Fitch warns of risks in Bitcoin legalization for insurers

The law recognizing Bitcoin as an official means of payment in El Salvador could negatively affect local insurance companies. This conclusion was reached by Fitch Ratings.

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Analysts pointed to additional operational risks and the asset’s high volatility. In their view, industry participants will not widely use Bitcoin and are likely to convert the cryptocurrency into US dollars as quickly as possible.

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\”Insurers that hold Bitcoin on their balance sheets for extended periods will be highly exposed to volatility, increasing risks,\” the report said.

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Fitch added that regulating the pioneer cryptocurrency \”appears overly hasty\” and leaves the insurance industry little time to adapt. In the analysts’ view, this creates additional risk.

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\”In regulation, it is necessary to determine how the cryptocurrency should be accounted for in financial statements and whether it will be considered suitable for backing insurers’ reserves,\” the agency said.

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Fitch expects that the adoption of digital gold will require market participants to incur additional costs for implementing internal protocols, strengthening security and anti-fraud measures, and staff training. This will reduce investment volumes in other strategic areas, the analysts added.

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In June, El Salvador’s Legislative Assembly passed a law recognizing the official means of payment in the country. The document will come into force on 7 September 2021.

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The International Monetary Fund saw risks in the legalization of Bitcoin payments, while the World Bank declined to assist El Salvador with the rollout of digital gold.

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JPMorgan experts cited low liquidity, volatility, and the risk of conversion to US dollars as the main constraints on the use of digital gold in El Salvador.

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Moody’s downgraded the country’s long-term foreign-currency rating to Caa1 with a negative outlook. One of the reasons was the legalization of cryptocurrency.

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Bank of America analysts suggested that the Salvadoran Bitcoin strategy will reduce remittance costs, attract foreign investment and democratise financial services.

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