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☆Bitcoin as a Legal Tender

 

Bitcoin is to be adopted as legal tender in El Salvador from September 7, 2021. Since Bitcoin does not have the capacity to be a currency, it is unbelievable that a country's government and monetary authority would make such a decision, let alone a private company like Tesla. I wonder if any currency trading experts and economists in El Salvador have opposed the decision, or maybe my own "common sense" is starting to go out of date.

 

El Salvador used to have the colon as its national currency, but changed it entirely to the US dollar in January 2001. Currently, only the U.S. dollar is in circulation, so starting today, both the U.S. dollar and Bitcoin will be in circulation as legal tender.

 

In any case, El Salvador cannot decide on monetary policy, which should accompany the currency. If it were to apply its own policy rates and other measures to the U.S. dollars and bitcoins in circulation domestically, there would be a discrepancy between these rates and those of the U.S. dollars and bitcoins in circulation outside the country.

 

Since Bitcoin is not a legal tender, private companies such as Tesla, for example, can accept Bitcoin as a payment currency if it is $20,000 and stop it if it is $50,000 (selling Tesla cars for more than twice the price than if they are only denominated in dollars). At least in the absence of regulation, it has been possible to use Bitcoin only when it is advantageous to oneself.

 

On the other hand, when it is legal tender, the people of El Salvador would difficult refuse to accept it. Otherwise, the credibility of the government and the monetary authorities who set it as legal tender will be ruined. It is natural to assume that this could apply not only to domestic companies but also to international companies operating in El Salvador.

 

Then, consumers in El Salvador will always be able to compare the rates of US dollars and bitcoins and use only the favorable one. This would mean that the receiving side would always provide goods and services at unfavorable rates. If the price fluctuates too much between the US dollar and bitcoin, the provider will always be exposed to the risk of losing a lot of money, and normal business activities will not be possible. This would destroy the economy of El Salvador.

 

Let us now consider what currency is, using the example of a gift voucher that functions as a substitute for currency.

 

Where a gift voucher can be used depends on the creditworthiness of the issuer of the voucher. For example, a gift voucher issued by a major credit card company can be used basically anywhere, but if it is issued by a supermarket, the places where it can be used are limited. If the gift voucher is issued by a local shopping mall, it has its original value only at the local mall. And if you take gift vouchers to a ticket store, you can get a rough idea of their "circulation value." The reason I say a rough idea is that value judgments vary depending on ticket stores, location, time of year, tastes and other factors.

 

To put it another way, even I could issue a currency to my grandchildren that would circulate only within the family. It may even be worth more than the Japanese yen. But outside the home, it is just a piece of paper.

 

It shows that the capacity to be a currency depends on the creditworthiness of the issuer that anybody willing to use and accept it, at least regionally. 

 

Bitcoin does not have an issuer like a currency or a gift voucher. The alternative to creditworthiness is a digital registry called the blockchain, but the act of authentication costs a lot of money in PCs and electricity. Since that cost is paid in Bitcoins, the price must be maintained to meet the cost. If the price falls below the cost, no one would perform the act of authentication, and the blockchain system will collapse. Or only a small number of people will authenticate, which increases the risk of tampering.

 

It suggests that crypto has to be supported by buying power of speculators. I wonder if how many crypto markets could survive during the future monetary tightening era.

 

There is nothing wrong with some people recognizing it as a currency, but assuming that it will be accepted everywhere will prove to be a mistake.

 

Also, looking at price movements against the US dollar over the past year, the Turkish lira, Brazilian real, South African rand, and Mexican lira have all made big moves, but still less than 10% of the price movements of bitcoin.

 

This means that if Bitcoin is used as legal tender to settle purchases of goods and services, the price of goods and services will go up and down more than tenfold. This would make it impossible for it to function as a settlement currency.

 

In other words, El Salvador's decision to make Bitcoin a legal tender will simply cause confusion, and we can see that the best option for the country's economy would be for no one to use or accept it.

 

This is the way I see it. But I wonder how the government and monetary authorities in El Salvador view currency?




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