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Fitch Warns El Salvador It’s Risky To Adopt Bitcoin As Legal Tender

By:
Olumide Adesina

Using Bitcoin to conduct day-to-day transactions would increase institutions' exposure to credit volatility, says the credit agency.

Bitcoin coin on white keyboard

Bukele’s Bitcoin plans have now been publicly ridiculed by world credit agencies as a result of protests, lawsuits, and criticism from multilateral organizations. In line with Moody’s concern earlier this month, Fitch Ratings likewise recently expressed concerns over possible adverse effects on El Salvador’s financial institutions and insurance sector if Bitcoin is adopted.

El Salvador’s new Bitcoin law leaves institutions with two options for survival: Keep their crypto assets, or convert their entire infrastructure into a BTC exchange as soon as they receive them.

Using Bitcoin to conduct day-to-day transactions would increase institutions’ exposure to credit volatility, says the credit agency. The price volatility of bitcoin will severely impact insurers who hold it on their balance sheets for extended periods, they said. “This will increase their asset risk, which results in negative credit scores,” they wrote.

As a result of sovereign bonds’ poor rating, insurers are already exposed to a considerable amount of risk, and that risk would only be exacerbated by holding Bitcoins.

On the other hand, institutions could adopt a fiat-only policy, which would mean selling incoming BTC to the market immediately since El Salvador wants mandatory Bitcoin acceptance. Besides incurring costs, such sales would also entail management costs – and that would entail less investment in other areas of the business.

‘It is not clear at this time whether the regulatory and operational framework will enable insurers to immediately convert bitcoin to U.S dollar so that they can minimize their holding period,’ says the report. The adoption of the pioneer crypto asset is expected to increase insurance company IT, operating, and administrative costs.

In addition to the adoption of new internal technology protocols, security and anti-fraud measures, and training of staff to handle cryptocurrencies, such costs may also include the adoption of new internal technology protocols.

Previously, Fitch noted that the country’s fiscal deficit, coupled with the IMF’s concern over BTC, isn’t helping either.

The fact that Bukale controls the country’s legislature made it relatively easy for him to pass such a law. As a result, Fitch says, all companies had little time to prepare for the changes, and the law was rushed.

About the Author

Olumide Adesina is a France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. He is a Member of the Chartered Financial Analyst Society.

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