Cryptocurrency will NOT be legal tender. At least, not by 2030.

Summary:

By 2030, cryptocurrency will likely NOT be legal tender in any of the world’s major economies. Today, legal tender in major economies is primarily government-issued currency, and these governments enjoy tremendous benefits from controlling their own currency.

There appear to be two potential paths for cryptocurrency to become legal tender, but neither appear possible by 2030.

  1. Major governments / economies issue their own cryptocurrency
  2. Widespread adoption of one or more cryptocurrencies forces governments to recognize these cryptocurrencies as legal tender

For either of these paths to be achieved by 2030, cryptocurrencies will have to overcome blockchain’s current scalability problems. Today, blockchain technology is vastly limited in the number of transactions it can process per second, in the amount of data it can store, and in the cost of its proof of work technology. Given (1) the technological uncertainty around blockchain scalability and (2) the benefits governments receive with status-quo fiat currency, it is unlikely that major economies will recognize cryptocurrency as “legal tender” by 2030. I explain in more detail below.

What is Legal Tender?

First, what do we mean by “legal tender?” Legal tender is defined as “any official medium of payment recognized by law that can be used to extinguish a public or private debt, or meet a financial obligation.” Creditors in a given country are typically obligated to accept legal tender. In the US, all legal tender (US currency) is issued by the US Treasury. In Canada, it is issued by the Royal Canadian Mint. Essentially, legal tender is a form of payment that must be accepted by creditors and tax collection agencies.

Nonetheless, we see many forms of payment in daily life that are NOT legal tender. These include credit cards, checks, EZ-passes, gift cards, gold coins, or even Bitcoin. In the US, merchants DO NOT have to accept legal tender as payment, they can accept whatever they choose. Due to ease of use, many choose to accept credit cards.

An important aspect about legal tender in major economies is that it is usually government-issued currency. The US, Great Britain, China, Germany, and other large countries use government issued currencies (Germany uses the Euro issued by the European Central Bank, run by a consortium of countries). In all of these economies, at the end of the day, even if payments are made in non-legal tender forms (e.g., checks, credit cards, EZ-passes), they are ultimately settled in the legal tender of their country. In major economies, government-issued fiat currency is both the legal standard and the accepted standard for money.

Is Legal Tender Always the Accepted Monetary Standard?

As we saw above, in major economies, government-issued fiat currency is both the legal and accepted standard for money. But is this always the case? Not always — in economies where there is a better monetary alternative to the legal tender, the legal tender may not end up as the primary form of money.

Venezuela saw this after it began devaluing its currency in 1983. Its legal tender, the bolivar, was very stable and widely accepted in its country from 1879–1983. Unfortunately, in 1983, the government began devaluing its currency in the wake of dropping oil prices. Venezuela had tremendous oil reserves, and in order to make its oil exports relatively more attractive in the market, it decreased the value of its currency relative to others (dropped its exchange rate). Instead of giving Venezuela the economic boost it was hoping for, this action began a period of hyperinflation in Venezuela that destroyed the savings and livelihoods of the citizens that held their wealth in bolivars.

Once Venezuela began experiencing hyperinflation, its citizens looked for a more stable alternative, and began using US dollars when possible. The US dollar was widely used globally because there was consensus that it was accepted as a (1) store of value, (2) medium of exchange, and (3) unit of account. The US government had managed the dollar supply well up to then, avoiding deflationary tactics that would destroy its value and its users trust (e.g., such as printing more money to pay off national debts).

While the bolivar was (and still is) the legal tender of Venezuela, a better, non-legal tender alternative emerged (the US dollar). This shows that a currency does not need to be a country’s “legal tender” to become the trusted and accepted standard for money. It just has to be a better form of money.

The US dollar has been adopted in numerous countries when their own government’s fiat currency has failed them (e.g., Ecuador, El Salvador, Zimbabwe). This shows that people do not always care about the “legal tender” of a country, they will use the best available currency for their needs.

