Fitch Ratings has become the latest global credit rating agency to warn El Salvador against adopting Bitcoin as legal tender, expressing concerns that crypto assets could cause systemic risks for the Latin American nation. Fitch Ratings stated,
Due to greater FX and earnings volatility risk, as well as extra regulatory and operating risk concerns, El Salvador’s recent legislation establishing bitcoin as a legal tender would likely be a credit negative for local insurance businesses having exposure to the newly formed currency. Regulators are yet to define Bitcoin’s effective application.
Fitch does not believe that insurers would utilize bitcoin to make claim or benefit payments, or that insurance company will market policies in bitcoin. The dangers of adopting bitcoin are primarily determined by how widely it is accepted by policyholders. If policyholders want to pay premiums using bitcoin, insurers will most likely convert it to USD as fast as possible to minimize exchange risks.
Insurers who keep bitcoin on their record for a long time will be vulnerable to its price volatility, which will increase asset risk, which is a credit negative.
The government has stated that it will release a regulation no later than September 7 if the recent unconstitutionality appeal does not affect its implementation. While the law is in keeping with the ambitious timetable for bitcoin acceptance as legal money, it looks to be overly hasty, leaving insurance firms with little time to adjust to its requirements, putting the industry in danger.
Profits from speculative activities or hazardous exposures like bitcoin are typically viewed as a credit negative by Fitch since gains may swiftly reverse, resulting in a fluctuating earnings stream. The country’s insurance sector is already exposed to low-credit-quality instruments, mostly government bonds, so adding high-risk assets to the mix would only increase the risk. Sovereign and related investments accounted for 24% of capital and 21% of total investment portfolios in the insurance sector as of YE20.
While governments and leaders consider the benefits and drawbacks of Bitcoin’s entry into mainstream banking, El Salvador’s finance minister, Alejandro Zelaya, told the International Monetary Fund that the country will continue to utilize both US dollars and Bitcoin. The government had requested a $1.3 billion loan from the IMF before this event, which has now shown to be a conflict of interest for the UN-led institution. Furthermore, the World Bank has withdrawn from assisting El Salvador in making Bitcoin legal tender.
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