El Salvador Move Could Strain Bitcoin Blockchain, JPMorgan Says

(Bloomberg) — El Salvador’s declaration of Bitcoin as legal tender could create challenges for both the country and the cryptocurrency, according to a team from JPMorgan Chase & Co.

Bitcoin trading volumes commonly exceed $40 billion to $50 billion per day, but most of that is internalized by major exchanges, said a group from JPMorgan including Steve Palacio, Joshua Younger and Veronica Mejia Bustamante, in a report Thursday. A large portion of Bitcoin is locked up in illiquid entities, with more than 90% not changing hands in more than a year — with a “significant and rising fraction held by wallets with light turnover,” they added.

“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 said, with the illiquidity and nature of the volume “potentially a significant limitation on its potential as a medium of exchange.”

El Salvador President Nayib Bukele’s initiative to make Bitcoin legal tender in the country has set off a raft of debate about whether it’s beneficial and what the ramifications could be. The 39-year-old Bukele has said that Bitcoin will help counter the country’s low banking penetration rate and cut the cost of sending remittances. But the International Monetary Fund — which is in discussions with El Salvador about its credit program now — is among those who have questioned that rationale.

Read more: El Salvador’s Bitcoin Bombshell – What Does It Mean?: QuickTake

Even many proponents of Bitcoin say that, while there’s an argument it’s a good store of value, its utility as a payments mechanism is limited.

“Bitcoin is the worst payment system ever invented. It’s terrible,” said William Quigley, the co-founder of stablecoin Tether and a pioneer of multiple aspects of the cryptocurrency space, in a recent video interview. “Almost any token is better than Bitcoin as a payment system.”

Other challenges JPMorgan sees for El Salvador’s adoption of Bitcoin as legal tender include:

• Recent surveys suggest widespread skepticism and hesitance of Bitcoin as a medium of exchange
• Bitcoin’s high volatility poses a particularly large challenge in a bimonetary system alongside official dollarization
• A persistent imbalance of demand for Bitcoin/U.S. dollar conversions on the government platform could “cannibalize onshore dollar liquidity” and eventually introduce fiscal and balance of payments risk

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