This shows that if a cryptocurrency does emerge that better suits the needs of people versus the existing fiat currency, then users will probably adopt it, and the importance of the fiat currency will decrease. Just because one currency is “legal tender” does not mean it is protected from better, alternative forms of money.

Why Does Legal Tender Matter to Major Economies?

As mentioned beforehand, in major economies, legal tender generally refers to the government-controlled fiat currency. Since these currencies have widespread adoption and use as money, their governments can use them to have influence on their economies. This is what “Monetary Policy” typically refers to.

Below are a few of the important aspects of monetary policy that governments use and value highly:

  • Increase / Decrease Money Supply: In times of recession, governments will increase the money supply to help drive down interest rates and encourage investment and consumer spending. This is seen as an important tool used to boost economic output and combat unemployment.
  • Set Exchange Rates: Governments can set certain exchange rates on its currency to influence global trade. For example, China has been accused of manipulating its exchange rates below their natural levels to make its goods appear cheaper in global trade. This boosts China’s exports and helps drive its economy. It is likely that China highly values this aspect of monetary policy.
  • Seigniorage: Seigniorage is the profit that governments make by issuing currency (the difference between the cost of producing the money and the value of the money). So long as new-money-issuance is controlled (doesn’t lead to too much inflation), this can lead to funds that can be used for government spending and boost the economy (under Keynesian economics).

These aspects of monetary policy are extremely valuable to the governments of every major economy in the world. The last thing that these governments would want to do is give up their monetary control. This is extremely important to consider when evaluating if governments would give “legal tender” status to one or more cryptocurrencies.

Given the economic benefits of owning their own currencies, major governments will NOT want to allow cryptocurrencies to proliferate as money in their economies without their control. With this in mind, I believe that there are only two ways cryptocurrency can become legal tender.

  1. Major governments / economies issue their own cryptocurrency
  2. Widespread adoption of one or more cryptocurrencies forces governments to recognize these cryptocurrencies as legal tender

Option 1: Major Governments / Economies Issue Their Own Cryptocurrency

First and foremost, major governments will be looking to protect the integrity of their fiat currencies. If it becomes clear that cryptocurrency is the way of the future for all currency, then major governments will probably try to issue their own cryptocurrencies (as “legal tender”) and link them to their own fiat currencies. They would do this in order to:

  1. Protect the value of their fiat currency, and thereby the wealth and wellbeing of their citizens
  2. Ensure continued ability to enact monetary policy and the economic benefits that go with it
  3. Include important features for government purposes (e.g., auditing, crime-limiting features)

As stated, for major governments (i.e., not Venezuela) to issue their own cryptocurrency linked to their fiat currency, they will have to be witnessing that cryptocurrency is the way of the future. In order for cryptocurrency to be the way of the future, they will have to scale to a point where they can challenge fiat currencies.

Below, I describe why this seems improbable, making this option highly unlikely. Governments will not issue their own cryptocurrency by 2030.

Option 2: Widespread Adoption of Cryptocurrency Forces Governments to Recognize One (or More) as Legal Tender

In this scenario, cryptocurrency turns out to be a better form of money than fiat currency, and its adoption becomes widespread very quickly (by peers, merchants, customers, etc.). Governments would likely try to enact controls and restrictions on the cryptocurrency. It will likely be a difficult battle over controls, but once governments are satisfied with the controls they’ve gained (or they have just given up on it), they will essentially be forced to recognize the cryptocurrency as “legal tender.”

This is a tough scenario for governments. They will be extremely reactionary and working hard to (1) protect the value of their fiat currency and the wealth of their citizens, and (2) ensure continued ability to enact monetary policy that benefits their economies.

While there is great uncertainty, and this COULD happen, I find it highly unlikely, for the same reason I find option 1 unlikely — this would require blockchain technology to overcome its current scalability issues. For reasons discussed in the next section, I do not believe that the right technology, infrastructure, or adoption of cryptocurrency will be in place by 2030 for it to be pervasively used. Therefore, this scenario (option 2), seems highly unlikely.

