Fitch Ratings warns El Salvador’s ‘Bitcoin Law’ will pose risk to local insurers

Fitch warned that mainstreaming Bitcoin without clarity can introduce volatility and operational risks for Salvadorans.

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

Citing the country’s lack of clarity in Bitcoin’s implementation in mainstream markets, Fitch Ratings warned about the inherent volatility and operational risks for citizens associated with the crypto ecosystem. In addition, the agency pointed out El Salvador’s ongoing exposure to low credit quality securities, stating that “additional holdings of high-risk assets will only compound this risk.”

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

Fitch predicts that insurance firms, who made 21% of El Salvador’s total capital in 2020, will be hesitant to adopt Bitcoin for claims or benefit payments. The agency speculates that insurers will likely seek to “convert Bitcoin into USD as quickly as possible to limit exchange risks” should policyholders opt to pay premiums in digital currency.

Related: Coercion and coexistence: How El Salvador’s Bitcoin Law may change global finance

While governments and leaders continue to weigh the pros and cons of Bitcoin’s move into mainstream finance, El Salvador finance minister Alejandro Zelaya has assured the International Monetary Fund that the country will continue to use both U.S. dollars and Bitcoin.

Before this development, the country had requested a $1.3 billion loan from the IMF, which has now proved to become a conflict of interest for the United Nations-led organization. Moreover, the World Bank has also backed out from helping El Salvador make Bitcoin legal tender.