Bitcoin as Legal Tender: a Look at the Pros, Cons, and Future Trends
Greg Waisman, co-founder and COO of the global payment network Mercuryo.
Since the inception of Bitcoin (BTC) back in 2009, there has always been buzz around the topic of adopting the cryptocurrency as a nation's official legal tender.
Indeed, such a move would mean one of the most significant milestones, for not just BTC, but also for the broader digital asset space. And when El Salvador's government made bitcoin legal tender alongside the USD on September 7 2021, this distant dream became a reality.
But is BTC well-suited to be utilised as a country's official currency for the everyday transactions of millions of residents?
Bitcoin as Legal Tender: the Potential Advantages and Downsides
Bitcoin's adoption as legal tender is a complex topic with advantages and disadvantages. By leveraging blockchain technology and public-key cryptography, the Bitcoin network is highly secure and decentralised. Instead of utilising central servers and letting a single entity or a small group be in charge, the Bitcoin ecosystem is maintained by a massive community of miners and full nodes distributed all over the world.
Lack of third parties and peer-to-peer (P2P) transactions offer reduced costs and much quicker transaction processing times a state can leverage to boost the efficiency of its financial system. This comes especially handy for nations that are heavily reliant on remittances, as this is the area where citizens can cut their costs the most via Bitcoin.
On the other hand, there is a common argument within the cryptocurrency space that, while bitcoin is an excellent store of value, it is an inefficient asset for everyday transactions. And this statement does make sense – at least for Bitcoin's mainnet.
While Bitcoin is often more efficient than traditional banking transactions (especially for international transfers), its primary focus is on security and decentralisation, not scalability. As a result, while there are cryptocurrencies on the market that settle transactions in 10 seconds or even less, Bitcoin's network requires around 20-30 minutes for a transaction to finalise.
In addition to that, due to Bitcoin's low scalability, its network can only process a limited number of transactions per second (up to 7), drastically increasing transfer costs in times of heavy usage.
Volatility has also been a great fear from the side of businesses and service providers in terms of BTC adoption. Since bitcoin and the whole asset class are highly volatile – especially compared to general market instruments like stocks, bonds, and fiat currencies – it could cause potential financial loss for both individuals and companies when they conduct a transaction with each other.
Can Bitcoin's Payments-Related Inefficiencies Be Solved?
The good news is that most of the downsides discussed earlier can be solved to make bitcoin an efficient currency of a nation.
For one, the Lightning Network plays a key role in improving Bitcoin network’s efficiency by offering instantaneous and inexpensive micropayments for users. This way, individuals, businesses, and governments don't have to make big sacrifices to settle their everyday payments in an efficient manner.
Volatility is also a problem that is relatively easy to fix. Nowadays, cryptocurrency payment gateways, as well as many wallets and digital asset-focused financial services, offer automatic BTC-to-fiat conversions. Since all the funds are exchanged to a stablecoin or a fiat currency before the transaction arrives at the recipient, it entirely eliminates all volatility-related risks.
BTC Adoption: Will Other Nations Follow Suit?
Undoubtedly, Bitcoin has a great potential to become one of the most convenient and fastest assets for everyday payments. However, to achieve that, its current disadvantages have to be taken into account and resolved by market players and the states seeking to adopt it as legal tender.
I believe we will see BTC rolled out as the official currency in multiple nations in the next three years.
At the same time, development will speed up around the Lightning Network and Bitcoin-centered financial services (e.g., payment gateways, wallets, transfer solutions) to support such large-scale events of adoption.
However, I don't believe bitcoin will come close to dethroning the USD's market share among currencies on a global scale.
In parallel to BTC adoption, states like China, the UK, and Sweden are rapidly developing their central bank digital currencies (CBDCs). CBDCs are issued and operated in a centralized manner but retain most of the benefits of cryptocurrencies, which allow governments to enhance their financial systems and economies.
For that reason, while the major trends around digital assets won't just be about Bitcoin adoption, the combination of CBDC rollout and the increasing popularity of decentralised cryptocurrencies will create a new digital age.
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