On June 22, 2021, the leading cryptocurrency Bitcoin tested $30,000 and slid further down after having touched a dizzying height of $50,000 only a couple of months ago. Volatility is the hallmark of all exchange-traded products and Bitcoin possibly could not buck the trend. But the issue that has been discussed animatedly is can it be elevated to the level of legal tender i.e. a national currency whose acceptance cannot be left to the whims of its takers?
The US electric car giant Tesla toyed with the idea of accepting Bitcoin as consideration for its cars what with its founder Elon Musk being a strong and ardent patron of the cryptocurrency. In April 2021, it went public with a declaration that its $1.5 billion Bitcoins were worth $2.48 billion thus suggesting it stood to make $1 billion for its shareholders were it to cash them in. Its enthusiasm for accepting it as payment for its cars seems to have been born of these notional profits. Looks as if it had exulted a bit too soon.
The US ecosystem, however, is a lot more robust than El Salvador’s which was the first country to accord Bitcoin the legal tender status a few weeks ago along with the US dollar which till recently was its only legal tender. So much so Tesla itself was guarded in its espousal of Bitcoin with riders such as subject to the US Federal Reserve and Inland Revenue among others giving their thumbs up to its acceptance as a consideration in commercial transactions.
Imagine the consequences had Tesla accepted Bitcoin in payment for its cars. Say at the material point of time its car was priced at $100,000 and the ruling Bitcoin price was $50,000. It would have meant the sale price being just two Bitcoins. Its auditors would have accused it of selling its cars for a mess of pottage in the light of the cryptocurrency’s slide after reaching dizzying heights.
To be sure, it could test $50,000 again in the future but that isn’t the point. The point is could a listed company have been allowed to look askance at the national currency thereby not only undermining it but also throwing everything pell-mell—rubbing the shareholders and auditors on the wrong side besides falling foul of inland revenue and Fed Reserve norms and so forth.
The tax authorities would have rightly insisted on the transaction being recorded at best as barter with the price being $100,000 (the ruling price at the material point of time) whether you paid in greenbacks or in Bitcoins. And the notional loss on accepting Bitcoins in payment would have been ignored. Mercifully Tesla has tempered its enthusiasm with respect for the law of the land.
Bitcoin like other currencies of its ilk has nobody to be kicked and no soul to be damned. It emerges out of thin air, as it were from out of a complex process of mining not done physically but on computers as a reward for solving complex mathematical equations which (the reward) has been halving every four years even as its market value has been appreciating thanks to its scarcity value. The maximum that can be mined are 21 million Bitcoins out of which as of February 2021 already 18.5 million have been mined. It is thus a prize for cracking mathematic quiz, period, although it is trading on online exchanges does reflect its scarcity value like that of gold. Be that as it may.
A currency especially the one that seeks to challenge the US dollar hegemony for international reserve currency status must have resilience in terms of supply to cater to its steadily rising demand besides being amenable to sovereign guarantee. Bitcoin has neither. The US government would certainly not be willing much less privy to presiding over the undermining of its own currency more than half of whose circulation is reportedly away from its shores.
To be sure, there have been raging debates over its undeserved exalted status especially after it chickened out of gold exchange standard—one ounce of gold for every $35—in 1971 at the height of the gulf war but that doesn’t mean a cryptic cryptocurrency Bitcoin is the answer. It can at best be a gaming and investment option for the netizens and investors respectively.
A dual currency regime does operate in a few countries like Hong Kong where both Hong Kong dollar and US dollar are kosher i.e. legal tender. Both have a body to be kicked and soul to be damned but the US simply cannot afford the brinkmanship of having two currencies one of which has existence only in the virtual world.
Embracing Bitcoin as legal tender far from being a creative disruption would be chaotic all round. Even for barter deals, it would come handy only in respect of large transactions because Bitcoin doesn’t come in smaller denominations such as $100 bill, $20 bill or $1 bill much less in fractions such as cents and dimes. It simply cannot be the ideal currency in grocery stores for example.
—S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own
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(Edited by : Ajay Vaishnav)