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One among the "Big Three credit rating agencies", Fitch Ratings Inc. highlighted that El Salvador accepting Bitcoin as legal tender could possess serious risks to the financial and insurance sector. Furthermore, the move to adopt the leading cryptocurrency as legal tender was “unnecessarily rushed”, according to the rating firm.
Fitch Warns Against El Salvador Accepting BTC as Legal Tender
In June, President Nayib Bukele took everyone by surprise by announcing his decision to accept the world’s leading cryptocurrency, Bitcoin as legal tender. While his decision was a moment of victory for Bitcoin holders, centralized organizations criticized the move.
Following a series of downvotes from the world’s top credit agencies, Fitch Ratings Agencies Inc is among the many to join the party.
In its newest report, Fitch Ratings highlighted that El Salvador accepting Bitcoin as a legal could pose serious risks to the insurance sector operating in the Central American country, “due to higher FX and earnings volatility risk as well as additional regulatory and operating risk considerations.”
Holding volatile assets like Bitcoin for the insurers period would only compound the risk since gains could quickly reverse which is a credit negative, argues Fitch.
Since the Central American country is already exposed to low credit quality securities, mainly sovereign bonds with B- rating “additional holdings of high-risk assets will only compound this risk.”
Clarity Needed in El Salvador's Bitcoin Legislation
With the Bitcoin legalization coming into effect from Sept 7, financial institutions are thereby forced to their Bitcoin to avoid price risks:
Therefore, the new Bitcoin-friendly legislation must clarify how the asset class should be accounted for on financial statements or institutions that are even eligible to hold the cryptocurrency.