Bitcoin as a legal tender – what we’ve learned so far

Image source: https://pixabay.com/illustrations/crypto-currency-bitcoin-blockchain-3130381/ 

Bitcoin was once thought to be a revolutionary alternative to fiat money that would disrupt the traditional financial system. 15 years after its birth, Bitcoin and the slew of altcoins that emerged in its wake are predominantly used as a trading and investment mechanism and less as a payment method. Investing in crypto is also easier than ever before, with plenty of guides on how to buy Bitcoin breaking down every step of the process. 

Although its popularity increased considerably over the years in keeping with its ongoing price rise, Bitcoin is still a long way from being embraced as a mainstream form of payment. Its legality varies substantially from one country to another, ranging from relative acceptance, as is the case in most developed economies, to complete prohibition in countries like China, Egypt, or Morocco.

Even in jurisdictions where Bitcoin is legally accepted, it still doesn’t enjoy the same status as government-backed currencies, with only two exceptions: El Salvador and the Central African Republic (CAR). These two nations have already grated Bitcoin the legal tender rank and several others seem to be interested in following down the same path in the future.

Trailblazers in cryptocurrency adoption 

It hasn’t been that long since Bitcoin became a legal tender for the first time, which is not in the least surprising given that the digital asset has a rather short history spanning only 15 years. But it’s been enough to gain some valuable insights and lessons in this respect. 

In 2021, El Salvador broke the ice by becoming the first nation to recognize Bitcoin as an official national currency alongside the U.S. dollar. Ensuring greater financial inclusion, enhancing investment opportunities and fostering innovation and economic development were the main arguments that Nayib Bukele, El Salvador’s president, put forward for this historical decision. 

Local authorities partnered up with several major companies like Bitso, Silvergate Bank and Athena Bitcoin to build a viable crypto infrastructure by facilitating the creation of official Bitcoin wallets known as Chivo and crypto ATMs. This allowed locals to conduct Bitcoin transactions quickly, effortlessly and free of fees. 

In 2022, the Central African Republic, one of the poorest countries in the world with almost 70% of its population being affected by extreme poverty, took a page from El Salvador’s book and proceeded to recognize Bitcoin as an official medium of exchange. The purpose was to tokenize the country’s natural resources as part of a master plan known as Project Sango.  

Unfortunately, Bitcoin’s stint in the local economy ended rather abruptly one year later when officials reversed their decision. The Banking Commission of Central Africa (COBAC) ban on crypto, a 90% lack of internet access among the population, mistrust and low levels of crypto literacy were the main factors that led to the project being rejected. 

Is the official adoption of Bitcoin a good idea? 

Both El Salvador and the CAR wanted to take advantage of Bitcoin’s capabilities to address many of the economic issues they were struggling with, namely low growth rate, inequality in the distribution of income, poor financial inclusion, and inflation. In CAR’s case, using Bitcoin alongside the CFA Franc would help them reduce their dependency on France which holds 50% of their foreign exchange reserves. 

From an economic standpoint, these two countries had solid reasons to make Bitcoin a legal tender, but their experiences highlight several challenges in this respect. The biggest hurdle in integrating Bitcoin into the local financial ecosystem was represented by the lack of adequate infrastructure. 

While El Salvador might have a better internet penetration than the CAR, 40% of its population still lacks access to the internet, making it impossible for a large number of people to participate in the crypto market. Moreover, Bitcoin use rates are low even among those who have access to the internet, with just 60% of people having downloaded Chivo Wallet and even fewer using it. The situation is even more dreary in the CAR where only 11% of people benefit from internet access, electrical supply is limited, power shortages are a common occurrence, and mobile phone ownership remains very low. 

Cybersecurity and system functionality were not strong suits for these two countries either. Bitcoin’s adoption in El Salvador was plagued by glitches from the very beginning, with citizens experiencing issues with accessing their wallets, data verification or withdrawing money from ATMs. Widespread reports of hackers gaining hold of the $30 that the government gifted citizens who signed up for the digital wallet further fueled people’s reluctance toward crypto. 

As for transparent communication, neither El Salvador nor the CAR were able to create a streamlined and consistent communication channel for crypto-related matters. Transparency concerns and the lack of information caused the public to lose trust in these initiatives. 

Also, El Salvador and the CAR adopted Bitcoin without having a clear regulatory framework in place first. Without clear standards and regulations for the use of digital assets, the risk of illicit activities within the crypto landscape emerged as a major point of concern. 

Lastly, Bitcoin’s inherent volatility raised questions regarding the potential benefits it might provide. 

Prospects for the future 

El Salvador and the CAR’s experiences underscore the importance of proper preparation in the integration of digital currencies within a country’s financial system. Aspects like having a robust digital infrastructure, educating the broader public on blockchain and cryptocurrency, ensuring clear and transparent communication and prioritizing cybersecurity are crucial for the success of these types of projects. 

Despite the obvious challenges that El Salvador and the Central African Republic have had with adopting Bitcoin, which many deem as failed experiments, there’s a growing list of countries that could follow suit. Especially countries in Latin America like Brazil, Colombia and Argentina which already have a large crypto user base seem keen on crypto adoption and have the potential to become major players in the global crypto market. Whichever nation might want to follow in El Salvador and the CAR’s footsteps, would do well to learn from the lessons these two countries have provided.