Bitcoin as legal tender

Great Debates
143

There are sites that do crypto lending but I’m not exactly clear how the borrower’s feet are held over the fire if they decide to default. Apparently they have to stake their crypto assets in the first instance to act as a guarantee. So does this means you can only borrow less than the total amount you own? Unclear, though I’m sure the rabbit hole will contain the answers.

This might be true if every BTC in the world was tied up in loans but I’m guessing that >99% of all BTC are not. There is plenty of BTC liquidity, and in fact liquidity mining is something that a lot of exchanges offer as a product - so much of that liquidity is actually provided by the market.

But let’s say there was a liquidity problem. A borrower could easily repay the debt using another coin that had the equivalent value. Perhaps you might return the borrowed BTC and then pay the interest in USDT.

144

Right now they are not, but if they were to become the primary form of legal tender for much of the developed world, then that would certainly change.

Once again, that’s assuming that there are multiple forms of acceptable currency. I’m talking about an all bitcoin world, as many bitcoin proponents want there to be.

If the flaws of bitcoin can be mitigated by the use of other currencies to handle what bitcoin can’t, then these are still flaws in bitcoin that should warn against using it as the primary currency in an economy. And if it’s not the primary currency, then it’s really just a novelty item.

145

I don’t think lack of liquidity is a flaw. Liquidity could very easily be arranged.

The other problem with talking about the finite numbers of BTC is that this argument forgets that an individual BTC can be divided up into very tiny pieces. The smallest amount of BTC is known as a satoshi and is one hundred millionth of a BTC, but apparently there are transactions that are down to the one hundred billionth. If BTC mining suddenly stopped then BTC could still grow by simply becoming more expensive and increasing its granularity.

146

I’m not sure in what way. Unlike a fiat currency, Bitcoin cannot be printed by a government.

The problem with finite numbers of Bitcoin has nothing to do with not being able to break them down into smaller chunks, but instead everything to do with not being able to grow the money supply to meet the demands of the economy.

Bitcoin mining slows down by design. This means that the value of every Bitcoin becomes greater, as the number of goods and services that can be bought, and the number of consumers that want to buy these things increase, while the money supply does not.

Subdividing Bitcoin into smaller chunks doesn’t solve that problem. Bitcoin will perpetually be deflationary. ALthough, that could to some extent solve the interest problem on loans, as you will be receiving a greater value than you lend when they are paid back.

147

Interestingly, a lot of liquidity is arranged via lending. You can lend crypto back to the exchange and in return they will pay you a share of the trading fees users are paying when they make a transaction. However this does need a pair of coins to work currently. I also don’t believe that it is viable if BTC was the only coin in the world. Which is a ridiculous idea that’s never going to happen.

I disagree and I just think it needs a shift in thinking. You can grow the money supply by subdividing it and that value will not shrink because the increasing demands of the coin will raise its value naturally. So you will never run out of currency but you will have an odd type of price deflation. I’m not advocating this by the way. It sounds awful. The price of a loaf of bread might be be 0.00001 BTC one morning and by the afternoon it might be 0.00009999.

I’m no financial expert so I could easily be wrong about all of this, but these two things seem logical to my brain.

148

I also think its a ridiculous idea, and would think that it would never happen, but I never thought that Bitcoin would end up being used as legal tender.

What a legal tender is is something that someone is required to take in order to pay debts. If I lend you money in dollars, you can pay it back in BTC. If I sell you a chicken, you can pay for it in BTC.

Having two legal tenders in an economy is confusing at best, catastrophic most likely, apocalyptic at worst. You can really only have one, and Bitcoin proponents want their crypto currency to be that one.

Banking and lending and liquidity works just fine if the Dollar is the only currency in play. That BTC needs another legal tender in play with it kinda defeats the entire point of it.

It’s the fact that the value grows that requires that subdivision. There is no reason why the US mint cannot make a .1 cent tenth penny, or a .01 cent hundredth penny. Given that most of our transactions are electronic anyway, there’s no reason why we can’t get rid of the traditional two decimal point system and subidive the dollar to our heart’s content.

