The debate about the ramifications of El Salvador President Nayib Bukele’s successful push to make Bitcoin (BTC) legal tender continues as the US investment bank and financial services holding company JPMorgan Chase & Co. (JPM) warns about the potential risks involved in the country’s crypto adoption.
According to Bloomberg, JPM’s experts released a report last week, concerning several challenges associated with the implementation of the new Bitcoin legislation, mainly in connection to the cryptocurrency’s high illiquidity – high volatility makeup.
Pressure on the Bitcoin network
According to the US bank’s expert report, El Salvador adopting Bitcoin as legal tender could result in significant pressure on the Bitcoin network.
“Bitcoin trading volumes commonly exceed $40 billion to $50 billion per day, but most of that is internalized by major exchanges,” JPM’s experts told Bloomberg, adding that the biggest amount of Bitcoin is locked up in illiquid entities with over 90% not changing hands in more than a year.
Alongside the “significant and rising fraction held by wallets with light turnover,” the expected daily payment activity in El Salvador would represent roughly 4% of recent on-chain transaction volume and more than 1% of the total value transferred between wallets in the past year,” according to the JPM’s report.
Due to such illiquidity and trading nature of Bitcoin, it’s adoption in El Salvador could potentially put a “significant limitation” on the cryptocurrency’s capability to serve as a medium of exchange, stated the report.
Pressure on the country
The JPM report also pointed out concerns regarding the impact of the cryptocurrency’s high volatility in a bi-monetary system alongside official dollarization, adding that a perpetual imbalance of demand for Bitcoin – US dollar conversions on the government platform might “cannibalize onshore dollar liquidity” and potentially introduce fiscal and balance of payments risk.
JPM expert report also reflected on the results of recent surveys, which revealed the country’s skepticism of Bitcoin as a medium of exchange, as they added public opinion concerns to their list of adoption challenges.
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