had to be re-denominated in US dollars. And Article 10 specified that the prices of goods and services were to be expressed in colones or dollars.
If Bukele took all of these extra steps with bitcoin, it would dramatically improve bitcoin’s monetary status. We do not yet see how far he is ready to go.
But even if Bukele gives bitcoin the full monetary treatment, that doesn’t solve bitcoin’s central monetary problem. Given the choice of whether or not to spend their bitcoin, bitcoins will generally prefer not to spend it. This is because the main motivation for owning bitcoin remains the dream of winning big. Paying your stack of sats on a trivial expense like breakfast bypasses that dream.
When it comes to non-bitcoin, the price of bitcoin is just too unpredictable to justify having bitcoin on hand for making payments.
This has perverse implications. Say Bukele is going out of his way and declaring that bitcoin is not only legal tender, but also requires Salvadoran stores and markets to price bitcoin and accept bitcoin as a form of payment (along with dollars). No Salvadoran will choose to take advantage of this feature: bitcoiners for fear of missing out on a price hike, and non-bitcoiners for fear of bitcoin volatility.
To become full-fledged money, bitcoin cannot depend on policymakers like Bukele. The change has to come from bitcoin itself. It has to stop being that thing that you make millions of into a boring thing that you are ready to part with.
But it is not clear that this will ever happen.
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