Reports broke this week that Brazil was poised to pass legislation recognising cryptocurrency bitcoin as legal tender. “Bitcoin will be currency in Brazil soon,” reported Livecoins, a Portuguese language crypto news website, quoting Brazil’s federal deputy Aureo Ribeiro as the source. Several bitcoin influencers echoed the ‘news’ on Twitter, and outlets such as Yahoo! Finance, Bitcoin News and Coin Rivet also picked it up. On Monday, the number of bitcoin trades skyrocketed, perhaps in part due to the impact the announcement had made in the crypto community.
— Lark Davis (@TheCryptoLark) October 4, 2021
The reports turned out to be inaccurate, however. In fact, Ribeiro said that people in Brazil would soon be able to use bitcoin for daily purchases – not that the cryptocurrency would become legal tender. “…with this asset [bitcoin] you will be able to buy a house, a car, go to McDonald’s to buy a hamburger, it will be a currency in the country as it happened in other countries,” Ribeiro was quoted in Livecoins.
As Saori Honorato, a journalist at Portal do Bitcoin, noted on Twitter in an attempt to stop the spread of the false information, Ribeiro was expressing his personal opinion rather than affirming that the bill will make bitcoin or any other cryptocurrency legal tender in Brazil.
What does Brazil’s crypto bill actually say?
Contrary to the rumours circulating online, what Brazil’s ‘Bitcoin bill’ is proposing is the regulation of cryptocurrencies – not the establishment of bitcoin as legal tender, something that is not mentioned anywhere in the proposed legislation.
1) First of all, the bill DOES NOT make any mention of bitcoin becoming a legal tender in Brazil. This bill has been in development since 2015 and giving bitcoin the status of 'legal tender' is something that has never even been considered in Brazil.
— Saori Honorato (@saorihonorato) October 4, 2021
In fact, Brazil’s Central Bank president Roberto Campos Neto said last week that his institution will first regulate cryptocurrencies as an investment and only afterwards as a means of payments due to overwhelming consumer demand for the investment use case, the Brazil Crypto Report said.
The bill, which was initially proposed by Ribeiro in 2015 and needs to be approved by deputies and the Senate before becoming law, proposes the regulation of cryptocurrency exchanges and businesses by requiring them to register with an as yet undetermined federal authority.
The bill would also increase the penalties for the use of cryptocurrencies for money laundering, scams and pyramid schemes, the latter having become common fraud in Brazil. If the legislation is passed, cryptocurrencies will no longer regulate frequent flyer programmes and it will modify the definition and nomenclature of virtual assets.
In a nutshell, the bill wants to introduce a system that would allow better monitoring of cryptocurrency trade and prevent tax avoidance and fraud. All very distant from making bitcoin legal tender.
What countries need to consider before making any crypto legal tender
As of today, El Salvador is the only country where bitcoin is legal tender. Its Legislative Assembly passed in June a so-called ‘Bitcoin Law’ which allows the use of the cryptocurrency alongside the US dollar, which since 2001 has been the single official currency in the Central American nation.
However, despite the advantages of financial inclusion and the cheaper cost of remittance associated with using bitcoin, there are legal and regulatory implications to its use as legal tender which countries, particularly emerging economies, need to be aware of, says Dr Iwa Salami, associate professor in law at the University of East London.
“Firstly, legal tender status requires that a means of payment be widely accessible and as internet access and the technology needed to transfer bitcoin and other crypto-assets remains scarce in many countries, this may go against the argument of it really facilitating financial inclusion,” Salami says
One of the issues reported after the introduction of bitcoin as legal currency in El Salvador is that it is leaving big sections of its population that do not have the necessary digital access or skills behind. Only half of the population in El Salvador has access to the internet, according to the latest data from the World Bank.
