- On 9 June, the Assembly of El Salvador passed a law giving bitcoin legal tender status alongside the US dollar.
- It was the first country to do so, and the experiment drew worldwide attention and criticism from bodies such as the IMF.
- The regulation of crypto-assets varies enormously from country to country: before dealing, it is worth knowing which rules apply and where.
On 9 June 2021, the Assembly of El Salvador passed a law giving bitcoin legal tender status alongside the US dollar, becoming the first country to do so. Until then, crypto-assets had moved in a grey area, tolerated or only partly regulated in most countries. This decision brought one of them into the realm of official money by legislative means. It is a decision each State can take within its powers, with effects that are limited, in principle, to its territory.
The news went around the world because of its unprecedented nature and prompted immediate debate. For some it was a bold bet on financial innovation; for others, a risky decision that put the stability of the economy at stake. Whatever one’s opinion of it, the episode is useful for understanding how far a rule can change the status of an asset and, with it, the conditions in which it is dealt in. A law can provide legal certainty, but it cannot by itself control how its price evolves.
What legal tender means
For a currency to have legal tender status means it must be accepted as a means of payment within the country. With the law passed in June, bitcoin came to share that status with the dollar, something no other country had done before, and it did so by decision of the legislator and not through the spontaneous evolution of the market.
It is worth distinguishing between legal tender and stable value. That a currency is accepted by law does not mean its price is predictable: a means of payment whose value changes a lot in a short time creates problems for whoever is paid, whoever pays and whoever has to keep the books. That is why price volatility was one of the main points of debate. If the price multiplies or halves within a few weeks, setting prices, wages or debts in that unit becomes complicated.
Attention and criticism
The experiment drew worldwide attention and criticism from bodies such as the IMF. Its supporters pointed to its potential to make payments and transfers easier; its critics warned about price volatility and risks to financial stability. The debate remained open.
A novel measure tends to arouse as much enthusiasm as caution. For companies and families with activity in the country, or ties to it, the legal change raised practical questions: how to get paid, how to record transactions, what tax treatment to apply and how to manage the risk that the value of the means of payment swings between one transaction and the next. For a business with tight margins, that variation can turn into a loss if it is not covered.
Regulation that changes by country
Beyond the headline, it was a reminder that the regulation of crypto-assets varies enormously from country to country. What is legal, or even compulsory, in one may be restricted in another, and tax treatment and reporting obligations also change. Anyone operating in several countries must know the framework of each. Regulatory changes can be rapid and are not always communicated clearly outside the country.
In practice, it is worth asking, before dealing, in which jurisdiction the activity takes place, which rules apply to each part of the transaction and what tax obligations follow. An adviser with experience in the field can help organise these questions and avoid mistakes that would otherwise be discovered too late.
Before dealing, it is worth knowing which rules apply and where.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
