Top Credit Rating Agency, Fitch Ratings, Questions El Salvador’s Bitcoin Adoption
According to credit rating agency Fitch Ratings, El Salvador's adoption of Bitcoin as a legal tender may come to have unintended consequences.
Bitcoin Adoption Could Lead To Negative Credit Rating
President Nayib Bukele’s decision to grant benchmark cryptocurrency Bitcoin a legal tender status a few months ago came amid global applause from enthusiasts of the emerging industry. The rule has generated mixed reactions across much of the financial space, which will come into force early this September. One of the recent comments on the decision is by top American credit rating agency Fitch Ratings.
In a blog post, the members of the ‘Big Three credit rating agencies’ noted that the subsequent adoption of Bitcoin as the second medium of exchange in the Latin American nation could create a negative credit rating for much of the country's financial institutions and the insurance sector.
It also pointed out that the practical implementation of cryptocurrencies like Bitcoin was still undefined, and this would pose challenges in using it as a store of value and as a medium of exchange. The issue lies in the fact that there is no historical precedence by any national bank or global financial markets, Fitch says.
With the new Bitcoin rule mandating all businesses operating in the country to accept BTC payments, Fitch says only two options are open for these revenue-generating institutions. The first would likely be to keep the BTC they get for rendering services, while the other alternative would see them swap BTC as soon as they receive them for the more recognized and stable US Dollars.
Businesses that decide to go with the former option would increase their risks due to the volatile nature of digital assets like Bitcoin. Fitch added that this would ramp up an insurer's asset risk and could lead to a credit negative.
Selling Bitcoin as soon as they arrive is no more palatable than holding them, Fitch pointed out, noting that it would incur high costs in converting it back to fiat currencies. The rating agency summed it up with,
“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.”
Insurance Companies Are Ill-Prepared
The El Salvadoran government has promised that regulatory guidance on Bitcoin use will follow the official launch on September 7. However, Fitch Ratings notes that this may be in a fast lane and gives companies little time to adapt their operations to the impending changes.
It argues that insurance companies would likely need to acquire new IT infrastructures. They also need to adopt enhanced internal protocols to accept payments, reinforce their security from cyber risks and fraud, and train personnel to manage crypto transactions.
The short timeframe could expose the sector to unexpected challenges given the short timeframe.
Even though the Bank of America is rooting for a Bitcoin adoption in El Salvador, the International Monetary Fund (IMF) has criticized the move.