Fitch Ratings agency warns. Introducing BitCoin into El Salvador's financial system could be dangerous.

Fitch warned that the mainstreaming of Bitcoin could introduce volatility and operational risk for Salvadorans.

Fitch Ratings has become the latest global rating agency to warn El Salvador against accepting bitcoin (BTC) as legal tender, expressing concerns that the crypto asset could cause systemic risk to the country.

Citing a lack of clarity in Bitcoin's implementation in major markets, Fitch Ratings warned of the inherent volatility and operational risks to citizens associated with the cryptocurrency ecosystem. 

In addition, the agency highlighted El Salvador's ongoing exposure to low-credit quality securities, stating that "additional ownership of high-risk assets such as BitCoin will only increase this risk".

In early June, the Salvadoran Legislative Assembly passed President Nayiba Bukele's controversial 'Bitcoin' bill, paving the way for BTC to be recognised as legal tender alongside the US dollar from 7 September 2021. As a result, all Salvadoran businesses will be required to accept Bitcoin in exchange for goods or services.

Fitch predicts that insurance companies, which accounted for 21% of El Salvador's total capital in 2020, will be reluctant to accept Bitcoin for claims or benefit payments. The agency speculates that insurers will likely seek to "convert Bitcoin to USD as soon as possible to mitigate exchange rate risk" if policyholders choose to pay premiums in the digital currency.

While governments and leaders continue to weigh up the pros and cons of introducing Bitcoin into mainstream finance, El Salvador's Finance Minister Alejandro Zelaya has assured the International Monetary Fund (IMF) that the country will continue to use both US dollars and Bitcoin.

Prior to this event, the country had requested a $1.3 billion loan from the IMF, which has now proved to be a conflict of interest for the UN-led organisation. What's more, the World Bank has also backed away from helping El Salvador make Bitcoin a legal tender.

20-08-2021, Mr Advice TEAM

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