Bitcoin Legalisation, Crypto Uncertainty Drag Down El Salvador’s Fitch Ratings

El Salvador’s financial score has fallen under the CCC category on the list of US-based credit rating agency, Fitch Ratings. The legalisation of Bitcoin in the Central American country has been cited as the reason why its economic rating has dropped this year on the Fitch scale. In September last year, El Salvador announced Bitcoin as an acceptable tender alongside the US Dollar. The President of El Salvador, Nayib Bukele, is a crypto supporter who plans to accelerate his efforts to drive crypto adoption in the country.

El Salvador’s long-term foreign-currency Issuer Default Rating (IDR) that was previously at B- grade has been downgraded into the “junk grade,” according to Fitch Ratings. The American credit rating agency is one of the Big Three, alongside Moody’s and Standard & Poor’s (S&P).

“The adoption of Bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023,” the Fitch Rating report said.

The International Monetary Fund (IMF) had expressed its concerns on El Salvador’s economic stability in November last year.

“Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities. Because of those risks, Bitcoin should not be used as a legal tender,” the IMF had said at the time.

IMF’s opinion did not sit well with the authorities of El Salvador. Alejandro Zelaya, the Treasury Minister of El Salvador angrily rejected IMF’s recommendation to drop Bitcoin as legal tender earlier this month.

The global financial organisation, that has 90 countries as its members, had suggested El Salvador to dissolve its $150 million (roughly Rs. 1,120 crore) trust fund of legalised Bitcoin and return any of those unused funds to its treasury.

The trust fund was intended to allow the automatic conversion of Bitcoin to US dollars in order to encourage people wary of adopting the highly volatile digital currency.

“El Salvador faces increasing risks from high and growing financing needs in 2022-2023. Fitch estimates total financing needs of $4.85 billion (roughly Rs. 36,575 crore) in 2022 (16 percent of GDP), rising to $5.4 billion (roughly Rs. 40,720 crore) in 2023 (18 percent of GDP),” the report noted.

The country might now hold over 1,500 Bitcoins in its reserve, exceeding $65 million (roughly Rs. 490 crore) in value. The current trading price of Bitcoin is $43,415 (roughly Rs. 33 lakh) on international exchange CoinMarketCap.

From establishing Bitcoin ATMs to creating a government-backed Bitcoin wallet called Chivo for Salvadorans, Bukele has been bringing initiatives focussed on expanding crypto acceptances and use cases in his country.

Cryptocurrency is an unregulated digital currency, not a legal tender and subject to market risks. The information provided in the article is not intended to be and does not constitute financial advice, trading advice or any other advice or recommendation of any sort offered or endorsed by NDTV. NDTV shall not be responsible for any loss arising from any investment based on any perceived recommendation, forecast or any other information contained in the article. 

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