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Fitch warns El Salvador on accepting bitcoin as legal tender

written by Bella Palmer

The IMF also expressed concern, stating that effective regulatory measures must be put in place when dealing with cryptocurrencies

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

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

However, protests, lawsuits and criticism followed after the decision was made, including El Salvador’s opposition party that sued the government over the new legislation.

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.

The International Monetary Fund (IMF) also expressed concern regarding digital assets, stating that the new asset class could pose significant risks, and effective regulatory measures must be put in place when dealing with cryptocurrencies.

According to IMF spokesperson Gerry Rice, the adoption of Bitcoin could raise a number of macroeconomic issues. Bukele responded that he would try to explain that the move to make the bellwether cryptocurrency a legal tender would not change their macroeconomics.

Exchange-rate volatility will be the most notable risk 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.


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