The “Bitcoin of Damocles”: What are the Pros and Cons of Bitcoin as a Legal Tender

In light of El Salvador’s controversial law implementing Bitcoin legal tender that began on September 7, 2021, officials in several countries started to consider the same. It should be noted, making Bitcoin a legal tender doesn’t mean all businesses or merchants must accept it in payment for a good or service.

Basically, legal tender refers to money (coins and banknotes) — that can be accepted if offered in payment of a debt. For example, the front of every U.S. banknote states “This note is legal tender for all debts public and private.”

Thus, is making Bitcoin a legal tender a good idea? Here is a quick guide to some of the pros and cons of legalizing Bitcoin. We believe these factors will be important if Bitcoin is adopted globally as legal tender in a country.

The Pros of Bitcoin as a Legal Tender

It is a Censorship-Resistant

The Bitcoin network’s decentralization is probably its strongest characteristic. It has a peer-to-peer (P2P) system designed to permit payments without an intermediary. As a result, unlike conventional banking methods, Bitcoin payments do not need to be validated by central authorities or third parties.

Simply put, each party in a transaction can execute a payment directly from their wallet, watching the transaction get validated by other participants. It is founded on the idea that Bitcoin transactions are not governed by one entity. Hence, it is technically impossible to censor or reverse transactions.

This system is the complete opposite of conventional payment systems like PayPal and banks. A service provider or bank controls this entire process. With that said, Bitcoin is best for remittances and other cross-border payments since its decentralized nature allow its holders to avoid restrictions.

It saves you Time and Money

Speaking of cross-border payments, using Bitcoin to make international payments saves you time and money because there is no bureaucratic process required where transactions have to be routed through multiple intermediaries.

The P2P nature of Bitcoin also makes transactions almost instantaneous — making it an affordable method for making cross-border payments and remitting funds.

This makes sense that El Salvador made this move as 70% of its population does not have a bank account and works in the informal economy.

It has an Anti-Inflationary System

The supply of Bitcoin is fixed at 21 million BTC. Currently, there is around 18 million BTC in circulation, which means there are still over 3 million BTC to be released to the market.

Another anti-inflation measure used by the Bitcoin network is the block reward halving system, which ensures that the number of BTCs minted for new blocks is halved roughly every four years.

Due to these two reasons, Bitcoin’s value has continued to climb since it launched in 2009. The situation is unlike what we see in the traditional financial landscape, whereas central banks and governments can print more fiat money, triggering inflation.

The Cons of Bitcoin as Legal Tender

Concerns of Tax Evasion

For Bitcoin payments, a strong tax system and regulations are needed for tracking and paying taxes. Taxing fiat transactions is relatively easy, but tracking Bitcoin users is a bit challenging, especially when they utilize non-custodial wallets.

As a result, by making Bitcoin legal tender, tax evasion is one of the potential problems that may arise. If Bitcoin is legalized in countries like the U.S., the government would have to physically hack into an individual’s account to find out how much income they generate from Bitcoin.

Volatility in Price

Price volatility is definitely one of the major arguments used to counter the validity of Bitcoin as a legal tender. Bitcoin has a volatile price by nature — meaning the price tends to be unstable. This is why it is frequently referred to as a speculative asset.

For instance, a business that received 1 BTC as payment for rendering service may experience losses if Bitcoin’s price falls before the 1 BTC is exchanged to fiat or a stable digital asset. Likewise, if the price goes up, the receiver may gain from it. El Salvador has understandably been talking about this risk a lot.

To summarize, El Salvador’s move has been a hot topic all over the world and there are clearly pros and cons of making Bitcoin a legal tender. Yes, it is comparably faster and cheaper, but its volatile nature has a two-edged sword. Let us know what you think about Bitcoin as a legal tender.

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