Is Bitcoin Legal Currency?
Bitcoin, the mysterious technology introduced by Satoshi Nakamoto in 2009, is a peer-to-peer decentralized cryptocurrency that operates without a central bank or in tandem with a third party. Additional coins are minted into existence and transactions are verified on it’s blockchain through an innovative process referred to as “mining”.
Much like any major currency (be it the Dollar, Pound, Yen or Euro) Bitcoin can also be traded for goods and services; with more vendors accepting the digital currency each day. Whether it was created by one person or a group of people is still unknown; however, it has taken the digital asset a little under 10 years to assume the position of most popular cryptocurrency in the world; but is bitcoin legal currency?
What “Legal Tender” Means
Before we get into the nitty gritty lets make sure we are on the same page in terms of understanding exactly what “Legal Tender” means. According to Merriam-Webster the definition of legal tender is money that is legally valid for the payment of debts and is required to be accepted for that purpose when offered.
Obtaining the status of legal tender within a country is huge deal because it not only allows citizens of the country to buy and sell for essentially anything in that currency, but it than shifts the assets’ classification from “commodity” to “currency” (at least based on US law). Who cares, you ask? Well that means the capital gains tax you would be required by law to pay if you experienced price appreciation while owning your cryptocurrency would no longer be required should Bitcoin be deemed legal tender. That means you get to keep a lot more of the money you make; and that is something we all can get behind.
Money Vs Currency
To better understand this topic it is also important to note the difference between money and currency. Lets’ quickly go over both terms:
What is Money?
At it’s very core, money is something that serves as a medium of exchange, a unit of accounting, and a store of value. Sound money has something called intrinsic value; which means that money itself is a form stored energy that that can be saved for the future. Lets use gold as an example; due to many of its natural properties (durable, fungible, portable, divisible, etc) gold has been globally viewed as one of the oldest and soundest forms of money for thousands of years.
How is a commodity such as gold equivalent to stored value? Great question! There is a cost to extract gold out of the ground, refine it and get it ready to be sold on the open market (that cost is approximately $1,200/ per oz at the time of writing this article). Gold serves as a great example of money with intrinsic value due to the fact that it takes $1,200 worth of someone else s’ labor to produce. Therefore, the price of gold is backed by the amount of energy expended in its production. Think about it, does it ever make sense to sell something to cost less than what it costs to produce it? Let me help you out, the answer should be a resounding NO!
The thought is if you are fortunate enough to save more than you spend that means you than you possessed more energy that was required for that given period of time (aka a surplus). Should you be in possession of 1 oz of gold you essentially have the ability to use someone else’s labor (besides your own) for any task or good that your little heart desires (like laundry that you hate doing or really anything else).
What is Currency?
Most people use the terms money and currency synonymously, thinking that they are simply the same thing; this could not be further from the truth. Currency, is every thing money is except a store of value and typically is much more portable and practical to carry around (because it is typically much lighter). Currency’s main function is to make it easier for people to participate in commerce with each other by acting as a representative of money (but should not be confused as actual money).
Here is a real world example that proves that there is a difference between money and currency:
- People used to carry around gold and silver money) to conduct trade
- Carrying around that heavy gold and silver got really old really fast
- In the attempt to find a lighter solution people started give each other paper IOUs (currency) that represented gold/silver.
- People established a constant measurement of gold/silver each unit of currency represented.
- At this point you can say that the currency is backed by gold/silver; meaning, the currency is given value due to the form of money (in this case gold and silver) that it is backed by.
- Should the backing of gold and silver ever get sold or goes away for any other reason than the currency goes back to the intrinsic value of the material it is made out of… and last time OI checked, the value of paper was next to nothing.
As you see above, money is the commodity that every one values and not the paper IOU that represents it. A currency not backed by anything is not worth anything. In fact, having a backed currency is the key to preventing inflation, which perserves your purchasing power over time.
Bitcoin vs National Currencies
The main difference between the government issued currency and the one you have in your bank account and cryptocurrency is that the later can send large amounts of money around the world nearly instantaneously, more securely, and at a fraction of the cost. Sounds too good to be true? Well, it’s not; as you could imagine such a revolutionary technology is a financial game changer and is here to stay. Due to the public’s acceptance of the digital currency decisions regarding national regulation and monetary policy are being made.
