Fitch, a top credit rating agency, does not view favorably El Salvador adopting Bitcoin: High volatility exacerbates credit risk

Since this year, Salvadoran President Nayib Bukele announced the adoption of Bitcoin as a legal tender, it has sparked debates of all sizes internationally. Well-known credit rating agency Fitch has also recently expressed its views on the matter.

Fitch Ratings' Perspective

Following the official implementation of the Bitcoin Law on September 7th, all businesses or institutions in El Salvador are required to accept Bitcoin as legal tender for goods or services. In a report released by Fitch Ratings yesterday, they warned of the potential negative impact that the adoption of Bitcoin by financial institutions and the insurance sector in El Salvador may bring. Report.

Fitch stated in the article: "Insurance companies holding Bitcoin on their balance sheets for the long term face severe risks from its price volatility, which increases asset risk and is credit negative for insurers."

Due to El Salvador's insurers already holding a significant amount of low-rated bonds, mainly from the country's sovereign bonds (rated B-), holding additional high-risk assets like Bitcoin would only exacerbate the credit risk for insurance companies.

The best way for institutions to avoid the price volatility risks associated with Bitcoin is to immediately sell the received Bitcoin in the market. Fitch also mentioned in the article: "The ability of insurance companies to shorten the period for holding Bitcoin will depend on whether regulators and operational entities allow immediate conversion of Bitcoin to dollars, which is currently unclear." At present, it appears that El Salvador's regulations regarding the adoption of Bitcoin are not yet fully developed.

In addition to the above issues, Fitch also noted in the article: "Adopting Bitcoin will require insurance companies to bear new IT, operational, and management costs. This includes the need to introduce internal projects to accept Bitcoin payments, enhance system security to guard against cyber risks and fraud, and train relevant personnel responsible for managing Bitcoin transactions."

From the perspective of the credit rating agency, Fitch Ratings, the decision for El Salvador to adopt Bitcoin as legal tender seems rushed, with many complementary measures still incomplete. Both the public and businesses will need more time to anticipate and regulate the changes brought about by this legislation.