Fitch Ratings Warns El Salvador's 'Bitcoin Law' Will Put Local Insurers at Risk

Fitch Ratings became the latest global credit rating agency to warn El Salvador against adopting Bitcoin ( BTC ) as legal tender, express...



Fitch Ratings became the latest global credit rating agency to warn El Salvador against adopting Bitcoin (BTC) as legal tender, expressing concerns that crypto assets could pose systemic risks to the Latin American nation.

Citing the country’s lack of clarity in implementing Bitcoin in mainstream markets, Fitch Ratings warned on the inherent volatility and operational risks to citizens associated with the crypto ecosystem. Further, the agency highlighted El Salvador’s continued exposure to low-credit quality securities, stating that “additional holdings of high-risk assets will only exacerbate this risk.”

In early June, the Salvadoran legislature passed President Nayib Bukele’s controversial “Bitcoin Law”, paving the way for BTC will be recognized as legal tender alongside US dollars from September 7, 2021. As such, all Salvadoran businesses will be required to accept Bitcoin in exchange for goods or services.

Fitch predicts that insurance companies, which accounted for 21% of El Salvador’s total capital in 2020, will be reluctant to adopt Bitcoin for claims or benefit payments. The agency speculates that insurers will likely seek to “convert Bitcoin to USD as quickly as possible to limit currency risks” if policyholders choose to pay premiums in digital currency.

Related: Coercion and Coexistence: How Salvadoran Bitcoin Law Can Change Global Finance

As governments and leaders continue to weigh the pros and cons of Bitcoin’s shift to mainstream finance, El Salvador’s finance minister Alejandro Zelaya has assured the International Monetary Fund (IMF) that the country will continue to use both the US dollar and Bitcoin.

Prior to this development, the country had requested a loan of $ 1.3 billion from the IMF, which has now turned out to be a conflict of interest for the United Nations-led organization. In addition, the World Bank has also renounced to help El Salvador make Bitcoin legal tender.