Fitch Ratings says establishing Bitcoin as legal tender will be ‘credit negative’ for Salvadoran insurance companies.
Fitch Ratings has warned that El Salvador’s “Bitcoin Law” will hurt local insurance companies’s credit ratings.
Fitch is just the latest critic of the law, which establishes Bitcoin as a formal currency — or legal tender — in the country, which also uses the U.S. dollar. The designation requires businesses and government agencies to accept it as payment.
El Salvador’s president, Nayib Bukele, announced the move in June, and the law goes into effect on September 7.
Fitch said the Bitcoin Law would expose the country’s insurers to the No. 1 cryptocurrency’s price volatility, which will lead “to higher FX and earnings volatility risk as well as additional regulatory and operating risk considerations.”
It will also impose additional IT and operating expenses, and increase the risk of cybersecurity breaches, it added.
The worsening credit scores will force those companies to pay more to raise money by selling bonds, as they are considered more likely to default. Fitch is one of the three main credit rating agencies, along with Moody’s and Standard & Poor’s.
El Salvador’s insurers already have to deal with the country’s own poor credit ratings, which classify its sovereign bonds as B-/Rating Outlook Negative, Fitch noted. President Bukele has a supermajority in congress, and has made some moves that concern the U.S. government, notably ousting its supreme court in May.
Practical Concerns
Fitch said it does not expect those insurance firms to make payments or denominated policy costs in Bitcoin, and will likely convert the Bitcoin into dollars as soon as they receive it.
The problem is that it is not clear how quickly they will be able to do that, Fitch said, as the regulatory and operational framework of the law has not been established yet. Among other things, it is not clear how Bitcoin should be accounted for in financial statements, or if insurance firms can use it to back policyholder reserves.
“Insurers that hold bitcoin on their balance sheets for extended periods will be acutely exposed to its price volatility, increasing asset risk, which is a credit negative,” Fitch said.
The speed with which Bitcoin is being made into legal tender is “unnecessarily rushed and leaves insurance companies with very little time to adapt to its requirements,” it added.
