When El Salvador’s President Nayib Bukele announced that his country would recognize Bitcoin as a legal tender in its territory, the cryptocurrency community actively welcomed new reforms in the region.
However, after a few months, the idea of equating BTC to the national currency no longer seems so great. At least, large international organizations, analytical firms and banks are sure of this.
Recall that at the end of June, the Fitch rating agency published the first report criticizing the new policy of the El Salvadorian government. Then they stated that interaction with cryptocurrency would essentially make local banks involved in various negative processes such as money laundering and tax evasion. This time, the experts’ comments turned out to be much more relevant.
What prevents Bitcoin from becoming the national currency?
Analysts are confident that the adoption of BTC at such a large-scale level will rather have negative consequences for the financial and insurance sectors of the country. They looked at two scenarios in which El Salvador’s organizations are starting to adopt the crypt. Local companies have two choices: either carry out a major reform of their infrastructure for storing digital assets, or sell bitcoins at market prices immediately after receiving, that is, exchange them for the dollar and the national currency.
In the first case, in addition to large spending on infrastructure modernization, companies are exposed to great risks given the volatility of the Bitcoin price, that is, sharp changes in its rate. That is, any rapid collapse in the price of BTC – and there were enough of them in the history of the cryptocurrency – will negatively hit the budget of organizations.
Here is a quote from Fitch analysts on this matter, in which they share their attitude to what is happening in the country. The replica leads to Decrypt.
Insurers who hold Bitcoin on their balance sheets for an extended period of time will be at high risk due to the volatility of the price of a digital asset.
That is, big companies will really struggle because of Bitcoin’s love of leaps in value – and especially if it falls. Yet organizations need a steady stream of funds for operating expenses. And since no one is going to evaluate goods in BTC at the official level, that is, dependence on the dollar still persists, companies may well close when the digital asset market collapses. In such a situation, they simply will not have the required amount of funds to conduct their activities.
The example above is especially relevant specifically for insurance companies, since many of them hold sovereign bonds of a country with a rather low yield on their balance sheets. The adoption of Bitcoin will exacerbate the risks, but it does not guarantee high returns on its own.
On the subject: Why Bitcoin may not become popular in El Salvador after it is recognized as an official means of payment?
On the other hand, local organizations can choose the second path – to adopt a policy of working only with conventional currencies, that is, get rid of the crypt immediately after receiving it. But such cryptocurrency sales will also entail additional costs. At the same time, the more a particular company allocates resources for the management of its cryptoassets, the less it can invest in other strategic areas. The experts continue.
The ability of insurers to minimize the period of ownership of a digital asset will depend on whether the regulatory framework allows the immediate conversion of bitcoins to US dollars, which is currently unclear. Fitch expects Bitcoin’s adoption will require insurance companies to cover new operating and administrative costs.
These costs can include spending on internal technology protocols, increased media security for cryptocurrencies, measures to combat potential hacker attacks, and much more. That is, both of the above outcomes carry both risks and costs for local businesses. In such circumstances, the adoption of BTC at the national level does not seem to be the most reasonable strategy. Moreover, this exchange rate could significantly worsen the relations of the El Salvadorian government with the International Monetary Fund.
We believe that this criticism turned out to be more thorough than last time, and it really makes you think about the prospects for the adoption of BTC in El Salvador. Obviously, it is not worth waiting for the rapid creation of a massive advanced infrastructure for working with cryptocurrencies in the state, since this requires both resources and an increase in the education of the population regarding working with digital assets. This means, at best, entrepreneurs will have to store the cryptocurrency on their own, which will make them a target for hackers and ordinary offline criminals. Apparently, in this case, one cannot do without the help of the state and global initiatives on the part of the country’s leadership.