Why Broad Adoption of Cryptocurrency by 2030 Seems Improbable

No one knows if or when cryptocurrency (and blockchain in general) will be broadly adopted. What we do know is that in order for cryptocurrency to have a chance, it must overcome its scalability issues. Blockchain offers security via distributed consensus, but this type of security is offered at the expense of transaction speed. In addition to speed, there are blockchain issues around data storage limits, a proof of work system that is computationally expensive and energy inefficient, and an ecosystem that is far from “user-friendly.”

In order for a cryptocurrency to become widely adopted by 2030, the following will have to occur.

  • Technical advances are made, overcoming blockchain’s cost and scalability problems
  • Infrastructure is put in place for merchants, customers, users (software, hardware)
  • Cryptocurrency becomes easier to use than fiat money alternatives (credit card, digital cash, cash)
  • This leads to widespread adoption

Many people are working hard today to overcome blockchain’s scalability issues. Below are some of the current solutions that will incrementally improve cryptocurrency’s scalability.

  • SegWit (Segregated Witness): The process by which the block size limit on a blockchain is increased by removing signature data from Bitcoin transactions. This frees up space / capacity to add more transactions to the chain.
  • Off-Chain State Channels: Participants transaction off the blockchain, and only save the transaction outcome (signed & timestamped) to the blockchain.
  • Sharding: A “shard” of data will be recorded on the blockchain (versus the entire set of data) to reduce the amount of stress on the blockchain system
  • Plasma: Plasma allows subsidiary “child” blockchains to branch off of the main “parent” blockchain. These child blockchains facilitate micro-transactions to process faster and at a cheaper rate.
  • Off-Chain Computations: Essentially brings proof of work computations off the blockchain to reduce computational stress on the system
  • Proof of stake: Miners put tokens at-risk in order to receive token rewards. Mining power is attributed to miners based on the amount of value put at risk.

While these are some of the leading scalability developments today, they are only incremental. Even with all of these incremental improvements to blockchain technology, it will still be nowhere near the transaction processing capacity of centralized transaction services like Visa. It appears unlikely that blockchain’s scalability issues will be solved in the next few years.

Even if blockchain’s scalability issues are solved in the next 5 years, a cryptocurrency will still need great infrastructure (both hardware and software) in place for it to be adopted. Developers will have to build applications for use by merchants and customers for currency payment. Creating software that is easy to use will likely take a few years.

Even if blockchain becomes scalable AND the right infrastructure is built over the next decade, cryptocurrency will still need to have a value proposition over traditional forms of payment. For merchants, it may reduce transaction costs (versus credit card providers) which could be valuable. But given the scale of large credit card providers, they could likely compete for many years against the energy-intensive crypto solution. For customers, the cryptocurrency would likely have to be easier to use than traditional forms of payment. Overall, it does not seem that adoption would come too quickly, even at this stage.

With so many hurdles (some of which may not be solvable — i.e., blockchain scalability) and a highly uncertain time frame around each, it does not appear that there will be widespread adoption of a cryptocurrency as currency by 2030.

Conclusion

As one can see, it is extremely unlikely that cryptocurrency will be legal tender in any of the world’s major economies by 2030.

The benefits that governments enjoy from controlling their own currency are large enough that they will defend their currency to the bitter end. They will be reluctant to designate cryptocurrency as legal tender (in a meaningful way) until cryptocurrency technology is ready to act as a true, scalable currency that can challenge fiat. Based on the technological hurdles today, it does not appear that that will happen by 2030. Perhaps by 2050, but not in a decade’s time.

Final Aside: Notably, Japan passed a law in April 2017 that designated bitcoin as legal tender, but this is an inconsequential update. Today, bitcoin and other cryptocurrencies are not scalable enough to challenge fiat currency, therefore designating them as legal tender is more a novelty than anything. The US, European Union, and China will not be recognizing it as legal tender.

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