It’s not the inability to subdivide that makes deflation harmful to the economy.

Yeah, and I think that would be extremely harmful to an economy. Since BTC is not legal tender in the US, it doesn’t really matter. Someone could sell a loaf of bread today for .00001, and tomorrow for .00000999, but they don’t have to. If Bitcoin were a legal tender, they would.

149

The whole point of crypto seems to be to take down the evil global financially system and replace it with something more “honest” that is outside the control of western governments.

If the entire global economic system has to go down with it, so be it.

150

Is Bitcoin the only legal Tender?

151

Is it though? In the case of dollars, the bank can borrow from the Federal Reserve. FDIC protects depositors. Ultimately, Congress could authorize the creation of additional dollars should the need arise. There isn’t anyone who can authorize the creation of additional bitcoins in a similar situation. My understanding is that this was in large part why gold was dropped as a standard, since obviously additional gold can’t be created by the Fed or an act of congress.

152

Right, the whole point of cryptocurrencies is that the government doesn’t have control over them.

Which means that no one has control over them. Personally, I don’t think that that’s an improvement.

153

It is different. Dollars can be created by the US government. Bitcoins (and gold before it) can’t be created by anyone. Once all the ones that exist are mined, that’s it.

154

Despite all the posts on this thread, I still don’t get where the value of bitcoins originates. Why do people attach any value to them? Let’s take the two twenty dollar bills in my wallet as an example. Their value comes from the fact that they got there because I performed a doctor’s visit on a patient in the nursing home who needed medical care, which is a service that provided value to that patient. Their value didn’t come from Joe Biden, Jerome Powell, Nancy Pelosi, or anyone else in the government proclaiming that they are valuable. It’s the same for most* of the other money out there. It’s valuable because somebody made a cheeseburger, cleaned a toilet, staffed the checkout line at a store, made an Abrams tank, raised some turkeys for people’s Thanksgiving dinner, or provided any number of millions of other services or goods that have value. The dollars are just a way of keeping track of all those things, with the US government being in charge of making sure that the overall score (the number of dollars) doesn’t get out of hand. At least that’s my understanding of things. With bitcoin, the underlying “value” seems to be the blockchain. Why is that something that anyone would consider valuable?

*. Again, at least based on my understanding. Things like the dollars from the COVID-19 stimulus money were seemingly created without being backed by any underlying economic output. That seems to be in part of what led to our current higher level of inflation compared to pre-COVID levels. I assume this is the sort of thing bitcoin fans have a problem with.

155

People generally don’t value dollars because of a deep understanding of the history of money and the inner workings of the Federal Reserve and Banking Regulations. They value dollars because the have an expectation they will be valued by others and thus work as money.

Bitcoin is no difference in that sense, but instead of a long history of this expectation holding true and making dollars an integral part of the US economy, bitcoin is fueled at the core by an expectation that it will be an integral part of the economy of the future. This will make it keep increasing in value and make all early investors rich. Every time it drops dramatically it allows more investors to believe they’re getting a chance at getting in “early”.

Of course it can also be argued it’s entirely fueled by investors hoping to time the bubble and tricking other investors to buy just before the bubble pops.

Or you can believe the pamphlet saying a decentralized electronic currency with a limited supply is something inherently useful and is indeed the future of finance, but somehow value is still being driven by investors and all attempts at having it serve as a medium of exchange is limited to novelty, avoiding restrictions on regular transfers or criminal activity.

156

The value of it is that you can transfer large sums of money across international boundaries with little accountability.

It is great for drug dealers, terrorists, embezzlers, and tax cheats.

They want everyone else to start using it, so that it has an actual value, one where you can buy actual goods and services, property, and pay taxes.

157

This is part of what I don’t get. Dollars (and the currencies of all the other developed economies) work just fine as they currently are. If those currencies collapse, bitcoin isn’t going to help. At that point the only thing that would have value are goods with inherent uses (clean water, food, guns, ammo, gasoline, things of that sort). Nobody is going to be using bitcoin in a world in which the dollar and euro have collapsed, because we are going to have much bigger problems on our hands if that ever happens.

