What is a legal tender?

Legal tender is anything the law recognizes as a means to settle a public or private debt or meet a financial obligation, including tax payments, contracts, and legal fines or damages. Almost everywhere, national money is accepted as legal tender. A creditor must accept legal tender to satisfy a debt.

Comprehending Law Enforcement

A statute designating an item to be used as legal currency and the organization authorized to create and distribute it to the general public—such as the US Treasury in the US and the Royal Canadian Mint in Canada—establishes legal tender.

Coins and notes issued by the  Federal Reserve are accepted forms of legal tender in the United States. While private businesses may decline to accept some or all cash currency, as long as no transaction has occurred and the consumer has incurred no obligation, creditors are compelled to accept them as payment offered to discharge a debt.

By default (and by design), legal tender laws prohibit the general acceptance of any currency other than the current legal tender as a medium of exchange in the economy. A check, or credit swipe, is not a legal currency; instead, it is a replacement for money that the bearer can use to get legal tender for the amount owed.

Cryptocurrencies are not widely used as money because they are not recognized as legal cash. But in June 2021, El Salvador became the first nation in the world to accept Bitcoin as cash.

In May 2013, the state’s governor vetoed a bill to make gold and silver coins legal tender in addition to Arizona’s current US currency.

Particular Points to Remember

Certain currencies, like the euro and the US dollar, are accepted as legal tender in nations that either don’t issue their own money or have decided that the steady dollar is a better option than their own. For instance, in 2000, Ecuador accepted the US dollar as legal money when its currency, the sucre, rapidly declined to the point that $1 was equivalent to 25,000 sucres.

Legal currency generally comes in two basic types. A government can accept tax payments and execute contracts denominated in market-determined commodity money, like gold, by merely ratifying it as legal tender. Alternatively, a government may declare a worthless token or tainted good to be legal tender, in which case it becomes a fiat currency.

Economic Purposes of Law Firms

Legal tender has various uses. When market players use it by default, it serves as a store of value, a unit of account, a medium of indirect exchange, and a standard for postponed payment.

The justification for legal tender laws is that markets frequently do not offer money that is the best possible combination of amount, quality, and type, and that legal tender increases the usefulness of money by reducing transaction costs. In particular, having legal tender can reduce transaction costs associated with using multiple competing currencies and allow for flexibility in the money supply. One approach to a single currency is the imposition of legal tender.

The legal tender also makes monetary policy possible. From the issuer’s perspective, legal tender makes it easier for the banking system to issue fiduciary media to meet trade demands. It permits the issuer to manipulate, debase, and devalue the currency to collect seigniorage.

Gresham’s Law states that without legal tender regulations, good money tends to drive out bad money, making monetary policy, seigniorage, currency manipulation, and fiduciary media issuance far more complex.

Virtual Money and Lawful Tender

The need for other payment methods to be accepted as legal cash is rising due to the growth of online and international commerce. Notable examples of these other payment methods include bitcoin and other prominent cryptocurrencies. Though these may still be years away, they do not constitute legal money in the United States or most other nations, given official opposition to such alternatives, save in a few isolated instances.

Cryptocurrency acceptance is widely available on the internet and is entirely legal. Because cryptocurrencies are considered unofficial competitors of legal money, their use is primarily restricted to the gray and black markets or speculative ventures.

There are a few outliers, though. Venezuelan President Nicolas Madura issued an order in 2018 to all federal institutions to accept the petro, a new electronic currency, as legal tender in the face of catastrophic hyperinflation. Based on its assessment of the worth of its natural resources, the Venezuelan government centrally controls the petrodollar. It was stated that Venezuela’s mineral, oil, and natural gas reserves supported the petro.

Despite being recognized as legal cash, the petro is not widely used as money in Venezuela, and the country’s experiment with it has not shown much success.

Additionally, the tiny Republic of the Marshall Islands (RMI) declared that it would accept the sovereign, a new cryptocurrency, as legal cash. The decentralized peer-to-peer cryptocurrency market will be the basis for the sovereign’s current value. In the RMI, the US dollar serves as both money and legal tender at this time, and it will do so in addition to the new legal tender once the government starts printing sovereigns.

Conclusion

• What is considered “legal tender” in a particular government jurisdiction?
• Legislation about legal cash makes it illegal to use anything else as money in a business.
• Legal cash is like money in the economy, but it also does a few other things, like letting monetary policy and currency trickery happen.