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The government of El Salvador has officially recognized Bitcoin as a legal currency and launched its own digital currency exchange, Gabinete Digital, in an effort to improve foreign exchange trade and cash payments. The move has sparked fears of a potential backfire, however, as the country’s adoption of digital currency raises the potential for a spike in price volatility to undermine economic stability and jeopardize the nation’s IMF negotiations.
The Central American nation of El Salvador is one of the few countries to adopt Bitcoin as a legal currency. Officials say the value of a bitcoin is too low to trigger a tax, but the move could jeopardize the country’s ability to participate in IMF discussions in case the value rises. El Salvador’s Ministry of Finance has released a statement saying that the government is not interested in cryptocurrency, which is not a legal currency, and it will not be used in any negotiations.
The Bank of Central America (BoCA) has been entangled in a complex web of issues, both political and economic, since the beginning of the year. The BoCA is the oldest central bank in Central America, and is ranked as the second most important central bank in Latin America after the Banco Central de la Republica Argentina. At the moment, the BoCA is in the process of creating a digital currency.
JPMorgan responds to El Salvador’s Bitcoin Adoption
JPMorgan was the latest source to respond to El Salvador’s decision to accept bitcoin (BTC) as legal tender in the country. In a note to customers, posted on Twitter @DocumentingBTC, the US banking giant said El Salvador had little economic benefit from adopting BTC as legal tender, parallel to the US dollar.
JP Morgan on the launch of #Bitcoin in El Salvador. Note the last line…. pic.twitter.com/5hl0kR9WB0 – Bitcoin documenting (@DocumenterBTC).
June 11, 2021: El Salvador’s parliament passed an important law on Thursday recognizing bitcoin as a legal tender. The bitcoin bill passed with an overwhelming majority of 62 out of 84 votes. A note from a JPMorgan client says of the move: As with dollarization in the early 2000s, this move does not appear to have been driven by stability concerns but is more focused on growth…But it is difficult to see tangible economic benefits associated with the introduction of bitcoin as a second legal tender, and this could undermine negotiations with the IMF.
Faced with a possible $3.2 billion budget deficit in 2021, El Salvador is reportedly negotiating a $1 billion financing package with the International Monetary Fund. Given the IMF’s role in providing access to external credit for countries like El Salvador, JPMorgan’s comments echo similar comments made by other market commentators about the potential impact of the introduction of the BTC. The IMF itself has looked into this development and stated that the introduction of Bitcoin as a legal currency in El Salvador could have significant legal and financial implications.
Related: IMF wants to speak to President of El Salvador about switching to bitcoin Earlier on Friday, Benoît Coeuré, head of the Bank for International Settlements’ innovation center, described El Salvador’s action as an interesting experiment. Mr. Coeuré, a well-known critic of bitcoin, once called BTC the evil child of the 2008 global financial crisis. Meanwhile, the Basel Committee on Banking Supervision on Thursday classified bitcoin in the highest risk category, recommending that banks hold $1 of capital for every $1 of bitcoin value.
El Salvador may be on the cusp of becoming the world’s next Bitcoin-friendly country. The country seems poised to make history as the first country in the Americas to adopt the decentralized cryptocurrency, according to a report from JPMorgan Chase & Co.
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