By Keith Knight.
In January 2022, an Arizona State Senator, Wendy Rogers, introduced SB 1341, a bill which seeks to amend the Arizona Revised Statutes to add Bitcoin as a legal tender in Arizona. Thus far, only one jurisdiction in the world has taken the decision to make Bitcoin legal tender, El Salvador. Though it might sound like an exciting and innovative move, Arizona should not take the decision to make Bitcoin a legal tender.
What is Legal Tender?
According to 31 U.S. Code § 5103, “United States coins and currency are legal tender for all debts, public charges, taxes, and dues.” A centralized legal tender is vital to any nation or state as it creates a system of trust and certainty which allows financial growth to occur. It is pointless for anyone in Arizona to take Monopoly money and begin paying taxes with it, as it is not considered to be legal tender by the U.S. Constitution and Congress. The U.S. only has one form of legal tender, the U.S. Dollar, but it is not unprecedented for a country to have more than one. Cuba, for example, has two currencies: the Cuban peso (CUP) and the convertible peso (CUC).
What Makes a Good Currency?
There are a slew of 180 currencies throughout the world recognized by the United Nations, all with varying values and strengths. This begs the question: what determines the strength of a currency?
Stability is of utmost importance. The best currencies in the world have maintained a stable value over many years. For example, the U.S. Dollar has only risen a modest 8.54% in the last year and the Euro has slid a similar -8.26%. This is as opposed to more volatile currencies such as the Turkish lira, which has had a calamitous -46.43% decrease in the past year. The lira is very much an outlier. Most currencies in the world maintain a reasonable degree of stability, except when they are wracked by internal and external problems that cause massive inflation or deflation. Stability improves individual welfare by assuring each person that the money in their pocket will keep a relatively consistent value.
Does Bitcoin Work as Legal Tender?
In September of 2021, El Salvador made the bold decision to enact Bitcoin as a legal tender alongside the U.S. Dollar. Nayib Bukele, the controversial President of the Central American country firmly believes Bitcoin will lead his country forward. However, all signs point to this being nothing more than a fantasy. Bukele is well indoctrinated into the Crypto community, frequently posting memes on Twitter and mocking the crashes of Bitcoin as his country suffers because of it. The International Monetary Fund (IMF) has urged Bukele to take steps to stop treating Bitcoin as a legal tender, their argument being that it will destabilize the country’s economic system. The IMF is an international financial institution comprised of 190 countries whose opinion holds weight over many countries, especially those which have taken out hundreds of millions in financial aid from the organization, like El Salvador.
As for Bitcoin’s stability, the picture is grim. Bitcoin is far and away more volatile than any legal tender in the world excepting those which are affected by extraordinary circumstances. In the past year, Bitcoin’s price jumped a dizzying 103.4% from January 2021 to November 2021 and subsequently plunged 43.2% by January of 2022. Why would anyone in El Salvador use their Bitcoin as currency when holding on to it could lead to an immense gain and spending it could potentially lead to an unpalatable loss?
This is one of the main flaws of Bitcoin as a legal tender. By its extremely volatile nature, it incentivizes those who own it to hold on to it rather than use it as a currency. This may be well and good for the individual holders of the asset, but it could have a devastating effect on the economy. Without money being pumped into the economy, it will soon stagnate. This problem is exacerbated by the fact that there will only ever be a maximum of 21 million Bitcoin. Even Bitcoin enthusiasts acknowledge and satirize this issue by taking as their proverbial motto HODL (Hold On for Dear Life). This means they have almost no interest in doing anything with Bitcoin except merely possessing it. Anyone could see how this mentality would grind an economy to a near standstill if Bitcoin was a primary legal tender.
What is the Future of Bitcoin as Legal Tender?
Bitcoin is not fruitless; its popularity alone is an indication of the genuine belief many hold that it will be a primary global currency in the future. Besides price instability, there are other controversies surrounding Bitcoin, such as its dubious consumer protection record. Conversely, Bitcoin holds many advantages, for example, how it is nearly infinitely divisible. Nevertheless, to the point at hand, Arizona and El Salvador are much better served sticking with the dollar.
