The rating agency Fitch Ratings has now also warned El Salvador against the introduction of Bitcoin (BTC) as legal tender and has expressed concerns that cryptocurrencies could pose systemic risks for the country.
Pointing out the lack of clarity regarding the implementation of Bitcoin in the mass markets, Fitch Ratings warned of the inherent volatility and operational risks to citizens dealing with the crypto ecosystem. The agency also noted El Salvador’s current exposure to poor credit securities, stating that “additional holdings of high-risk assets will only increase that risk.”
At the beginning of June, the Salvadoran Legislative Assembly passed the controversial “Bitcoin Law” by President Nayib Bukele, paving the way for BTC to be recognized as legal tender alongside the US dollar from September 7, 2021. This means that all Salvadoran companies will become Bitcoin for goods or accept services.
Fitch predicts that insurance companies, which accounted for 21 percent of El Salvador’s total capital in 2020, are less likely to want to use Bitcoin to pay damages or benefits. The agency speculates that insurers will likely try to “convert Bitcoin to USD as soon as possible to limit exchange rate risk” if policyholders choose to pay out premiums in digital currency.
In this context: Coercion and Coexistence: How El Salvador’s Bitcoin Law Could Transform Global Finance
Governments and heads of state continue to weigh the pros and cons of using Bitcoin in the financial world. 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.
The country had previously applied for a $ 1.3 billion loan from the IMF. There is now a conflict of interest for the United Nations-led organization. In addition, the World Bank has refused El Salvador any support for the introduction of Bitcoin as legal tender.