What are the implications of El Salvador's legal tender law to bitcoin's legal classification in other countries?

Question

It is my understanding that foreign currencies have a specific legal framework in many jurisdictions, for example that an exchange from one currency into another is not subject to tax. At the same time, many countries do not recognize bitcoin as a currency but rather an "intangible asset" or "property".

El Salvador has now passed a law that makes bitcoin the country's legal tender. Does this mean that when the law comes into effect in September 2021, other countries will presumably start treating bitcoin as a foreign currency?

Answer 1

El Salvador has now passed a law that makes bitcoin the country's legal tender. Does this mean that when the law comes into effect in September 2021, other countries will presumably start treating bitcoin as a foreign currency?

It is possible that few countries consider bitcoin as foreign currency. Every country has their own laws for foreign exchange.

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Example: Foreign Exchange Management Act, 1999 (FEMA) in India has below definitions related to currencies

'Foreign currency' means any currency other than Indian currency

https://www.rbi.org.in/scripts/ECMUserView.aspx?CatID=12&Id=21

Foreign Currency Account means an account held or maintained in currency other than the currency of India or Nepal or Bhutan

https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=164

In pursuance of clause (h) of Section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank notifies debit cards, ATM cards or any other instrument by whatever name called that can be used to create a financial liability, as ‘currency’.

https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=169

'Permitted currency' means a foreign currency which is freely convertible

https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=168

Answer 2

El Salvador has now passed a law that makes bitcoin the country's legal tender.

The US dollar will continue to be legal tender in E.S.

Anyone in E.S. who lacks the necessary technology does not have to accept Bitcoin.

Does this mean that when the law comes into effect in September 2021, other countries will presumably start treating bitcoin as a foreign currency?

No, I don't think you can make that assumption. Particularly as E.S. continues to use the US dollar.

A sudden change in the legal status of Bitcoin could be detrimental to some Bitcoin businesses. For example in jurisdictions where currency exchanges are subject to different regulations and registration requirements than other financial services.

We have seen that US, UK Canada and Japan have issued warnings to some unregistered but well-known Bitcoin businesses and issued strong warnings to the public about those unregistered businesses. These warnings mainly relate to Bitcoin as an investment but they illustrate that a change in Bitcoin's legal status might not always be a positive thing for everyone.