Unlike fiat currency, cryptocurrency isn’t created in a specific geographic location and it doesn’t have a centralized controlling entity; meaning the Bitcoin payment system is both global and autonomous. These attributes make it extremely difficult for governments to peg it to any one set of laws or control it in any significant way (besides banning it).
In fact, when you break it down, cryptocurrency is a sovereign government’s worst nightmare. It is hard to tax, it is hard to track, it is deflationary, and it is extremely mobile (which prevents governments from halting capital flight in times of unrest). It essentially stripes the traditional weapons of economic control right out of the hands of the (insert your local government here).
Due to these reasons it is not a surprise that each country is establishing their own laws/regulations regarding bitcoin; some declaring it legal tender while others ban it completely. A countries’ attitude towards bitcoin largely depends on a couple of factors: Political stability of the government, inflation being experience by the general population and access to technology for citizens. Yet the question still remains, is bitcoin legal currency?
Uncle Sam’s Take on Bitcoin
At the time of writing this article bitcoin is not illegal in the United States, but it is not classified as a “legal tender” either. This means that it is essentially up to each individual merchant to determine if Bitcoin is an acceptable form of payment at their particular store.
The main issues is when people conceptualize bitcoin, they often struggle in understanding exactly what it is. As time passes and more people come to learn more about bitcoin and it’s use cases; the public’s opinion is shifting from seeing it as worthless internet money and to actual real world money.
Once a merchant wraps their head around the idea of a private, fast and secure payment solution that doesn’t charge VISA type fees the business case for cryptocurrency speaks for itself.
Is Bitcoin Legal Tender Anywhere?
In August 2013, Bitcoin was first recognized as “private money” by the German government. In 2017, it was also defined as a “unit of account” which officially allowed it to be used as a legal currency for tax/trading purposes. Germany’s goal was to denationalize the production of money; thus, legitimizing cryptocurrency and providing a solid step in the right direction. Parliament member Frank Schaeffler famously said, “A free country should not intervene in a private citizen’s choice of money” (we stroungly agree). The goal of the German government is to collect taxes on profits made through bitcoin capital appreciation.
On April 1st, 2017 the Japanese legislature categorized bitcoin as a prepaid-payment instrument and passed laws bringing bitcoin exchange under anti-money laundering/know-your-customer rules. Since than all Japanese consumers are mandated to provide information regarding profession, trade purposes, verification of their address and identity. Being the first nation to embrace Bitcoin as legal tender, of course the price of bitcoin skyrocketed immediately after the historic announcement.
Has Bitcoin Been Banned Anywhere?
While a few countries’ have defined bitcoin as a “legal tender”, others have taken the opposite position and have banned it entirely’; Egypt, Saudi Arabia, Algeria, Iran, Morocco, Nepal, Bolivia, Ecuador, Colombia, Taiwan, Pakistan, Cambodia, Indonesia.
China, for the time being, would also make this list (until their government finally feels comfortable lifting their cryptocurrency ban). In 2017 China was the king of crypto, driving a huge percentage of the trading volume and dominating the bitcoin mining space. However, China has a long-standing history of heavy government economic intervention and has no plans in making an exception for cryptocurrency. In the back end of 2017 China slapped a big fat (and temporary) crypto ban on the country and it’s citizens until they get a better handle on regulation and fraud prevention.
The Bottom Line
Cryptocurrency, being the innovative and controversial technology that it is, transfers power from governments and financial institutions and back into the hands of the people. Needless to say, it is no surprise that countries’ have drastically different perspectives on the topic. On one side you have governments that embrace technology and have a positive outlook on the blockchain and its efficiencies; the other despises the fact that it enables their populous to transact in a peer-to-peer fashion without a third party.
While the future of cryptocurrency adoption on the sovereign country level is yet to be determined this environment of uncertainty is common for any new financial transnational instrument (just as the credit card and the dollar experience during their public roll outs). The issues bitcoin is experiencing in terms of legal recognition aren’t inherent to bitcoin itself, but rather the inadequacies of the governments and their people’s willingness to learn something new.
It is expected that more countries’ will follow in Germany and Japan’s path while others will lag in crypto adoption. However, this much is true; when a new technology makes it easier, faster, cheaper and more secure to do a task that technology has enormous value. If a government is too stubborn to recognize that value, fear not, it is certainty that there will be multiple countries jocking for position to incorporate this technology into their infrastructure.