A second factor mentioned by Salami is the potential adverse effect that bitcoin adoption can have on domestic financial systems since banks and other financial institutions could be exposed to the massive fluctuations in bitcoin and other crypto-asset prices: “This has financial stability implications and could result in the potential crashing even of stock markets,” Salami adds.
These risks mean international financial bodies are not keen on countries adopting cryptocurrencies as legal tender. When El Salvador made its bitcoin announcement, the World Bank declined to help the Salvadorian government implement the new system, citing environmental and transparency concerns and raising questions about whether the bitcoin will ever be suitable for making everyday payments.
Similarly, the International Monetary Fund (IMF) said that there are “macroeconomic, financial and legal issues” with the Central American adoption of the cryptocurrency, despite the Salvadorian finance minister originally saying that conversations with the IMF had been successful.
As fintech lawyer Willem Röell notes, bitcoin’s decentralised nature means that it is outside the control of central banks, so naturally the IMF and central banks are critical of its use as legal tender by countries.
"At the same time, taking into account its high volatility, one can question how much sense it makes to consider bitcoin legal tender when most people still (continuously) calculate back and forth between the value of their bitcoins and fiat currencies like the USD and EUR," Röell told Tech Monitor.
"Real adopters use bitcoin in the same way as EUR. For example, they would not say a bitcoin is worth EUR 41.673 but would make that comparison the other way around. Most people also don’t think about buying and selling USD or EUR like they do with BTC."
Salami also warns about the use of bitcoin and other crypto-assets for money laundering, terrorism financing and tax evasion in countries with weak regulatory regimes. “This could result in further significant risk to a country’s financial system, its fiscal balance and can also impact cross-border financial services,” she adds.
In 2018, the Venezuelan government created a cryptocurrency, petro, backed by its considerable oil, gold and diamond reserves. However, the project failed and according to Venezuelan money-laundering expert, Alejandro Rebolledo, the introduction of the petro provided President Maduro with the opportunity to create structures that would allow corrupt military leaders to launder money in the form of the cryptocurrency exchanges.
Salami says that widespread use of bitcoin could impact and erode consumer protection and result in losses to consumers and retail investors due to the volatility and the wild fluctuations in bitcoin price, fraud, or cyberattacks. Other economic factors that countries considering bitcoin as legal tender should bear in mind, according to Salami, include the exposure of government revenues to exchange rate risk due to the huge volatility which has characterised bitcoin price.
Domestic prices could become highly unstable as central banks would not be able to use monetary policy to achieve stable price if bitcoin becomes widely used as legal tender.
Dr Iwa Salami, University of East London
“Also, if widely used as domestic currency, central banks will not be able to effectively conduct monetary policy through the use of interest rates to steer their economies in the path of growth – since they cannot set interest rates on a foreign currency,” she adds. “Closely linked to this is that domestic prices could become highly unstable as central banks would not be able to use monetary policy to achieve stable prices if bitcoin becomes widely used as legal tender.”
Lastly, Salami mentions the environmental impact of cryptocurrency mining. Bitcoin’s environmental impact has come under scrutiny due to the huge amounts of electricity required for ‘mining’, or bringing new bitcoin into circulation. In May, Elon Musk tweeted that Tesla would be suspending bitcoin transactions for its vehicles because of its environmental impact, causing the cryptocurrency to fall by more than 10%.
According to the Cambridge Bitcoin Electricity Consumption Index, a tool created by the University of Cambridge to measure bitcoin’s electricity consumption and environmental impact, the cryptocurrency consumes more TWh per year than Finland or Kazakhstan alone.
However, the index also claims that there is little evidence to suggest that bitcoin contributes directly to climate change, even if it was entirely powered by coal, and that its environmental footprint remains marginal. And still, bitcoin’s growing electricity consumption may jeopardise the achievement of the United Nations Sustainable Development Goals in the future.
Salami concludes: “This process [cryptocurrency mining] is heavily energy-intensive, requiring significant amounts of electricity to power the computers used for mining and as such has huge implications for the environment.”