Due to increased foreign exchange and earnings
volatility risk, El Salvador's decision to accept bitcoin as legal money would
likely be credit negative for local insurance firms with exposure to the
cryptocurrency, Fitch Ratings stated in a press statement on Monday.
- On June 9, El Salvador's legislature approved and
enacted a Bitcoin Law, which would see the nation officially accept
cryptocurrency as legal money on September 7.
- El Salvador accepting bitcoin as legal currency
carries "added regulatory and operational risks," according to Fitch
Ratings, since bitcoin's practical application has yet to be defined by
authorities across the globe.
- The agency said that it does not anticipate insurers
to utilize bitcoin to file claims or pay benefits in the digital currency, nor
to sell insurance in the digital currency.
- “The dangers of adopting bitcoin are mainly
determined by how widely it is accepted by policyholders. If policyholders want
to pay premiums using bitcoin, insurers would likely convert it to USD as soon
as possible to minimize currency risks, according to Fitch.
- The insurance industry in El Salvador is now exposed
to poor credit quality assets, primarily government bonds (B-/Rating Outlook
Negative).
- Additional ownership of high-risk assets, according to Fitch, will only increase the danger.
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