El Salvador and legal Bitcoin: new concerns from Fitch

The issue of adopting Bitcoin as a legal currency in El Salvador continues to create more and more concerns. Even Fitch Rating expresses its opinion, calling the Bitcoin Ley as risky. 

According to reports, the international rating agency has expressed concerns about the possible adverse effects on financial institutions and the insurance sector if BTC is adopted. 

It was mid-June 2021 when Nayib Bukele, president of El Salvador, announced the Bitcoin Ley, making bitcoin legal tender in the country starting next September 7. 

Now Fitch Rating specifies the risk just for the institutional financial and insurance category:

“Using bitcoin to conduct day-to-day transactions would increase institutions’ exposure to credit volatility.”

Essentially, according to Fitch, the new Bitcoin Ley would leave Salvadoran institutions with two options for survival: keep their crypto-assets, or convert their entire infrastructure to a BTC exchange as soon as they receive them.

Even for insurers, BTC price volatility could significantly impact keeping their balance sheets, increasing their capital risk, which translates into negative credit scores. 

Fitch Rating: the Bitcoin Ley in El Salvador is a hasty law

According to Fitch Rating, El Salvador is not yet ready for Bukele’s Bitcoin Ley in practice. 

“It is unclear at this time whether the regulatory and operational framework will allow insurers to immediately convert bitcoin into U.S. dollars so that the holding period can be minimized.”

The lack of clarity on how best to handle the operational side of BTC adoption also leads the rating agency to assess extra IT, operational and administrative costs for insurance companies. 

Not only that, but institutions could also adopt a fiat-only policy and then have to sell as soon as BTC is received, with transactions that involve extra fees, which, in turn, also affect investments in specific business areas. 

While Fitch Rating considers the financial factor unbecoming for the country, it has opened up an anti-bitcoin protest for other parties. Last week, the former government official of El Salvador, Eugenio Chicas, had appeared in a hearing with anti-bitcoin symbols.