Fitch Ratings says establishing Bitcoin as legal tender will be ‘credit negative’ for Salvadoran insurance companies.
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.
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.