El Salvador’s Bitcoin Adoption Doesn’t Pose any Material Financial or Market Risk to Banks: Fitch Ratings

The rating agency recommended that financial institutions follow additional regulatory guidelines and policies to put barriers to entry to participate in the crypto market.

American credit rating agency Fitch Ratings said this week that El Salvador’s Bitcoin adoption as a legal tender alongside the USD in September currently does not have any material direct financial or market risk on its banks.

That is because no products or services offered are denominated in BTC, which means there is no direct bank balance sheet exposure, it added.

“Widespread adoption of BTC has been limited by its inherent price volatility, the domestic banking sector’s low financial inclusion, and the lack of broad internet availability.”

It would depend on the regulations if Bitcoin adoption could expose banks to greater operational, cyber, and money laundering risks, it added.

The agency further said that though the lack of tax on Bitcoin capital gains in the country could attract foreign inflows of BTC to the country, it can also increase money laundering risks for the country’s financial system.

In fact, businesses and banks are required to accept payments in BTC, which are converted to USD during the payment process. It has been “an economically positive development for the tourism sector in rural areas surrounding San Salvador.”

“However, the sustainability of growth and future demand are uncertain,” it said.

In its assessment, Fitch Ratings recommended El Salvador’s financial institutions follow additional regulatory guidelines and policies regarding money laundering risk management to offer digital wallet services or USD-BTC convertibility so that barriers to entry to participate in the crypto market can be created.

It concluded that private customer deposits have remained stable in the country, except for a slight decrease of 2.0% from May 2021 to September 2021.

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