El Salvador’s decision to adopt bitcoin as legal tender will likely be credit negative for local insurance companies with exposure to the cryptocurrency due to higher foreign exchange and earnings volatility risk, Fitch Ratings said on Monday in a press release.

  • El Salvador’s legislature voted and passed its Bitcoin Law on June 9 that will see the country formally adopting crypto as legal tender on Sept. 7.

  • Fitch Ratings warned there are “additional regulatory and operating risks” around El Salvador adopting bitcoin as a legal tender, as bitcoin’s practical implementation has yet to be defined by regulators worldwide.

  • The agency stressed that it does not expect bitcoin to be widely used by insurers to make claims or benefit payments, nor to offer policies denominated in the digital currency.

  • “The risks of using bitcoin largely relate to its rate of acceptance among policyholders. Insurers will likely convert bitcoin into USD as quickly as possible to limit exchange risks, if policyholders decide to use it to pay premiums,” said Fitch in the press release.

  • Currently El Salvador’s insurance sector is exposed to low credit quality securities, mainly sovereign bonds (B-/Rating Outlook Negative).

  • Fitch said additional holdings of high-risk assets will only compound this risk.

Read more: Fitch Says Germany’s ‘Spezialfonds’ Investing in Crypto Face Liquidity Risk

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