El Salvador's decision to make bitcoin legal tender will hurt the credit ratings of local insurers, Fitch says

• El Salvador's move to embrace bitcoin as legal tender poses a serious risk to its local insurance companies, Fitch Ratings said in a note on Monday.
• In June, Salvadoran president Nayib Bukele ushered a bill through congress that made the cryptocurrency legal tender, exempting it from capital gains tax and requiring businesses and tax collectors to accept it.
• Fitch said Salvadoran insurers will be under pressure to quickly convert bitcoin to dollars to avoid price risk. If that is not possible, they could face steep losses.

El Salvador's move to embrace bitcoin as legal tender poses a serious risk to its local insurance companies, Fitch Ratings said in a note on Monday.

In June, Salvadoran president Nayib Bukele ushered a bill through congress that made the cryptocurrency legal tender, exempting it from capital gains tax and requiring businesses and tax collectors to accept it.

With bitcoin's legality set to come into effect on Sept. 7, Salvadoran insurance companies will soon be vulnerable to fresh credit risks, Fitch said.

Most notable is the risk of exchange-rate volatility, stemming from the requirement that insurers accept bitcoin. Such firms will be under pressure to quickly convert bitcoin to dollars to avoid price risk. If that is not possible, insurers could face steep losses should bitcoin sell off.

Bukele has reassured Salvadorans as well as international investors that using bitcoin will be optional and that bitcoin payments can automatically be received in dollars.

Yet the underlying regulation governing bitcoin's official status remains uncertain. With the Sept. 7 deadline looming, Fitch described the process as "unnecessarily rushed," adding that it "leaves insurance companies with very little time to adapt."

In issuing its ratings for Salvadoran insurers, Fitch says it will consider bitcoin a risky reserve asset, citing the cryptocurrency's "lack of transparency." This could leave the industry even more fragile, as many insurers already hold large caches of low-rated Salvadoran government bonds.

In its rating of El Salvador's sovereign debt in July, Fitch cited the new bitcoin law as one of several reasons for maintaining a B- rating - which is considered below investment grade. The ratings agency noted that adopting bitcoin as legal tender could imperil debt-relief talks with the International Monetary Fund, further debasing the country's bonds.