Fitch Ratings, the US credit agency and a member of the “Big Three” credit bureaus, published an article on the adoption of bitcoin by El Salvador and the legal tender of the crypto asset in the country. Fitch believes that the country will face both “volatility risk” and “regulatory, operational risks” once it enforces the new tendering laws.
Fitch Ratings: El Salvador’s adoption of Bitcoin invites new risks
After the bill to legalize bitcoin in Salvador was approved by a qualified majority of Salvadoran Congress (June 9), the Salvadoran Bitcoin Offerings Law (Salvadoran Bitcoin Offerings Law) will be in force within 21 days.
One of the three major credit rating agencies is now in operation. Fitch reviews, possesses Published an articleWhy he thinks El Salvador adopting cryptocurrency may be risky. Fitch does not think so. Bitcoin (BTC).The insurance industry will use bitcoin extensively. If they take advantage of it, “insurers may convert bitcoin to USD as soon as possible to minimize currency risks, if premium-paying policyholders decide to use them to pay premiums,” Fitch’s report states.
The editorial notes that the bitcoin bidding legislation, which is expected to become mandatory on September 7, 2021 “appears to have been needlessly rushed, and leaves very little for insurance companies to adjust its demands.” The credit agency. The Fitch Ratings report includes:
Insurers will be able to reduce their holding period if the regulatory and operational framework permits the immediate conversion of bitcoin into USD. This is currently unclear. Insurance companies that hold bitcoin on their balances for long periods will be exposed to its volatility. This will increase credit risk.
Fitch tracks Moody’s downgrade of El Salvador, credit agency warns that Bitcoin’s gains may quickly reverse
Fitch Ratings isn’t the only member of Big Three that is unhappy with El Salvador adopting bitcoin as legal currency. Moody’s downgradedEl Salvador’s June rating and the bitcoin law are both partly to blame. Moody’s downgraded El Salvador from B3 to Caa1 and pointed to a “deterioration” in policy-making quality.
Fitch explained that he considers profits from “speculative activity or risky exposures like bitcoin as negative credit.” Fitch Ratings further notes:
Since [bitcoin]Gains could quickly reverse, creating volatile earnings streams. The insurance sector of the country is already exposed to low credit-quality securities, mainly sovereign bond (B-/ Rating Outlook Negative), so any additional holdings will only increase this risk. . Since YE20 sovereign and similar investments have accounted for 24% and 21% respectively of total portfolios of investment in the insurance sector.
Fitch concluded that bitcoin adoption would force certain sectors of society, including auditors, agents in insurance, and others to “absorb new technologies.” These economic sectors will have to take advantage of the cryptocurrency infrastructure spending if bitcoin is adopted.
“These will likely include the improvement of internal protocols for accepting payments, strengthening their security systems against fraud and investing in advice for the board and managers. , as well as the training of staff who will directly manage transactions, ”concludes the Fitch report.
Fitch Ratings claims that El Salvador will use bitcoin as a legal tender. What do you think? Comment below to share your thoughts about this topic.
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