Fitch Rating warns El Salvador’s bitcoin adoption could risk to local insurers.

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Fitch Ratings has become the latest global credit rating agency to warn El Salvador against adopting Bitcoin as an optional legal tender, expressing concerns that crypto assets could cause systemic risks for the Latin American nation. Citing El Salvador’s lack of clarity in Bitcoin’s implementation in mainstream markets, Fitch Ratings warned about the inherent volatility and operational risks for citizens associated with the crypto ecosystem. 

 

El Salvador passed a law to make bitcoin an optional legal tender. 

Fitch Ratings also pointed out El Salvador’s ongoing exposure to low credit quality securities, stating that “additional holdings of high-risk assets will only compound this risk.” As reported earlier, the Salvadoran Legislative Assembly passed President Nayib Bukele’s controversial “Bitcoin Law,” paving the way for bitcoin to be recognized as legal tender alongside United States dollars starting Sept. 7, 2021. As such, all Salvadoran businesses will be required to accept Bitcoin in exchange for goods or services. Several global financial regulators and financial experts criticized El Salvador for passing the bitcoin law.

 

Fitch Ratings warns that insurance firms will be hesitant to adopt bitcoin.

Fitch Rating has predicted that insurance firms, which made 21% of El Salvador’s total capital in 2020, will be hesitant to adopt Bitcoin for claims or benefit payments. The agency speculates that insurers will likely seek to “convert Bitcoin into USD as quickly as possible to limit exchange risks” should policyholders opt to pay premiums in digital currency. While governments and leaders continue to weigh the pros and cons of Bitcoin’s move into mainstream finance, El Salvador finance minister Alejandro Zelaya has assured the International Monetary Fund (IMF) that the country will continue to use both U.S. dollars and Bitcoin. 

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