Legal, tender and legal tender

At the CSFI’s April “Fintech for Breakfast”, which was kindly hosted by the law firm Denton’s, an interesting topic popped up in discussion about Bitcoin. I’ll come back to precisely what the discussion was later on, but at this point I just want to note that it involved a core issue that often wanders into fintech chats: legal tender.

Andrew Hilton (CSFI), Izabella Kaminska (FT), Emma Vartolomei (AllStreet), Winston Yong (IBM) and Angus Young (CSFI).

Who knows what “legal tender” means? Pretty much no-one, in my experience. I remember a story about a schoolboy who was chucked off a Welsh bus for trying to pay with a Scottish banknote. The bus company apologised, saying that “Scottish currency is legal tender” which, of course, it isn’t. Scottish banknotes are not legal tender in England or, for that matter, Wales. Only Bank of England notes are legal tender in England and Wales. Scottish banknotes are not legal tender anywhere, even in Scotland. In fact, Bank of England banknotes aren’t legal tender in Scotland either, because Scotland (which has a separate legal system) has no legal tender law although (and thanks to Colin Platt for this via Twitter) Royal Mint coins are legal tender in Scotland in thanks to the Coinage Act 1971 (Section 2).

No legal tender notes! Oh my goodness, it must be chaos! 

Actually, it isn’t. I’ve been to Scotland several times and I’ve often seen Scots buying things in shops using banknotes, cards and mobile phones. So not having legal tender laws does not seem to be much of  a barrier to trade. This shows how uninteresting the issue of “legal tender” really is in the modern age and for decades I’ve tended to assume that any article that talks about making a digital currency legal tender is written by someone who hasn’t taken this on board yet.

I do mean decades, by the way. If I cast my mind back to 2006, I can remember writing about the Snap Cafe in Georgetown, Washington D.C. This particular establishment had attracted my attention because it had decided to stop accepting cash. This is commonplace for forward-looking eateries today, but then it was a revolutionary act. As I reported at the time, the owner said that it had saved her time and money, meant she didn’t have to go to the bank any more and (most importantly, I suspect) didn’t have to trust staff she didn’t know. That point about trust is a recurrent theme in surveys of retailers and cashlessness: even if they perceive cash to be cheaper than electronic payments, cash has a tendency to evaporate. There was discussion around that time as to whether it was legal to do this, since Federal Reserve Notes (ie, greenbacks) are legal tender in the U.S.A. So, people said, the cafe owner could not refuse them, and some outraged comment asking whether it was legal to ban cash from an establishment.

Some time later, I remember an interesting clarification of the subject of legal tender in a useful paper on Payments and the concept of legal tender by Nick McBride, Legal Counsel, Reserve Bank of New Zealand. The paper describes something else that happened a decade ago, when the coins in New Zealand changed. The new coins were introduced on 1st July 2006. For a period of three months, the old coins were circulating in parallel with the new, but some retailers put up signs saying that they wouldn’t accept the old coins. This, presumably, was because they didn’t want the hassle of having to bag them all up and take them to the bank to swap for new coins. So could retailers refuse to take the old coins in payment even though they were legal tender?

The answer in both cases was that retailers can refuse to accept legal tender.

Wait, what? So what’s the point of legal tender then?

Well, the point is that you cannot force a retailer to accept legal tender or indeed any other form of tender. If, however, you buy something from them and there is no contractual barrier to the use of any form of tender, and you offer legal tender in payment, and they refuse it, then they cannot enforce the debt in court. That’s what legal tender means: it’s about discharging debts. If you incur a debt you can discharge it with legal tender, but you cannot be forced to incur the debt in the first place, if you see what I mean.

Another linked story from a decade ago was in Techdirt. Apple were refusing to accept cash for iPhones and insisting on credit cards conveniently had a link to the relevant U.S. Treasury page to explain the score to outraged citizens. In the U.S. there is no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Similarly, in the U.K. where only coins valued 1 pound Sterling and 2 pounds Sterling are legal tender in unlimited amounts you cannot force Apple or anyone else to accept them. They are free to enforce any conditions they like (within the boundaries of the law) with customers. When you buy a coffee from the coffee shop, you are entering in to a private contract. (Our good friend Leo van Hove made a very good presentation about this, called When Will Electronic Money Be Legal Tender? at our 7th annual Forum).

