Legal Tender

Legal Tender

What is the legal offer?

Legal tender is anything recognized by law as a means of settling public or private debt or of meeting a financial obligation, including payment of taxes, contracts and fines or damages. The national currency is legal tender in almost all countries. A creditor is legally obliged to accept legal tender for the repayment of a debt. Legal tender is established by law which specifies what is to be used as legal tender and the institution which is authorized to produce and deliver it to the public, such as the United States Treasury in the United States and the Royal Canadian Mint in Canada.

Key points to remember

  • Legal tender is money legally recognized in a given political jurisdiction.
  • Legal tender laws effectively prevent the use of anything other than legal tender existing as currency in the economy.
  • Legal money performs the economic functions of money as well as a few additional functions, such as making monetary policy and manipulating currencies possible.

Understanding the legal offer

In the United States, the legal tender currency consists of Federal Reserve notes and coins. Creditors are required to accept them as payment offered to settle a debt, but, unless prohibited by state law, private companies may refuse to accept some or all forms of cash offer provided that transaction has not already taken place and a debt has not been incurred by the client.

By default and by design, legal tender laws prevent widespread adoption of anything other than the legal tender existing as currency in the economy. A check or credit check is not legal tender; it functions as a monetary substitute and simply represents a means by which the holder of the check can possibly have legal tender status for the debt. Cryptocurrencies are generally not accepted for use as money largely because they do not have legal tender status. In May 2020, the Governor of Arizona vetoed a bill that would have made gold and silver coins legal tender in the state, in addition to existing American currency.

Certain currencies, such as the US dollar and the euro, are used as legal currency in countries that do not issue their own currencies or have found the stable dollar preferable to their own currency. For example, Ecuador adopted the US dollar as legal tender in 2000 after the currency issued by Ecuador, sugar, depreciated rapidly, so that 1 dollar was worth 25,000 sugars. The adoption of the US dollar as the main legal tender is commonly called “dollarization”, although the practice is generally called currency substitution.

In general, legal tender can take two basic forms. A government can simply ratify a market-determined commodity, such as gold, to have legal tender status and agree to accept tax payments and enforce the contracts denominated in that product. Alternatively, a government can declare adulterated product or a worthless token to be legal tender, which then takes on the characteristics of a fiat currency.

Economic function of the legal tender

Legal tender serves several purposes. By default, it is used by market players to fulfill the functions of money in the economy: an indirect medium of exchange, a unit of account, a store of value and a standard for deferred payment. Supporters of legal money laws argue that markets generally do not produce the optimum type, quality and quantity of money, and that legal money improves the usefulness of money as a means of reducing transaction costs. More specifically, having a legal tender can allow flexibility in the money supply and a single currency can eliminate the transaction costs associated with the use of several competing currencies. Legal tender is one way of achieving a single currency.

Legal tender also makes monetary policy possible. From the point of view of the issuer, legal tender currency allows the issuer to manipulate, degrade and devalue the currency in order to obtain seigniorage and facilitates the issuance of fiduciary media by the banking system to meet the needs of trade. In the absence of legal tender laws, Gresham’s law would make monetary policy, seigniorage, currency manipulation and the issue of fiduciary media much more difficult, because good money tends to chase bad money into it. case.

Cryptocurrency and legal offer

The popularity of cross-border and online shopping is increasing the demand for more forms of money, such as popular cryptocurrency alternatives like Bitcoin, to be recognized as legal tender. However, given the official opposition to such alternatives, except in a few minor cases, they may still be in a few years and they are not legal tender in the United States or in most other countries. There are many online services that accept cryptocurrencies, and this practice is perfectly legal. Due to their status as unofficial currency competitors of the legal tender currency, cryptocurrencies are mainly limited to use in gray and black market activities or as speculative investments.

There are, however, some exceptions. In 2020, faced with devastating hyperinflation, Venezuelan President Nicolas Madura ordered all federal institutions to accept a new electronic currency, the petro, as legal tender. The Venezuelan petro is centrally controlled by the Venezuelan government, based on its own estimate of the value of its natural resources. The petro would have been supported by Venezuela’s natural gas, mineral and petroleum reserves. Venezuela’s experience with petro, however, has not made much progress, and petro generally does not circulate in the form of money despite its legal tender status.

The tiny Republic of the Marshall Islands (RMI) has also announced that it will adopt a new cryptocurrency, the sovereign, as its legal tender. The sovereign will be attached to an existing decentralized peer-to-peer cryptocurrency market. Currently, the US dollar functions as the currency and legal tender in the RMI and will continue to do so alongside the new legal tender when the government starts issuing sovereigns.

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