El Salvador's law making bitcoin legal tender means banks face higher risks, including of violating rules against money laundering and terrorism financing, rating agency Fitch said in a report on Friday.
The bitcoin move, set to take effect on Sept. 7, "would increase financial institutions' regulatory, financial and operational risks, including the potential of violating international anti-money laundering and terrorist financing standards," said Fitch.
The possibility of using bitcoin for all obligations, including bank loans, could funnel bitcoin traffic through the Central American country, which "may increase the risks that proceeds from illicit activities pass through the Salvadoran financial system," Fitch said.
On Thursday, Salvadoran president Nayib Bukele said bitcoin use will be optional, meaning anyone receiving a bitcoin payment can chose to automatically convert those into U.S. dollars, legal tender in El Salvador for the last two decades.
Fitch added regulations need to fully comply with global standards set by the Paris-based Financial Action Task Force, given that "bitcoin's lack of transparency could increase the risk of money laundering."
Bukele has touted advantages of bitcoin for international transfers which are key in a country like El Salvador, where a fifth of gross domestic product in 2019 was linked to money sent back from workers abroad according to the World Bank.
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