According to an investigation by the US bank JPMorgan Chase & Co., El Salvador’s Bitcoin law may become a burden. Accordingly, challenges could arise for both the country and the Bitcoin blockchain.

Too many transactions, too few Bitcoins

Analysts at JPMorgan Chase see El Salvador’s move to make Bitcoin legal tender as a potential source of trouble for the country and the Bitcoin blockchain. In particular, too little liquidity, according to the note, could prove to be a stumbling block as Bitcoin integration picks up speed in the country, Bloomberg reports.

Because: Bitcoin usually records a trading volume of 40 to 50 billion dollars per day. However, a large part of Bitcoin is included in” illiquid units”. Simply put: These Bitcoins are not available for use. In addition, more than 90% had not been moved for more than a year. And: There is a “significant and increasing share, which is held by wallets with low turnover”.

This could become a problem in El Salvador in the future. For the first time, it is possible to use Bitcoin as a means of payment in an entire country – but what if not enough Bitcoin (read: liquidity) is available? JPMorgan analysts explain: Around 4% of Bitcoin’s transaction volume could be accounted for by El Salvador – but the illiquidity and nature of the volume would “potentially represent a significant limitation of its potential as a medium of exchange.” report:

“Daily payment activity in El Salvador would represent ~4% of the recent on-chain transaction volume and more than 1% of the total value of tokens transferred between wallets over the past year.”

According to JPMorgan Bloomberg, Bitcoin’s high volatility and a persistent imbalance in the demand for Bitcoin/US dollar conversions on the government platform are further hurdles. This could “cannibalize onshore dollar liquidity” and lead to balance of payments risk.

The IMF also warns of consequences

Not only JPMorgan comments critically on El Salvador’s move. Numerous global organizations are expressing their views accordingly. For example, the International Monetary Fund (IMF) warned the country of legal and financial consequences. IMF spokesman Gerry Rice on the concerns:

“The introduction of Bitcoin as legal tender raises several macroeconomic, financial and legal issues that require very careful analysis. […] We are following developments closely and will continue our consultations with the authorities.“

Crypto assets could carry significant risks, which is why regulatory measures are “very important” in dealing with them.

In addition,: Bitcoin is currently nowhere near as popular in El Salvador as President Nayib Bukele might hope. Thus, according to the head of state, although 70% of his compatriots do not have a bank account and could benefit from Bitcoin as a means of payment. According to recent surveys, however, 65% of all Salvadorans also say: They do not want to be paid in Bitcoin. Is the Bitcoin initiative going backwards in the country?

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Last updated on July 12, 2021

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