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12-07-2021|Business

El Salvador could face a ‘limitation' on the use of Bitcoin as a medium of exchange: JPMorgan.

JPMorgan, a global investment bank, says bitcoin's use in El Salvador's economy is facing headwinds, implying that its use as a medium of exchange may be limited.

JPMorgan claimed difficulties could occur because much bitcoin is held in illiquid businesses, with 90% of it not changing hands in over a year, according to a paper released on Thursday and cited by Bloomberg on Sunday.

The bank cites daily payment activity in the country as accounting for about 4% of recent on-chain transaction volume and more than 1% of the total value of tokens exchanged between wallets in the previous 12 months.

This is “potentially a substantial constraint on its viability as a medium of exchange,”  JPMorgan said.

On June 8, El Salvador's legislature voted and passed a Bitcoin Law, which would see the country formally recognise the cryptocurrency as legal tender on September 7.

Some detractors criticise President Nayib Bukele's decision to introduce the bill, while others claim it infringes their constitutional rights.

JPMorgan also mentioned a recent poll that found the majority of Salvadorans thought the new law was "not at all correct," and that 46% of those asked had no idea what bitcoin was.

While this could present issues, JPMorgan believes that, aside from the asset's illiquidity, the biggest worries about bitcoin's integration into the country's economy are its volatility and the demand imbalance between bitcoin and US dollars.

Conversions on the government platform, according to the bank, have the potential to "cannibalise onshore dollar liquidity," putting the balance of payments and fiscal stability at danger.

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