Researchers at Fitch Ratings believe that the adoption of bitcoin in El Salvador as a means of payment will negatively affect local insurance companies due to its high volatility.
In early June, El Salvador’s President Nayib Bukele signed into law a law that would make bitcoin legal tender in the country on September 7. Analysts at Fitch Ratings believe that the decision of the Salvadoran authorities to legalize bitcoin will have negative consequences for local insurance companies. This is because regulators still have to determine how they will control the use of BTC for payments.
In addition to the risks of high volatility of the first cryptocurrency, there are also operational risks. Given that no central bank has interacted with bitcoin yet, the consequences of its introduction on the financial market of El Salvador could be unpredictable, researchers at Fitch Ratings said. Together, these factors make it difficult to use bitcoin as a store of value and payment.
Analysts are not sure bitcoin will be widely used for insurance payments. The introduction of the first cryptocurrency in the insurance industry will largely depend on how popular it is among policyholders.
Insurance firms are likely to rush to convert the received bitcoins into US dollars to hedge against risks if their clients decide to use BTC to pay insurance premiums. However, it is unclear if firms will be able to convert bitcoins to fiat currency immediately, as this will depend on the regulatory framework.
Therefore, insurance firms holding BTC for a long period of time can be hit hard by bitcoin volatility. This means that in the event of a sharp drop in the BTC rate, they may become insolvent. In addition, there is very little time left for insurance companies to adapt to the new requirements of the law, which creates additional risk for the industry.
Researchers believe that the El Salvadorian government should determine how bitcoin will be listed in financial statements and whether it should be considered a suitable asset to support policyholder reserves. Fitch Ratings named the profits generated from speculative activities or risky transactions with bitcoin as a factor negatively affecting the creditworthiness of firms, since the volume of these profits can change at any time.
Fitch Ratings expects that with the transition to Bitcoin, insurance firms will be forced to cover new operating and administrative costs. They will have to improve internal protocols for accepting payments, increase the security of their systems to prevent cyberattacks, and also invest in training staff who have to make transactions with bitcoin.
Earlier, researchers at Fitch Ratings said that the adoption of bitcoin in El Salvador would increase regulatory risks for banks and other financial institutions.
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