What is Legal Tender

A legal tender is an official form of payment that can be accepted for a public or private debt or meet financial obligation according to the laws of the area. Generally, the term refers to the national currency such as bills and coins, as opposed to credit lines, checks, or cards. A creditor is obligated to accept legal tender for repayment of a debt. Legal tender can only be issued by the national body that is authorized to do so, such as the U.S. Treasury in the United States and the Royal Canadian Mint in Canada. The laws surrounding legal tender have proved vital in the formation of the fiscal policy of many countries.

BREAKING DOWN Legal Tender

Coins and banknotes may cease to be legal tender if new notes of the same currency replace them or if a new currency is introduced replacing the former one. In the case of the Euro, coins and banknotes of former national currencies were in some cases considered legal tender from 1 January 1999 until 28 February 2002. Legally, those coins and banknotes were considered non-decimal sub-divisions of the Euro.

Countries with extensive business and cultural ties may also accept each other's currencies as legal tender in limited amounts. For example, some U.S. and Canadian merchants located close to the U.S.-Canada border accept both Canadian dollars and U.S. dollars as payment for goods and services.

A cashless society describes an economic state whereby financial transactions are not conducted with money in the form of physical banknotes or coins, but rather through the transfer of digital information (usually an electronic representation of money) between the transacting parties. Cashless transactions have also become possible using digital currencies. Bitcoin is another popular payment alternative, as it is a virtual online currency that can be used for a growing number of transactions but is not considered legal tender.