El Salvador’s adoption of Bitcoin as legal tender later this year could cause problems for both the country and the cryptocurrency, according to analysts at JP Morgan.
According to a Bloomberg report on Sunday, the investment bank said in a report last week that a large amount of Bitcoin is tied up in illiquid entities, around 90% of which has not changed hands in over a year, which could present issues with its use as a medium of exchange by citizens of the Central American nation.
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Analysts said daily payment activity in El Salvador would represent around 4% of recent transaction volume on the Bitcoin blockchain and over 1% of the total value of tokens that have been transferred between wallets in the last year.
As a result, JP Morgan said the low volume and illiquidity impact could potentially be a “significant limitation on its potential as a medium of exchange”.
Should the assessment prove accurate, the effort by El Salvador’s president Nayib Bukele to make Bitcoin legal tender, which is said to be an attempt to decrease the country’s large unbanked population as well as lower the cost of remittances, could end up causing more harm than good.
JP Morgan flagged other challenges facing the adoption of Bitcoin in the nation, notable widespread scepticism of using the crypto as a medium of exchange, its high levels of price volatility and a demand imbalance for Bitcoin and US dollar conversions which they warned could present fiscal and balance of payments risk.
In late morning trading in London on Monday, Bitcoin was up 0.3% at US$33,835, giving it a market cap of US$634.5bn.