El Salvador’s banks have this to lose thanks to country’s Bitcoin adoption

El Salvador’s banks have this to lose thanks to country’s Bitcoin adoption

Earlier this month, El Salvador became the first country to adopt Bitcoin as legal tender, passing a bill to this effect. What’s more, El Salvador now is going as far as airdropping $30 worth of BTC to its registered citizens.

While the aforementioned bill will take effect on 7 September 2021, the country is still awaiting implementation guidelines from the country’s regulators. Now, although this move was received with much enthusiasm by many, it was also subject to criticism from several sectors including regulators and financial institutions.

More recently, Fitch Ratings, the New York-based economic analytics and rating firm, published its views discussing the challenges in store for El Salvador. According to the firm, there is the possibility of increased “regulatory, financial, and operational” risks for El Salvador’s financial institutions. Moreover, this would also give rise to concerns over infringement of the international standards against money laundering and terrorist financing.

The firm pointed to the high price volatility of the world’s largest cryptocurrency as being a “challenge to its use as a store of value and means of payment.” It added

“Financial institutions could face potential volatility in the USD value of their balance sheets if Bitcoin assets/liabilities are not quickly converted to USD or if positions remain open. The lack of adequate regulations to manage banks’ balance sheet exposure would be a credit negative based on a recent Basel prudential consultation. This would effectively fully deduct open positions from banks’ regulatory capital.”

The bill also requires all businesses in the country, with the exception of those with little or no access to the necessary technology, to accept Bitcoin. In this context, Nayib Bukele, the President of El Salvador, had reportedly said, “If you go to a McDonald’s or whatever, they cannot say we’re not going to take your bitcoin, they have to take it by law because it’s a legal tender.”

Fitch Ratings, however, cautioned of an adverse impact on the actual rate of acceptance due to challenges related to implementation, financial inclusion, and Internet access. Further, the report cited concerns regarding the “macroeconomic, financial and legal issues” expressed by the IMF recently, while also touching upon the lack of support from the World Bank in this regard.

Meanwhile, some analysts have expressed a more positive opinion towards El Salvador’s Bitcoin adoption. In fact, according to analyst Lark Davis,

The ratings agencies don't like what El Salvador is doing with #bitcoin! These are the same people who lied about the mortgage markets at the behest of banks which led to the 2008 GFC. https://t.co/EOoBFfyDH8— Lark Davis (@TheCryptoLark) June 25, 2021

Samson Mow, CSO of Blockstream, too expressed his admiration for El Salvador, stating that the country knows what freedom is.