Recently,
El Salvador became the first country to adopt
Bitcoin as legal tender, throwing a googly at central bankers across the globe. So far, the US dollar was the only legal tender in that country.
Bitcoin is legal in several countries but nowhere else is it legal tender. The difference is significant.
In countries where Bitcoin is legal, it can be bought, sold or otherwise exchanged. It may even be regulated and taxed. But it is primarily looked upon as another asset class – but not as equivalent to a fiat or government/central bank-issued currency per se.
A legal tender is something which the law of the country recognises as something with which you can settle public or private debt, buy goods and services or meet any financial obligation in that country.
In general, central bankers do not like Bitcoin for exactly the same reasons its fans love it. Fans of Bitcoin and similar cryptocurrencies love them simply because they do not like the thought of central bankers and governments regulating their currency.
Bitcoin was immediately adopted by people who wanted to bypass the system altogether: they included those who wanted to trade in the deep web, the dark web and in general by anyone who liked the anonymity and the lack of central oversight that it promised.
Central bankers hate it because they cannot exercise any control over it and nor can they regulate transactions using it. Money can be moved across borders with no oversight by the banking regulators and bypassing the conventional financial systems.
In fact, there are a lot of reports of bitcoins and other cryptocurrencies being accumulated by people who can afford them in Afghanistan.
After Bitcoins and other similar cryptocurrencies became extremely popular, governments and banking regulators have long been trying very hard to figure out how to bring them under some modicum of government control.
Some nations have taken the pragmatic approach and started treating them as a distinct asset class with proper regulations and tax on buying and selling them. Others have tried to ban them without much success. India has done neither – it is not legal but neither is it explicitly illegal to hold cryptocurrency in our country either.
Of late, multiple central bankers have toyed with the idea of killing off cryptocurrencies – or essentially rendering them worthless – by issuing their own official digital tokens. China is the first one to actually do something, though the US and India and others are also studying the ways and means.
The problem they refuse to recognise is that Bitcoins cannot be killed by digital coins or tokens issued officially by a banking regulator. The appeal of Bitcoins is that they are free from regulation of central bankers and governments and to a large extent anonymous.
Of late, the anonymity has created its own set of problems. News of hacking of cryptocurrency wallets and exchanges and stealing of cryptocurrencies have cropped up from time to time, causing major issues of trust and the crypto currency communities are trying to find solutions to these.
If there is no central oversight, there is no way to get back your stolen Bitcoins or other altcoins unless the hacker is identified or decides to return them on his or her own.
That is why many countries and regulators think that recognising bitcoins and ensuring they follow some regulations in the country is the lesser of the two evils. That is a view that many bitcoin investors are also gravitating to – some oversight and transactions via a government recognised cryptocurrency exchange is better than a more risky and unregulated exchange. But another group feels that any attempt by governments to regulate them would come with too many riders.
For many economists, especially monetary economists, Bitcoins and other altcoins are simply another financial bubble because they have no intrinsic value and their prices fluctuate massively, on a daily basis and sometimes even hourly, because of demand, supply and sentiment.
Many people ask why that is a problem, given that even stocks can fluctuate depending on sentiment. The difference is that stocks are valued based on a registered company doing some real businesses and with some oversight. They have to report their profits, losses, assets and liabilities regularly. There is, hence, at least the illusion of assets backing a stock’s current value. (Of course, as frauds and sudden bankruptcies have shown, many of the assets exist only on paper or are overvalued).
Bitcoins and altcoins often have no intrinsic value and their price depends on what anyone is willing to buy them for at a given time.
There is another class of cryptocurrencies called stable coins, which have values linked to specific commodities like gold and silver and fluctuate far less. But they are less popular for precisely that reason. If one were to invest in gold, why would one buy a cryptocurrency linked to it.
But given the fluctuations in the value of Bitcoin, why did El Salvador decide to recognise it as legal tender? One reason is that a lot of the country’s economy depends on remittances from abroad by citizens working in other countries. These remittances, when sent by conventional banking channels, pay a huge transaction fee or commission.
According to some estimates, $400 million was the transaction charges last year alone of the remittances sent via conventional money service providers like Moneygram or Western Union. With bitcoins, transfer charges would be minuscule. Of course, the risk of fluctuations remain – the money transmitted as Bitcoins can become far more but also far less if the value drops overnight.
Meanwhile, the initial days of El Salvador and its Bitcoin experiment has been rocky and full of teething troubles. These may settle down over time. Central bankers across the world are watching the country’s experiment keenly to see how it plays out. It may give ideas on how to actually regulate crypto currencies better – but that might also lead to them losing some of their current appeal.
(For the latest crypto news, investment tips and real-time price updates, follow our Cryptocurrency page.)