El Salvador’s move to make bitcoin legal money could damage local insurers’ credit ratings.

Spotlight:

  • El Salvador’s decision to accept bitcoin as legal money poses a significant danger to the country’s insurance firms, according to Fitch Ratings.
  • President Nayib Bukele of El Salvador pushed a law through Congress in June that declared bitcoin legal cash, exempting it from capital gains tax and mandating companies and taxmen to adopt it.
  • Salvadoran insurers, according to Fitch, would be under pressure to convert bitcoin to dollars as soon as possible to avoid pricing risk. If this is not achievable, they may suffer substantial damage.

El Salvador’s decision to accept bitcoin as legal money poses a significant danger to the country’s insurance firms, according to Fitch Ratings.

President Nayib Bukele of El Salvador pushed a law through Congress in June that declared bitcoin legal cash, exempting it from capital gains tax and mandating companies and tax collectors to utilize it.

With the legalization of bitcoin due to take effect on Sept. 7, Salvadoran insurance firms would be exposed to new credit risks, according to Fitch.
The danger of exchange-rate volatility, which stems from the need that insurers accept bitcoin, is the most significant.

To prevent price risk, such businesses will be under pressure to convert bitcoin to dollars as fast as possible. If it isn’t achievable, insurers may risk significant losses if bitcoin falls in value.

Bukele has informed Salvadorans and international investors that the use of bitcoin will be voluntary and that bitcoin payments will be immediately converted to dollars.

However, the fundamental rule that governs bitcoin’s official status is still up in the air. Fitch criticized the procedure as “unnecessarily rushed,” adding that it “leaves insurance companies with very little time to adapt” as the Sept. 7 deadline approaches.

Fitch says it would consider bitcoin a hazardous backup asset when assessing Salvadoran insurers, noting the cryptocurrency’s “lack of transparency.” Because many insurers already have substantial holdings of low-rated Salvadoran government bonds, this might make the business even more vulnerable.

Fitch listed the new bitcoin law as one of many grounds for retaining El Salvador’s B- rating, which is regarded below investment grade, in its rating of the country’s sovereign debt in July. Adoption of bitcoin as legal money, according to the rating agency, may jeopardize debt-relief discussions with the International Monetary Fund, further debasing the country’s assets.