Following El Salvador, will Bitcoin become a global legal tender?

Konstantin Anissimov-  Executive Director at the international CEX.IO exchange

As cryptocurrencies are set to reclaim their losses from the past few months, the adoption of the crypto asset class is continuing to grow.

According to a recent report by Chainalysis, worldwide digital asset adoption has surged a whopping 880% compared to the blockchain data analytics firm’s 2020 index, with emerging markets like Vietnam, India, and Pakistan ranking in the top spots.

With this in mind, the cryptocurrency community is curiously observing whether Bitcoin can become a globally accepted currency in the near future.

It’s a significant milestone many in the crypto space have been long dreaming about, especially if we consider that the Latin American country El Salvador is set to make BTC a legal tender from September.

But is it possible for Bitcoin to achieve this goal in the future?

Can Bitcoin become more than just a store of value?

In its original whitepaper, Satoshi Nakamoto described Bitcoin as a peer-to-peer (P2P) electronic cash system. Indeed, BTC is designed to facilitate decentralized transactions between users with real ownership over their funds and without any governmental oversight or intermediaries.

However, while these benefits are there, most of us don’t use Bitcoin to settle our everyday payments. And for a valid reason.

If you think it through, buying your daily dose of caffeine with BTC leads to a rather tedious, inconvenient process that features multiple risks for the coffee shop.

In this hypothetical scenario, the customer would have to wait at least 20-30 minutes for his transaction to reach 2-3 confirmations (Bitcoin’s block time is roughly 10 minutes). While it’s definitely an unpleasant experience for the consumer, the merchant faces increased risks of volatility as BTC, and the cryptocurrency asset class is often subject to sudden, rapid price movements.

In addition to that, suddenly accepting crypto in your shop may trigger some unfavourable actions from your financial institution or regulators towards the shop itself. And I haven’t even mentioned the transaction costs, which can go as high as $63 (April 2021 data) when Bitcoin’s network experiences a high load.

For these reasons, I believe Bitcoin in its original form is not suited for everyday payments. Instead, most people see and use BTC as a store of value due to the cryptocurrency’s limited supply and deflationary halving mechanism.

However, for Bitcoin to be used to settle everyday payments and become a legal tender worldwide, it needs an efficient infrastructure facilitated by third-party service providers. This way, consumers can pay for products and services in BTC without facing most of the issues described above.

On top of that, utilizing a layer-two scalability solution like the Lightning Network or a Bitcoin-based sidechain such as the Liquid Network can create a more seamless experience for consumers as they will have access to instantaneous and cost-efficient BTC transactions.

And this is what crypto businesses in El Salvador are working on. According to a recent interview with several market players, both the Liquid Network and the Lightning Network are being piloted in the Latin American country for micropayments solutions and digital bonds.

The road to becoming a global legal tender

As I mentioned earlier, BTC in its original “untouched” form is not well suited for mass adoption in payment processing.

At the same time, while payment-optimized digital assets like Ripple (XRP) and Stellar (XLM) offer cheap, fast, and efficient transactions for users, they lack the popularity and trust that comes with the “Bitcoin brand.”

For that reason, if a cryptocurrency were to become a global legal tender today, it would most probably be BTC. But, for that to become a reality, we need a more efficient infrastructure around the digital asset.

Utilizing a combination of user-friendly third-party services to offer consumers a flawless process to settle everyday payments is a vital step the industry has to take to onboard people who are not familiar with crypto.

Proper education about digital assets is also crucial for Bitcoin to become a legal tender. In my experience, many still believe that crypto is some kind of evil pyramid scheme or is predominantly used for illicit transactions.

We all know that these statements are simply not true, especially if we consider that illegal activity accounted for only 0.34% of the total cryptocurrency transfer value in 2020.

However, a considerable share of the world’s population possesses limited knowledge about the asset class. An effective education not only helps to eliminate the myths and the false information I illustrated above but also raises awareness about the best practices of securing your coins.

Eventually, it will lead to a significant change in consumer behavior, which is a key factor for Bitcoin to reach mass adoption and potentially become a worldwide legal tender.

The ‘El Salvador experiment’ will have a great impact on Bitcoin adoption

And now, let’s return to El Salvador’s case with BTC adoption.

There’s a chance El Salvador’s government jumped the gun by introducing its “Bitcoin law” before rolling out the necessary infrastructure and educating its population of nearly 6.5 million. As such a bold decision can easily backfire, this approach holds significant risks for the nation’s economy that has been rippled with limited GDP growth.

However, while El Salvador is a small and agile economy, it can serve as an excellent example for other countries to make Bitcoin a legal tender if its experiment goes well.

As a result of a favourable scenario, I expect smaller, remittance-dependent developing nations with larger unbanked populations to follow El Salvador’s footsteps in this area as they can benefit the most from crypto.

Of course, major economies like the United States won’t rush to adopt BTC as its official national currency, especially if we take into account the USD’s leading position that had a global ripple of nearly 60% in Q4 2020.

That said, we are many years away until BTC can potentially become a legal tender on a global scale. And, as the crypto market is a super busy place, many innovations may happen which could change the course of events and direct the industry in a very different direction.

Although, one thing is certain: crypto will stay with us for a very long time. And, as digital asset adoption is steadily increasing, I won’t be surprised to see cryptocurrency prices reach new highs by the end of the year.

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