Fitch warned of risks of bitcoin legalisation for insurers

August 23, 2021

Fitch warned of risks of bitcoin legalisation for insurers

A law recognising bitcoin as official tender in El Salvador could negatively affect local insurance companies. That was the conclusion reached by ratings agency Fitch Ratings.

Analysts pointed to additional operational risks and the high volatility of the asset. In their view, members of the sector will not use bitcoin extensively and are likely to decide to convert the cryptocurrency to US dollars as soon as possible.

"Insurers holding bitcoin on their balance sheets for long periods of time will be acutely exposed to volatility, which will increase risk," the report said.

Fitch added that regulating the first cryptocurrency "appears to be over-hasty" and leaves the insurance industry little time to adapt. This, according to the analysts, creates additional risk.

"The regulation [...] needs to define how cryptocurrency should be accounted for in financial statements and whether it would be considered appropriate to secure policyholders' reserves," the agency said.

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

In June, El Salvador's Legislative Assembly passed a law recognising the first cryptocurrency as an official means of payment in the country. The document will come into force on September 7, 2021.

The International Monetary Fund saw risks in legalising bitcoin payments and the World Bank refused to help El Salvador with the introduction of digital gold.

JPMorgan experts cited low liquidity, volatility, and the risk of conversion to the US dollar as major limitations to the use of digital gold in El Salvador.

International rating agency Moody's downgraded the country's long-term foreign currency credit rating to investment grade Caa1 with a negative outlook. One of the reasons was the legalisation of cryptocurrency.

Recall that Bank of America analysts have suggested that El Salvador's bitcoin strategy will reduce the cost of remittances, attract foreign investment and democratise financial services.

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