JPMorgan Chase, citing a report, stated that El Salvador’s designation of Bitcoin as legal tender would bring various obstacles to its country, questioning the robustness of the payment mechanism, Bloomberg reported Monday.
A team at JPMorgan Chase stated that Bitcoin’s cross-traffic liquidity, high price volatility, and USD exchange risk are the main challenges for its use as a legal tender.
According to Bloomberg’s report Monday, JPMorgan Chase, citing a report that the daily trading volume of Bitcoin exceeds $40 billion to $50 billion, but most of the transactions come from cryptocurrency exchanges.
The report added that a significant portion of Bitcoin is locked in less liquid entities. More than 90% of bitcoins are tied to “wallets with low turnover”-held without changing hands in more than a year.
The team from JP Morgan Chase said:
“Daily payment activity in El Salvador would represent ~4% of recent on-chain transaction volume and more than 1% of the total value of tokens which have been transferred between wallets in the past year.”
The report believes that due to the nature of Bitcoin itself, transactions will become “potentially a significant limitation on its potential as a medium of exchange.”
On June 9, El Salvador became the first country to adopt bitcoin as legal tender, with 62 votes approval out of 84. Later on, El Salvador President Nayib Bukelet announced Bitcoin (BTC) would become another legal tender, effective September 7.
However, the initiative of president Bukele to make Bitcoin a legal tender in the country has sparked a lot of national discussions.
As reported by Blockchain.News on July 9, more than three-quarters of Salvadorans are sceptical towards the implementation of Bitcoin across the country. About 54% of people viewed the bitcoin adoption as “not at all correct”, another 24% described it as “only a little correct.”
In addition to the poor liquidity of the asset, El Salvador also faces the high volatility of Bitcoin pegged to the U.S. dollar when it is pegged to the U.S. dollar. The bank stated that the exchange of Bitcoin and U.S. dollars on government platforms might “cannibalize the liquidity of onshore U.S. dollars”, leading to risks to the balance of payments and fiscal stability.
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