What Will Hold Back Bitcoin Adoption in El Salvador? The Dollar, Says JP Morgan

Jul 12, 2021 | Decrypt News | 0 comments


In a research report released last week, JP Morgan analysts enumerated some of the potential issues with El Salvador’s plans to make Bitcoin its second official currency.

As it turns out, a main challenge is its first official currency, the dollar—at least, according to analysts at the global investment bank.

Bitcoin probably won’t stack up too well against the dollar as a way of sending remittances, says JP Morgan, unless the local government can beef up infrastructure. The bank cites a recent study from Johns Hopkins University suggesting the cost of transferring remittances in Bitcoin is “nearly double” that of making similar transactions in US dollars, though it admits those numbers may be overly pessimistic.

That’s no small concern. The country is heavily reliant on remittances, often in USD; in 2020, such money transfers amounted to about 24% of El Salvador’s GDP, per the World Bank.

JPMorgan Struggles to Find ‘Tangible Benefits’ For El Salvador’s Bitcoinization

Complicating matters is El Salvador’s switch from the colón to the dollar in 2001. The researchers find that dollarization in a bimonetary system leaves the country more sensitive to price swings. And Bitcoin is already a volatile market. 

JP Morgan noted several other hitches in El Salvador’s plan to make Bitcoin legal tender, including the blockchain’s inability to handle the influx of new “on-chain” payment activity and the high fees charged for each transaction on the Bitcoin network. As the price and overall trading volume of Bitcoin increase, so does the cost of using the blockchain.

President Nayib Bukele has said that Salvadoran merchants will be required to accept Bitcoin alongside US dollars, but as the bank points out, Bitcoin is a terrible medium of exchange. Most of the existing Bitcoin supply is “locked up in illiquid entities,” with “more than 90% not changing hands in more than a year.”

JP Morgan also points to the International Monetary Fund’s recent skepticism around El Salvador’s Bitcoin ambitions, and warns that Bukele is “complicating” an important economic relationship.

El Salvador passed its so-called “Bitcoin Law” in June. An American crypto wallet company called Strike played a significant role in pushing for the legislation; its CEO, Jack Mallers, has been doing PR for the country’s Bitcoin experiment over the past few months. Crucially, Strike is not actually licensed as a money transmitter in any state besides Washington. Attorneys told Decrypt that sending Bitcoin from the US to El Salvador through Strike could create legal complications.

Salvadorans aren’t exactly lining up for the Bitcoin rollout. According to polling data from El Salvador’s Chamber of Industry and Trade, 96% of businesses and 92% of individual consumers believe accepting Bitcoin should be optional, rather than mandatory.

Bitcoin is set to become the country’s second official currency in early September.

News Source from Decrypt.co

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