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Cash has legal tender status

Its legal tender status gives cash a robust legal framework and facilitates its acceptance and usage. However, restrictions on the use of cash are increasing.

Legal tender has been developed alongside the evolution of notes and coins. In the 13th century, Mongol Emperor Kublai Khan, the first to introduce paper notes and then fiat money, declared his currency the only acceptable currency of the land. He banned the use of gold and silver, as well as private vouchers and coupons that could be a threat to the new currency22.

Legal tender is a legal concept and by definition, depends on the legal framework of each country. For example, the legal tender status of euro banknotes is laid down in Article 128 of the Treaty on the Functioning of the European Union; however member States have very different national legislative provisions in relation to legal tender. Consequently, the European Commission issued a recommendation in 201023 to clarify the scope and effects of legal tender in the euro zone. The recommendation lays down ten guiding principles:

  • The concept of legal tender should rely on three main elements: a mandatory acceptance of banknotes and coins, for their full face value, with a power to discharge debts.
  • The acceptance of payments in cash should be the rule: a refusal is only possible if grounded on reasons related to the ‘good faith’ principle (for example, if the retailer does not have enough change).
  • Similarly, the acceptance of high denomination banknotes should also be the rule.
  • No surcharges should be imposed on payments in cash.
  • Member States should refrain from adopting new rounding rules to the nearest five cent.
  • Member States should take all appropriate measures to prevent euro collector coins from being used as means of payments.
  • Stained banknotes should be brought back to the National Central Banks as they might be the product of a theft.
  • Total destruction of banknotes and coins by individuals in small quantities should not be prohibited.
  • Mutilation of banknotes and coins for artistic purposes should be tolerated.
  • The competence to destroy fit euro coins should not belong to national authorities in isolation anymore.

In principle, legal tender provides a secure legal framework for notes and coins and ensures its widespread acceptance. In practice, it appears that the above guidelines are not enforced strictly. Several countries, including Finland and the Netherlands, have adopted rounding rules whereby amounts are rounded to the nearest five cents in order to reduce the handling of one and two cent coins. Across Europe, some retailers refuse to accept the highest denomination notes – €200 and €500. In October 2014, a customer of French supermarket chain Leclerc was taken into police custody after trying to pay with a genuine €500 note24. The cashier and the police suspected the note was a counterfeit. In the Netherlands, several stores no longer accept cash payments. Several countries have imposed caps on cash payments, essentially in order to reduce tax evasion. Payments exceeding these amounts cannot be settled in cash.
Restrictions on cash usage
Most countries have defined legal tender in their central bank’s mandate or in their legislation. Singapore was the first country to announce the adoption of a form of electronic legal tender as early as 1998. According to Low Siang Kok, Director of Quality at the Board of Commissioners of Currency Singapore25, “BCCS envisages that an electronic legal tender system would reduce the cost of handling physical cash, improve the efficiency of business transactions and boost the cashless business environment for Singapore. It would also support the government’s drive to turn Singapore into a cashless society. At its strategic planning seminar in 1998, BCCS set as its corporate vision the introduction of a Singapore electronic legal tender (SELT) within 10 years.” However, in 2014, the SELT project no longer seems to be on the agenda and the Singapore Monetary Authority continues to issue banknotes, which increased in value by 6% in 2012.

In 2014, the Central Bank of Ecuador announced plans to create a virtual currency, which would be used alongside the U.S. dollar, which is legal tender in Ecuador26. The first virtual money accounts were opened in December 201427. Following the banking crisis of 1999, the Ecuadorian peso sucre banknotes lost legal tender status in favour of the US dollar. Today, Ecuador only issues centavos coins.
22 Tullock G, Paper Money - A Cycle in Cathay, February 2008. The Economic History Review
25 Singapore Electronic Legal Tender (SELT) A Proposed Concept. Low Siang Kok, Director (Quality), Board of Commissioners of Currency Singapore in The Future of Money, OECD, 2002