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.
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."