Fitch Ratings Inc has warned that El Salvador’s move to legal tender Bitcoin poses a serious risk to its local insurance companies.
On June 9, Nayib Bukele, the President of El Salvador, lobbied the legislature to vote and eventually passed the Bitcoin law. The country will officially adopt Bitcoin as legal tender on September 9, exempting it from capital gains tax, and requiring tax collectors and local businesses to accept it Cryptocurrency.
However, Fitch Ratings, a US-based rating agency, has announced that El Salvador’s decision to adopt Bitcoin as legal tender is likely to be a negative credit exchange for local insurance companies with exposure to crypto, given the volatility of earnings and higher Exchange rate risks are increased.
Fitch went on to say that converting Bitcoin into dollars would put pressure on El Salvador’s local insurance companies to quickly avoid price risks. If that is not possible, insurers could face massive losses if Bitcoin loses its value, the agency said.
Fitch also warned of additional operational and regulatory risks associated with El Salvador’s adoption of Bitcoin as legal tender, noting that regulators around the world have failed to define the practical implementation of the cryptocurrency.
Fitch stressed that such a lack of implementation shows that Bitcoin is not being widely used by insurance companies to make claims, make benefit payments, or provide policies in digital currency.
The underlying regulations governing the official status of Bitcoin remain uncertain as the September deadline draws closer. Fitch describes the process as “unnecessarily rushed” and adds that the plan “leaves insurance companies very little time to adjust”.
Fitch, who is tasked with providing ratings for global insurance companies, says Bitcoin is a risky reserve asset, pointing out the “lack of transparency” of crypto. The agency also noted that the introduction of Bitcoin in El Salvador could make the local insurance industry even more vulnerable, as many insurers already hold large holdings of flow-rated Salvadoran government bonds.
In July, Fitch rated El Salvador’s government bonds and local insurance industry a B (negative outlook), which is low credit quality securities, mostly government bonds. The agency cited the new Bitcoin law as one of the many reasons for maintaining a sub-investment grade B rating. The rating agency said the introduction of Bitcoin as legal tender could negatively impact El Salvador’s debt relief talks with the IMF (International Monetary Fund) and further devalue the country’s bonds.
Cryptocurrency as the national currency
The IMF also warned El Salvador of the risks associated with adopting Bitcoin as legal tender. Last month, the international agency said that upgrading Bitcoin to national currency status could harm the country’s financial integrity, macro-financial stability, consumer protection and the environment.
That IMF also noted that cryptocurrency could cause price volatility, difficulties in setting fiscal policies and negative environmental impacts. The agency also spoke about crypto assets that could raise security concerns as cryptocurrency could evade taxes, finance terrorism and launder illegally obtained money.
However, politicians in many other nations were eager to follow El Salvador’s adoption of cryptocurrency as a national currency. Latin America in particular has pushed their respective countries to be more open to Bitcoin and other crypto assets.
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