A legal tender refers to a form of money that must be accepted for payment of debts within a country. El Salvador made history as the first nation to adopt Bitcoin as legal tender in 2021.
Satoshi’s vision of a digital currency
Fiat currencies are standard and accepted forms of money and typically refer to monies issued by governments around the world. Common ones include the U.S. dollar, the euro, and the Japanese yen. They are used as stores of value and media of exchange, but these basic principles underestimate their wider reach, societal impacts, and complex interplay. Changes in the uses and qualities of currencies have determined power across the world over the course of history.
Bitcoin was first described in October 2008 by a pseudonymous creator named Satoshi Nakamoto. In the Bitcoin whitepaper, Satoshi described a peer-to-peer electronic cash system without ever mentioning the words “ Blockchain” or “ Cryptocurrency.” In fact, the word “currency” is only used once in Bitcoin’s foundational 9-page document—and not in reference to Bitcoin itself. Still, Satoshi described a vision for a new digital payment network that was trustless and secure, suggesting Bitcoin as an alternative to the one(s) established by nation states around the world. This decentralized network would not rely on a trusted third party (like governments or established financial institutions), it would give users sole control over their assets by relying only on computing power.
The adoption of Bitcoin on a national level
Some argue that Bitcoin has the potential to supplant national currencies and drive worldwide economies and trade. Its true-ownership, no-middle-man system is ideal for such a currency in many ways. However, Bitcoin also has its shortcomings in areas like technological complexity. So, although proponents may consider it an alternative to the traditional financial system, others see it as a complement.
The gold standard and fiat
World currencies used to be entirely backed by reserves of valuable resources. The most famous of these is the gold standard, which established the value of a nation’s currency on the basis of gold held in government-owned vaults. In 1944, the Bretton Woods Agreement further established that world currencies would be pegged to the U.S. dollar, which was in turn convertible to gold at a stable rate. This solidified the need for gold reserves to back currencies, and it strengthened the U.S.’s place in the world economy.
However, in 1971 President Richard Nixon announced an end to the ability to convert dollars to gold. This introduced a new standard: fiat. Major economies followed suit, making other nations’ money into fiat currencies—their value backed purely by government decree and control. The new system allowed for more flexibility for governments to support economies in crisis or stimulate economic growth, but in exchange for new inherent risks of inflation, reliance on debt, and sensitivity to changes in policy.
Bitcoin’s potential as legal tender
Bitcoin was conceived as a peer-to-peer payment system that could emulate cash, but it wasn’t explicitly touted as a full replacement for fiat currency. Still, Satoshi hinted at the rationale for Bitcoin’s creation by including in the blockchain’s first block: “The Times Jan/03/2009 Chancellor on brink of second bailout for banks.” Satoshi’s goals did not (likely) include the regulation of BTC to establish it as legal tender.
The term “legal tender” refers to government-approved forms of payment. Usually, this is limited to fiat currency notes and coins. However, in 2021, El Salvador became the first country to pass legislation characterizing Bitcoin as legal tender. President Nayib Bukele proposed the bill himself, arguing that it would ease the process of sending remittances and better serve the underbanked. The government released its own digital wallet, giving users access to the Bitcoin network—and the layer 2 Lightning Network.
However, the rollout was not without its hiccups. Adoption was moderate, with only 1-2% of all remittances being transacted using BTC and a minority of merchants initially conducting business using the cryptocurrency. Furthermore, in 2024, a hacker group released wallet-related personal data of over 5 million people, and it followed with publicly posting the code of the Chivo Wallet Bitcoin ATMs. In December 2024, El Salvador agreed to a $1.4 million loan from the International Monetary Fund (IMF) with a stipulation that the country would scale back its “engagement in Bitcoin-related economic activities.”
El Salvador became a test case of what can and can’t work when making cryptocurrency legal tender. There were early successes and failures, but the impact of its decision is still playing out. Regardless, it showed that countries can pass laws that establish crypto’s legal status to match their needs. Whether this is sensible is dependent on each nation’s needs and priorities.
Conclusion
Bitcoin was initially proposed as a peer-to-peer electronic system that could be used like cash, but its regulatory status was not a stated priority at the outset.
“Legal tender” refers to forms of payment that are approved by governmental legislation, and this usually refers to fiat currencies like the U.S. dollar or the euro.
In 2021, Bitcoin was established as a form of legal tender in El Salvador, where there has been some successes in its use for remittances and payments within the country.