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LeoGlossary: Legal Tender

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Anything that is recognized by law to be use as settlement on private or public debt along with meeting financial obligations. This can be used to pay taxes, fulfill contracts, or pay fines.

Creditors are obligated to accept payment in legal tender. Governments determine what the legal tender of a nation will be.

It is often known as the currency of a nation.

In 2021, El Salvador became the first country to make a cryptocurrency *legal tender when Bitcoin was legally inserted into this role.

Legal Tender Laws

Countries establish laws around their currencies. Not only do the laws specify what the currency is, it also names who is responsible for creating the currency. In the United States, the U.S. Treasury is responsible for coins and the Federal Reserve handles the banknotes.

These laws have historically pushed out alternative currencies. Businesses rarely accept currency outside what is named as legal tender.

Cryptocurrency

The naming of Bitcoin as legal tender was a big step for the alternative currency. To date, it is the only nation to do so.

Cryptocurrency was not designed to be country dependent. It was created in the digital world. This spans globally, operating on blockchains. The code is the counterparty as opposed to banks or governments.

Many question whether this is the future of currency or money. It is far from certain that cryptocurrency is the solution many promise it to be.

Gresham's Law

The main essence of Gresham's Law is "bad money drives out good."

While the validity of this concept is debated, there is a piece that certainly holds true.

Legal tender laws drive good money out of systems. Since the laws are written and enforced by governments, innovation in competitive currencies get driven out. Even if something shows up that is an improvement, legal tender laws protect the incumbent currency along with the financial system built around it.

Many question whether legal tender laws will be required in the future as the digital world along with tokenization take over. If Gresham's Law can be reversed, this could spring a new financial system. This might follow along the lines of decentralized finance (DeFi).

Demonetization

Periodically, legal tender currency has to be removed from circulation. This is often done when old banknotes or coins get older and destroyed.

There are times when countries do change their currency. The old one will be completely replaced with the new currency, usually at an agreed upon exchange rate.

Cashless Society

Technology and improvements in communication systems (digital networks) have brought for the prospect of a society without any cash. Payment applications have changed how people view money.

Under such a system, financial transactions are conducted without the use of banknotes or coins.

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