Fitch Ratings Warns About This Negative Aspect of El Salvador’s Bitcoin (BTC) Adoption
Fitch Ratings has joined the long line of opposition in regards to El Salvador’s Bitcoin Legal Tender. The global credit rating agency has alerted the nation of substantial risks post-BTC adoption. Fitch Ratings argue that BTC legal tender will cause credit negative for local insurance companies. This would mean, profits can quickly convert into losses and vice versa.
BTC adoption may cause Credit Negative
The agency highlighted El Salvador’s uncertain BTC adoption plans for traditional markets. It stated that the country’s lack of clarity in policymaking, combined with crypto’s high volatility, may result in unwanted outcomes, especially for insurers.
“El Salvador’s recent legislation establishing bitcoin as a legal tender will likely be a credit negative for local insurance companies with exposure to the newly established currency due to higher FX and earnings volatility risk as well as additional regulatory and operating risk considerations.”, according to Fitch Ratings’ press release.
Insurers to convert BTC to USD sooner than later
There lies no practical example of Bitcoin legal tender implementation. This thereafter would only spike doubts about making Bitcoin a functioning currency in the country. Fitch asserts that there are high chances of mass rejection regardless of the government’s efforts, post-BTC legal tender implementation.
According to Fitch, if the government allows Bitcoin to pay premiums, the insurers will prefer to immediately convert their Bitcoin holdings into USD to prevent volatility risk. However, the conversion time frame will depend on whether the regulatory and operational structure would allow immediate BTC to USD conversions. The policy structure remains uncertain to date.
“The risks of using bitcoin largely relate to its rate of acceptance among policyholders. Insurers will likely convert bitcoin into USD as quickly as possible to limit exchange risks, if policyholders decide to use it to pay premiums…Insurers that hold bitcoin on their balance sheets for extended periods will be acutely exposed to its price volatility, increasing asset risk, which is a credit negative.”, Fitch added.