According to JP Morgan, there could be a lack of liquidity in Bitcoin and it would be harmed as a means of payment.
Investment banking believes that El Salvador’s economy could be at risk.
After the Assembly of El Salvador approved the adoption of bitcoin (BTC) as legal tender on June 9, the financial company JP Morgan pointed out that this decision could create challenges for both the country and the cryptocurrency itself.
According to a recent report prepared by the aforementioned international bank, payment activity with BTC in El Salvador could be the 4% of Bitcoin network transactions worldwide. This equates to more than 1% of the total value of BTCs transferred between wallets in the last year, according to the report.
This situation, according to the investment firm, could cause a lack of liquidity in Bitcoin that limits its potential as a medium of exchange.
JP Morgan explains, giving more details on the matter, that bitcoin trading volumes commonly exceed $ 40 billion to $ 50 billion per day, but most of it is internalized by major exchanges.
The publication adds that a large chunk of bitcoin is “locked” in what it calls “illiquid entities.” He mentions that more than 90% of bitcoins were without changing hands for more than a year, with a “significant and growing fraction in portfolios with little turnover.”
Challenges for the adoption of bitcoin as legal tender in El Salvador
Not only would Bitcoin be harmed by El Salvador’s law, according to JP Morgan, but also the Central American nation itself.
JP Morgan observed that El Salvador must overcome several challenges to adopt bitcoin as legal tender. Among these, he mentions recent polls that suggest skepticism in a large part of the population.
It also highlights the financial company that high bitcoin volatility poses a challenge particularly large in a bimonetary system like El Salvador, where the US dollar is the other official currency.
JP Morgan experts believe that there is a persistent imbalance in demand for bitcoin and the US currency. Dollar conversions on the government platform could ‘cannibalize dollar liquidity’ in El Salvador and, eventually, they would introduce fiscal and balance of payments risks.
Skeptical views on the adoption of bitcoin in El Salvador
While El Salvador’s move to legalize bitcoin received majority support from the bitcoiner community, it also continues to receive expressions of skepticism and criticism. In addition to JPMorgan, the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank (IDB) have also addressed the issue.
In the opinion of the President of the IDB, Mauricio Claver-Carone, the adoption of bitcoin (BTC) in El Salvador as a legal currency will not help boost the economy and warns of the risks posed by volatility in the price of the cryptocurrency, as reported by CriptoNoticias.
According to the IDB executive, “what the Government of El Salvador is looking for is how to facilitate transactions, how to facilitate trade and how to do it in a transparent and secure way, but bitcoin is not the solution.”
For its part, the World Bank denied technical assistance to El Salvador to adopt bitcoin due to the supposed environmental and transparency deficiencies that this implies.
JP Morgan: While El Salvador’s move to legalize bitcoin received support from the crypto community, it also continues to receive expressions of skepticism. Source: Wikipedia.
El Salvador: the first «bitcoiner nation»
El Salvador is the first country in the world to adopt bitcoin as legal tender along with the dollar, after a majority decision of the Assembly of that country.
President Nayib Bukele said the government would grant citizenship to those who invest in bitcoin in the nation’s economy. In addition, the head of state of the Central American country announced plans to use geothermal energy for Bitcoin mining.
In addition, bitcoin is expected to be a useful tool to incorporate into the formal economy by 70% of people in El Salvador who are unbanked. Adopting bitcoin as legal tender would also reduce the cost of sending remittances.