A couple of years later, the European Commission (remember that) put forward its recommendation on legal tender (22nd March 2010). It was, as I recall a banker saying, “strange and undesirable”. So, what is the European perspective? Well, the key points were:

• Euro notes and coins are legal tender and retailers can only refuse them for reasons of “good faith” (for example, the retailer has no change).
• Retailers should only refuse high-denomination banknotes in “good faith” (for example, if the value of the note is disproportionate to the purchase)
• No surcharges should be imposed on cash payments.
• Banknotes stained by the Intelligent Banknote Neutralisation System (IBNS) remain legal tender but should be returned to national central banks (as they likely come from a robbery).
• Retailers must accept 1 and 2 eurocent coins in payment.

Sensible policies for a better Eurozone, you might think, but you’d be wrong. The essence of these recommendation was that shops will be forced to accept €100, €200 and €500 euro notes and 1- and 2-euro cent coins. Why? Well, because in many countries the shops don’t want them. In some countries (eg, The Netherlands and Finland) the retailers and the public seem to have, in a decentralised fashion, decided to abandon the 1- and 2-cent coins. They are nothing but a hassle and do nothing to assist commerce. At the other end of the scale, retailers in many countries will not accept high-value notes, partly because they don’t want to make change and partly because they are worried about counterfeiting. After all, if you are a corner shop and you get stuck with a bent €500 note then you are €500 out of pocket: the ECB won’t take your counterfeit note and give you a new one. It’s worth paying a few cents to the bank for a debit payment to avoid that risk.

I thought the Commission’s recommendation was dead in the water, largely because it didn’t take economics into account and I rather think that the EU’s goal for payment systems should be economic efficiency. Forcing your average tabac to take 500 euro notes does not contribute to that goal in any way.

Anyway, apart from people like me, and Professor van Hove and the European Commission, no-one much cared about legal tender one way or the other for another couple of years after the recommendation. Until Bitcoin came along.

Now, people say the silliest things about Bitcoin, such “the [insert name of distant country here] have made it legal tender”. No. Bitcoin isn’t legal tender anywhere and it never will be any more than Avios will be (and I’ve bought more cups of coffee with Avios – one – than I’ve ever bought with Bitcoin). I shouldn’t really be so sweeping, but I am tempted to say that the only reason that people say Bitcoin will be legal tender is that they don’t understand what legal tender is (and almost certainly don’t know what Bitcoin is either).

The media don’t help. A couple of years further on, in 2014, Britain’s Minister of Finance (a man of the people who for historical reasons is known as George Gideon Oliver Osborne, of the Baronetcy of Ballentaylor and Ballylemon in the County of Waterford, Chancellor of the Exchequer and Second Lord of the Treasury) gave a speech at an Innovate Finance conference in London, in which he said that he had instructed Treasury officials to hire some management consultants to knock up some slide decks looking at the benefits and threats of digital currencies. This was reported on as being interesting, although as I mentioned at the time he wasn’t clear about the benefits to whom or the threats from what. It was even reported on (in The Telegraph, for example) as “Chancellor embraces Bitcoin” and I remember one or two comments  along the lines of “British government may legalise Bitcoin”, which set me thinking, since I had already seen shops advertising that they accepted Bitcoin and it had never occurred to me that it was illegal (because, of course, it wasn’t).

There’s another aspect to the discussion. People like me think that Bitcoin is an interesting kind of property, not money. This brings us to Japan, which was the subject of the discussion at the CSFI breakfast, because someone mentioned that Japan is legalising Bitcoin. But what does this mean, exactly? I’ve read in several places that Japan is going to make Bitcoin legal tender. At least, according to that journal of record Sputnik News, which seems to be the origin of the claim. I’m sure this isn’t true. As far as I can tell, and as was confirmed around the CSFI table this morning, the actual story in Japan is that new provisions there consider Bitcoin a commodity and any such commodity that can be exchanged for goods and services or legal tender (my emphasis) will be considered a currency, bringing Bitcoin and many other cryptocurrencies into the normal course of business.

Sorry to be a spoilsport, but to the very best of my knowledge, Bitcoin is not legal tender in any country. Nor, I would wager, will it ever be. As I hope my quick trawl through the last decade has shown,  legal tender is an outdated and essentially meaningless concept, which is why I am baffled by the continued discussion of it. Businesses are free to accept to Bitcoin in payment, just they are free to accept wampun or used tea-bags, since it’s a matter of private contract, but they cannot and will not be forced to accept Bitcoin in settlement of debts incurred.

[Updated 8th April 2017 with clarification on coinage]