El Salvador has made Bitcoin official legal tender, but there might be some challenges in the near term for the Central American country
Credit rating agency Standard and Poor (S&P) Global has stated that the adoption of Bitcoin in El Salvador has affected the country's credit rating in the short term. El Salvador's Bitcoin adoption became official on 7 September, and the leading cryptocurrency is now recognised as legal tender in the country.
In a report by Reuters yesterday, S&P Global said the adoption of Bitcoin exposes El Salvador's economy to huge financial risks and poses certain challenges for the lending industry in the country. The credit rating agency further added that the move has seriously affected El Salvador's chances of obtaining a $1 billion loan agreement from the International Monetary Fund (IMF).
S&P Global added that the risks associated with adopting Bitcoin by El Salvador seem to outweigh the benefits, highlighting the immediate negative implication of the law. The warnings are similar to what Fitch Ratings, another popular credit rating agency, said last month.
Last month, Fitch Ratings said, "El Salvador's recent legislation establishing bitcoin as a legal tender will likely be a credit negative for local insurance companies with exposure to the newly established currency due to higher FX and earnings volatility risk as well as additional regulatory and operating risk considerations."
Despite the warnings from some financial entities, Salvadoran President Nayib Bukele remains optimistic about the positives that Bitcoin adoption will bring to his country's economy. The government recently proposed exempting foreign Bitcoin investors from paying tax, a move expected to attract thousands of Bitcoin enthusiasts to the country.
Both Fitch Ratings and S&P Global rated El Salvador's credit score as B-, stating that the country is at high risk with a negative outlook. While El Salvador remains the only country to make Bitcoin legal tender at the moment, some countries are now looking at the cryptocurrency in a positive light.
Ukraine recently recognised Bitcoin and other cryptocurrencies as an asset class, while the parliament in Panama and a few South American countries also want to legalise cryptocurrency transactions.