The move by the Caribbean Island nation, El Salvador to adopt Bitcoin as its official legal tender after the United States Dollar has been tagged by FitchRatings as bad for its banks. According to the New York-based economic analytics and rating firm, El Salvador’s plans will increase the need for local financial institutions to bolster their Anti Money Laundering (AML), and terrorist financing standards.
El Salvador made the news a couple of days back when its legislative arm affirmed the proposal by the country’s President, Nayib Bukele to make Bitcoin a legal tender. While the move has been celebrated by the crypto community, there are a number of challenges that lie ahead for El Salvador in implementing Bitcoin as a Legal Tender.
Once the Bitcoin standard is adopted and launched as planned in September, businesses will be obligated to receive the cryptocurrency as payment for all goods and services. The premier cryptocurrency can be used for payment of taxes and Capital Gains from holding Bitcoin will not be subjected to any form of taxation. The country is set to set up a Trust with $150 million to facilitate the instant conversion of received Bitcoin to USD, to mitigate against price volatilities.
Fitch Ratings, however, expressed skepticism, saying “it remains unclear as to how this will work in practice.”
The Faults with the El Salvadoran Bitcoin Embrace
The Fitch Ratings identified the lack of the right positioning of El Salvador’s banks to duly implement or integrate the proposed Bitcoin legal tender provision. Citing the IMF’s projection of legal and macroeconomic challenges in relation to the integration of Bitcoin into the nation’s monetary ecosystem, Fitch Ratings believe this declaration could “could weigh on investor confidence.”
The lack of transparency in Bitcoin, according to the rating could also predispose the country towards receiving remittances that may be tied to terrorist activities. In all, the Fitch Ratings believe more challenges than is envisaged lie ahead of El Salvador, and the banks will be one of the most impacted.
“A rushed implementation of the new alternative payment system platform will affect financial institutions’ management framework for operational, cyber/ransomware, currency and liquidity risks, with additional implications for banks’ underwriting standards,” the Fitch Ratings said.