Even assuming that there is some value to having a decentralized electronic currency with a limited supply, it seems that bitcoin isn’t used for that purpose. It seems to me, rather, that it’s a high tech version of gold, and trying to force its use as a currency comes with all the same problems we ran into with using gold as currency. I’m guessing that is why people seem to mostly use bitcoin as an investment rather than as currency.

158

I’m in agreement, especially with how bitcoin got its start. In the particular case of El Salvador, my suspicion is that the people in charge are trying to cheat the ordinary citizens of that country out of their dollars that they currently use. It’s like a high tech version of what European colonists did to various indigenous peoples when they would use glass beads to trade with them for goods that had actual value.

159

I’m probably going over what has been gone over a hundred times, but dollars only have value because people believe in the full faith and credit of the United States Government, and the US is currently the global reserve currency simply because people believe more in the FF&C of the US than of any other country on Earth.

This belief, one tied in with nationalism, is what Bitcoin is up against. And I don’t see it winning the hearts and minds of 7 billion people, not without having another belief system (like nationalism) blowing in its sails.

Bitcoins only have value because people are willing to denominate them in terms of national currencies. Nobody but a BC evangelist would bother denominating national currencies in terms of BC, it’s just not done.

It’s even in our language and how we phrase the transactions: “I sold a BC for $52,000” is a statement made in a world where national currencies are dominant in the consciousness, otherwise people would say “I bought $52,000 with 1 BC” (“I bought a dress for a dollar!”)… and they don’t. In our world, you still use dollars to buy bitcoins, and not the other way around.

And it will never be the other way around.

It’s going to be very difficult for people to replace their economic faith in the power of their country with the faith needed to accept bitcoin as a more ‘legal’ tender than their national currency. It would, in fact, require… as noted… the sort of economic collapse which would render national currencies useless - and the Great Depression didn’t even come close to achieving this. And even with a collapse, the idea of national currencies is so powerful it always comes back: after all, Jesus referenced Caesar’s coins many a time and the collapse of Rome didn’t a 5th-century Bitcoin make or the twentieth-century dollar prevent. :wink:

BC’s are just speculative vehicles upon which a lot of hooey has been foisted by bad actors and people trying not to be the last true believer in an ever-rising market. And their danger is, unlike derivatives, calls, puts, and other regulated (and non-regulated) investment vehicles, these things are being sold to a gullible general public.

Well, the danger is that and the money laundering. Bitcoin is a godsend for criminals. Good going, guys.

160

And I would think that a collapse of that level would also interfere with the infrastructure needed to do Bitcoin transactions in the first place.

Yep. There’s a reason why ransomware hackers want bitcoin.

161

Seeing a lot of posts that are zeroing in on the basic concept of my original question. And the issues involved.
I personally like the basic concept Of Bitcoin. If it was actually the only official currency it would enforce a lot of economic hard reality. But at the same time it constricts or maybe even eliminates some common economic interactions. For better or worse?
Reading posts and doing more thinking. I do not see how Bitcoin can be loaned in the same way banks and other financial institutions currently handle such things.
It’s finite supply and blockchain rules just do not handle loans.
The one way that it can be done is this. The person or financial institution that is making the loan, must actually own that amount of Bitcoin. They turn over ownership of that Bitcoin to the person taking the loan. A contract stipulates that the loan will be paid back in Bitcoin, or something of equal value. Not some currency, because Bitcoin is the only currency. Maybe gold for instance, with an extra amount as interest. The one making the loan now has none of that Bitcoin to spend till the loan is paid. Maybe they can use the loan contract as collateral for some purchase of value. This happens now. But they no longer have that Bitcoin that is loaned.
So no loaning out 100 bitcoins just because you have 10 Bitcoins in reserve. Those 90 Bitcoins do not exist and will not function.
Taking into account interest on such loans. That is also a thorny problem. Does it drive down the prices of things used to pay back loans in lieu of Bitcoin payback? Or drive them up?

162

Nobody at all is overlooking that. How the legal system deals with the situation - whether dollars or BTC - has been explained over and over. There are none so blind…