In another criticism of El Salvador’s planned Bitcoin adoption, global credit scoring agency Fitch Ratings has warned the move will likely adversely affect credit ratings of the country’s insurance sector, due to heightened foreign exchange and earnings volatility risk.
Fast facts
- Fitch Ratings explained in a press release on Monday that once a law comes into effect requiring local firms to accept Bitcoin as payment, they will be forced either to hold Bitcoin or adapt to sell it as soon as they receive it. Analysts said the credit rating of the country’s insurance sector, already exposed to poorly rated sovereign bonds, could be hit particularly hard by the volatility of Bitcoin. “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,” they said.
- Alternatively, if a company decides to not to hold Bitcoin, it would still be legally required to accept it as payment, meaning that it would then need to sell it immediately. Managing that functionality successfully, Fitch argued, would incur costs — funds that could be better invested in other strategic areas of business.
- “The ability of insurers to minimize their holding period will depend on whether the regulatory and operational framework allows for bitcoin to be immediately converted to USD, which is not clear at this time.” it said. “Fitch anticipates that the adoption of Bitcoin will require insurance companies to absorb new IT, operating and administrative expenses.”
- El Salvador became the first country to legislate Bitcoin as legal tender in June as President Nayib Bukele pushed legislation through using his super-majority in parliament. Although the bill does not come into effect until Sept. 7, it has proven to be unpopular in the country, with one recent poll finding less than 20% of the population supports it.
- Fitch is far from the only international institution to express wariness over the move. Credit ratings agency Moody’s downgraded the country’s rating in July, saying that a “deterioration in the quality of policymaking” had raised tensions with international partners, including the U.S. and the International Monetary Fund. The IMF has said it does not support the nation’s adoption of Bitcoin, recently going so far as to issue a thinly veiled warning to any country seeking to follow suit.