Bitcoin legal

List of countries where Bitcoin (BTC) cryptocurrency is legal


What does it mean to use Bitcoin as legal tender?

Unless citizens can demonstrate that they do not have access to the necessary technology, they can use Bitcoin as a form of payment if BTC is treated as legal tender in their jurisdiction.

In general, a nation’s central banks and regulatory authorities decide which currencies are legal tender in their economy. This means that any form of value it deems fit to be legal tender can be used to pay for goods in shops. For example, $10 bills and $0.50 coins are accepted for payment (are legal tender) in the United States.

Making Bitcoin (BTC) legal tender means that when someone wants to pay for a cup of coffee, they can use BTC to pay for it. Without a central bank declaring Bitcoin as legal tender, the risk of accepting BTC for goods sold would remain with merchants. If a central bank explicitly declares Bitcoin as legal tender, then it becomes an official form of value exchange within the economy.

The rise in popularity of Bitcoin and several other decentralized cryptocurrencies have already led several central banks to consider digital currencies as a more robust alternative to fiat currencies. As a result, many countries, including China, the UK, the US and India, are all working on central bank digital currencies (CBDCs).

The rationale for adopting digital currencies is to achieve better traceability and control of each monetary unit in the economy. This traceability will help them calculate taxes more accurately and identify money launderers more easily, but more importantly identify any accumulation of wealth and come up with policies to keep it in their savings.

What factors contribute to a country’s adoption of Bitcoin as legal tender?

There are usually a number of macroeconomic factors that a country tries to manage by adopting a currency as legal tender. To make Bitcoin legal tender, these factors would have to coincide with the vision of those in charge of the monetary system in a given country.

Several central banks around the world have already started working on their own digital currencies. At the same time, there are countries with fundamental problems that a simple digital version of a fiat currency may not solve. For example, countries like Argentina and Venezuela have faced hyperinflation for several years and can do better with a form of currency that gains value beyond their own economies. There are also countries like El Salvador, Panama, Guatemala and Honduras where remittances contribute a large percentage of GDP. This paves the way for a form of value exchange that is not restricted by national borders. For example, 24.07% of El Salvador’s GDP in 2020 came from remittances.

Another consideration for most countries is the degree of financial inclusion in their economies. While citizens’ venture into the crypto space is by no means easy to manage, it must be said that local experiments in creating a Bitcoin ecosystem in countries like El Salvador have seen some success. Given that remittances are a major contributor to the economy, digital currencies can not only help with financial inclusion but also achieve cost savings on remittance fees.

It should also be noted that countries that launch Bitcoin as legal tender claim to bring financial inclusion to its citizens. However, financial inclusion often needs to be preceded by mobile and internet penetration. Without digital infrastructure, a digital currency will not be able to solve the problem of financial inclusion on its own.

So which countries have adopted Bitcoin as legal tender and how did they do it?

El Salvador is the first country to adopt Bitcoin as legal tender. Apart from the macroeconomic factors described above, the country has a leader who is willing to experiment with Bitcoin. El Salvador has since been considered an ambassador country for cryptocurrency.

The second country to adopt Bitcoin as legal tender is the Central African Republic (CAR). CAR is rich in natural resources such as gold and diamonds and has an economy of $2.3 billion. However, financial inclusion is quite low and relies on remittances. In addition to embracing Bitcoin, the country also revealed that 20% of its treasury will hold Sango Coin (SANGO), a digital currency that will reflect the health of the country’s natural resources.

What do countries intend to achieve by accepting BTC as legal tender?

Countries rely on effective monetary policy as a key lever to manage their economies. Therefore, they need a credible currency and the ability to maneuver policies around their own currency in times of crisis.

Both El Salvador and CAR have stated that they want to make money transfers within the country cheaper. El Salvador President Nayib Bukele has projected a $400 million remittance economy as the country moves to Bitcoin infrastructure. Using the Bitcoin lightning network, payments could be cheaper than using existing methods.

On a macroeconomic basis, the currencies of these countries have generally struggled to hold their value against the US dollar. El Salvador switched to using the USD as its currency, but soon realized that most of its exports were to the US and that a weakening dollar did more harm than good to its people. Unlike other Latin American economies, El Salvador did not have very high inflation before embracing the dollar.

Additionally, the country had no control over monetary policy around the USD, which is controlled by a centralized entity in another country. Therefore, El Salvador believes that BTC will help solve key remittance issues in its economy without being affected by the fluctuations of the US dollar.

What are the challenges of adopting Bitcoin as legal tender?

There are liquidity and regulatory risks around the crypto market that a country will take on when using cryptocurrency as legal tender. Since the crypto market is highly correlated with the US stock markets, policy changes by the Federal Reserve will have an impact on crypto prices.

The narrative most of these countries have for adopting Bitcoin is the lower cost of remittances to a highly unbanked population. This could be a superficial reason as most of these countries have very low digital and mobile penetration. Therefore, unless they can set up Bitcoin ATMs all over the country, it would not be practical for them to scale BTC as their default currency.

The other challenge is the volatile nature of the crypto market. As BTC is down more than 70% from its all-time high since November 2021, El Salvador has been making more purchases of the cryptocurrency. However, the decline in Bitcoin prices has been relentless and most of these positions are currently held at a loss.

The fact that a country’s treasury has consumed citizens’ money in a volatile asset that can lose 70-80% of its value in six months cannot be seen as sound economic policy. Due to weak cash positions, the country’s ability to borrow more from international markets is also severely affected.

On the other hand, Bitcoin regulation is largely driven by national regulatory authorities. Due to the decentralized nature of cryptocurrency, banning BTC in one national jurisdiction does not directly affect its legal status in another jurisdiction. However, when a country like the US institutes regulations in the crypto area, the market reacts to it. The resulting price action may affect all countries that use Bitcoin as legal tender or reserve currency.

Which countries ban Bitcoin and other cryptocurrencies?

Banning a global technology and economic paradigm like BTC is not the best approach for governments to protect their citizens from the risks of this asset class.

To date several bans have been instituted around the world for BTC as well as other cryptocurrencies and especially for cryptocurrency mining, blamed for its huge consumption of electricity. China banned cryptocurrencies in 2021, although it is working on its own digital currency, which has also affected Bitcoin mining. As a result, the BTC hash rate has decreased in 2021. However, the industry has been brought back to its feet by an increase in Bitcoin mining in the United States.

In 2022, India took a tough stance on cryptocurrencies. However, as history has shown so many times, every time there is a ban on this asset class in one part of the world, another region seizes the opportunity. Therefore, until there is a coordinated worldwide ban on cryptocurrencies, it is extremely difficult for anyone to stop the growth of BTC and digital assets in general.

Countries that want to ban cryptocurrencies to protect their citizens, such as retail investors, are unlikely to succeed. However, a more collaborative and democratic approach will perhaps help them achieve their goal of protecting their retail investors.

Also read: Countries where cryptocurrencies are restricted or illegal

(i) Check the updated list of cryptocurrencies by market capitalization.