On September 7th, El Salvador will be the first country to make Bitcoin legal tender.

The government even went a step further to promote the use of cryptocurrency by giving $ 30 in free bitcoins to citizens who sign up for their national digital wallet called “Chivo” or “cool” in English. Foreigners who invest three bitcoins in the country – currently around $ 1,40,000 – will be issued a residence permit.

Panama is considering following El Salvador’s example.

Does the introduction of Bitcoin as legal tender mean that every business and merchant in El Salvador must now accept digital payments? If more countries are doing the same, what does it mean for consumers and businesses around the world?

As an economist studying wealth and money, I believe that a brief explanation of what legal tender is will help answer these questions.

What is legal tender?

Legal tender refers to money – typically coins and banknotes – that must be accepted when offered to pay a debt.

The front of every US banknote reads, “This bill is legal tender for all public and private debt.” This statement has been enshrined in federal law in various forms since the end of the 19th century.

The greenback is legal tender not only in the United States. El Salvador, for example, switched from the previous currency, the Colon, to the US dollar in 2001. Ecuador, Panama, East Timor and the Federated States of Micronesia also use the dollar as legal tender.

Create acceptance

But despite the definition above, legal tender does not mean that all businesses must accept it as payment for a good or service.

This requirement only applies to liabilities to creditors. The ability to opt out of business, cash, or other legal tender is offered on both the US Treasury’s website, which is responsible for printing paper money and coinage, and the Federal Reserve, which is responsible for distributing the currency to the banks of the Country.

This is why many companies, such as airlines, only accept credit card payments and many small retailers only accept cash.

As the Treasury Department points out, “there is no federal law requiring a private company, person, or organization to accept money or coins as payment for goods or services. Private companies are free to develop their own guidelines for accepting cash, unless state law says otherwise ”.

And this would be no different if the US made Bitcoin legal tender. Private companies would not have to accept this.

However, there is clearly confusion in El Salvador. The original Bitcoin law, passed in June, states that “every economic operator must accept Bitcoin as payment when offered by someone who purchases a good or service”.

I just sent the #BitcoinLaw to Congress pic.twitter.com/DljnxsXlyt

– Nayib Bukele 🇸🇻 (@nayibbukele) June 9, 2021

This sparked protests and aroused skepticism from economists and others. As a result, El Salvador President Nayib Bukele tweeted in August that companies would not have to accept bitcoins.

El Salvador and Bitcoin

El Salvador is betting that it will boost its economy if it is the first to open its doors fully to Bitcoin.

President Bukele said he believes this will encourage cryptocurrency investors to spend more of it in his country. He even has plans for El Salvador’s state-owned geothermal utility to use energy from the country’s volcanoes to mine Bitcoin.

Bitcoin production or mining requires a lot of energy, so mining only makes sense in places with cheap electricity.

The $ 30 given to every citizen who joins the cryptocurrency craze will temporarily boost the economy. The overall impact, however, is likely to be a short-term boost. The effects of similar payments in other countries, such as Covid-19 stimulus payments, appear to end after people have spent the money. Furthermore, it is unclear whether the increasingly indebted El Salvador government can even afford it.

And the widespread adoption of Bitcoin is likely to take years. El Salvador has installed 200 Bitcoin ATMs so that people can convert cryptocurrency into dollars.

Since only 30% of the population of the Central American country even have a bank account, I believe that the US dollar will be used in El Salvador for a long time, even if the president wants to switch to Bitcoin.

Jay L Zagorsky is a Senior Lecturer at the Questrom School of Business at Boston University.

This article first appeared on The Conversation.