On my earlier post, Bitcoin Must Be Made Legal Tender (Your Coins Aren't Safe Until It Is), a kind reader asked this question in the comments: what the benefit would be for established governments like the US or UK to make BTC legal tender?
I fired off a reply, attributing a nefarious motive to a government making Bitcoin (BTC) legal tender. That motive was to acquire and thus remove a sufficient quantity of Bitcoin (BTC) from the marketplace to raise its price in fiat out of reach of most people.
But what if a forward-thinking government of a large, developed economy made Bitcoin (BTC) legal tender without the motive of pricing BTC out of reach for ordinary people? What changes might we see? What would be the effect on the BTC-fiat exchange rate?
I love a good thought experiment. Let's start with our assumptions:
Bitcoin (BTC) will circulate side-by-side with the existing fiat currency.
Bitcoin (BTC) is not regulated as a security or a commodity, but treated (correctly, in my opinion) as a currency. No taxes on exchange of BTC and fiat.
BTC is accepted for taxes and fees at market rates. In other words, there is no monetary advantage to using either BTC or fiat for government payments.
The government does not accumulate BTC (beyond any BTC payments), but instead sells excess BTC at market rates for fiat.
Monetary and fiscal policies remain unchanged. In other words, the taxing and spending and inflating continue as before.
With our assumptions in hand, we can now speculate about the effect of Bitcoin (BTC) being made legal tender.
Most changes will not appear immediately. The first to be seen will be prices advertised in both BTC and fiat. However, point-of-sale terminals will not be ready at the same time, so purchases with BTC will be made directly from and to wallets. India is an example of this, having transitioned to a mostly-digital economy, after large denomination banknotes were demonetized in 2016. Now even street vendors display QR-codes for purchases made at their stands, even for very small purchases.
Banks may create dual-currency checking accounts, with overdrafts by either currency covered by the other (for a fee, of course). The credit and debit card processing system will need a second currency function added. Institutions will offer BTC products. There will be the first stock paying its dividend in BTC.
A major factor that will increase the BTC/fiat rate: foreign central banks could hold BTC as a reserve currency, increasing demand for, but also pulling it out of circulation, alongside the fiat they currently hold in reserve, which they will demand less of.
Modifying government payment systems will probably take even longer, due to many factors, such as putting contracts out for bid and updating antiquated computer systems.
These changes are important, but most Bitcoin enthusiasts are more concerned with Bitcoin (BTC) compared with the fiat currency. My prediction is that there will be an immediate rise in the fiat price of BTC, due to increased demand. Some of this demand will come from current BTC owners, but a lot will come from those who have never owned BTC, due to FUD about its future and whether or not it might be banned.
All of this is a big step toward the crypto paradise we hope for. But there is still a roadblock: the continued existence of the fiat currency.
The rise in the price of Bitcoin (BTC) will slow, but probably not reverse. Changes in the BTC/fiat rate will moderate and become more like those in the foreign exchange markets, driven by monetary factors, like interest rates. The volume of transactions in BTC will fall after their initial spike following Bitcoin (BTC) being made legal tender. The cause: Gresham's Law.
Gresham's Law is an economic principle that applies when there are two currencies circulating side-by-side. In simple terms, Gresham's Law states "bad money drives out good money". People will hold on to the currency they believe is better (however they define it) and spend the other. In my opinion, most people will think BTC is a better value than fiat and will begin to hoard it, spending their fiat first, and BTC as a last resort.
At this point, my crystal ball gets hazy. The government may reverse itself on Bitcoin (BTC) being legal tender ("no one is using it," they'll say). A central bank digital currency (CBDC) may be introduced to replace fiat cash ("people prefer a digital currency, that's why they're hoarding BTC," they'll say). The least likely action, unfortunately in my opinion, is removing the fiat and going to all BTC, all the time.
If the forward-thinking government is still in power, they may start making payments in Bitcoin (BTC). Of course, these BTC payments would be sent to a BTC-enabled bank account, not a self-custodial wallet. Paying welfare and other benefits in Bitcoin (BTC) might keep the volume up, but Gresham's Law will still apply. Bitcoin (BTC) will still be hoarded.
At this point, it should be very nearly impossible for the government to ban Bitcoin (BTC). Too many people will own Bitcoin (BTC). The smarter ones will have moved their BTC to self-custodial wallets.
A bright future for Bitcoin (BTC) owners would arrive under these assumptions. If desired, BTC could be exchanged for more fiat than before Bitcoin (BTC) was made legal tender, but it wouldn't be priced out of reach or most people. In Part II, I will change some assumptions and make some more predictions.
It shouldn't need to be said, but here it is: This is neither financial nor legal advice. Do Your Own Research (DYOR). Stay safe out there and keep on stacking!
Earlier Post:
Bitcoin Must Be Made Legal Tender (Your Coins Aren't Safe Until It Is)
