El Salvador’s crypto-friendly plans are facing some important questions

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El Salvador’s crypto-friendly plans are facing some important questions
Bitcoin Beach in El SalvadorBitcoinBeach/Twitter
  • El Salvador became the first country to accept Bitcoin as legal tender last month.
  • Bitcoin’s lack of liquidity may make that difficult to achieve.
  • Investment bank JPMorgan and the IMF have both said this needs more looking into.
El Salvador’s move to accept Bitcoin as legal tender within its borders has been hailed as a positive move from the industry, but experts are starting to find flaws in that plan. In a report last week, the investment bank, JPMorgan, said that choosing to make Bitcoin as a mode of payments in the country may put “potentially a significant limitation on its potential as a medium of exchange.” The bank was primarily concerned about the illiquid nature of Bitcoin.

Essentially, while El Salvador may consider cryptocurrency as a valid exchange medium within its borders, money is a global concept. The country has to eventually convert its digital wealth into currencies that can be used as a mode of exchange with other countries — in most cases, the US dollar. And the only way to convert crypto to any fiat currency is by finding someone who will pay you fiat money in exchange for it.

Will El Salvador's financial system be able to keep up?



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According to JPMorgan’s report, which was cited first by Bloomberg, states that 90% of Bitcoins in existence haven’t been converted to fiat currency in over a year. Most of the Bitcoin that people own is being held in digital crypto wallets, which means a large part is not being converted to fiat currencies. This might become a problem for El Salvador when it makes the crypto token a valid currency come September.

JPMorgan said that the daily payment activity in El Salvador will be approximately 4% of the total Bitcoin transactions in the world, and will represent over 1% of the total value of tokens. But since Bitcoin is moving from wallet to wallet, and most of them aren’t being converted to fiat currencies, El Salvador may have trouble keeping such a system up in its financial systems.

JP Morgan isn't alone in its concerns about El Salvador's crypto experiment



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The investment bank isn’t the only one that’s sceptical about Bitcoin’s feasibility as a mode of payment inside El Salvador. “Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis," Gerry Rice, a spokesman from the International Monetary Fund (IMF) said during a press briefing last month when El Salvador had asked the IMF for a $1 billion finance agreement.

Further, many Salvadorians themselves don’t see the possibility of making Bitcoins legal tender. A survey conducted by polling company Disruptiva showed that about 54% of the people in the country saw Bitcoin adoption as “not at all correct”, and a total of 78% of the respondents weren’t really convinced by the idea.

El Salvador’s historic Bitcoin law was passed on June 9 and will come into force on September 7, making the country the first to accept Bitcoin as legal tender.

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The country has also said it plans to provide clean energy for crypto miners by leveraging its volcanoes. Salvador’s plans were followed by Paraguay, which showed interest in formulating regulations favourable for the cryptocurrency industry as well.

For a more in-depth discussion, come on over to Business Insider Cryptosphere — a forum where users can deep dive into all things crypto, engage in interesting discussions and stay ahead of the curve.

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