By: Douglas Notaris
In 2021, President Nayib Bukele of El Salvador had a bold vision for the nation. He aspired for El Salvador to transform into a “bitcoin haven.” Now, what does this mean, you may be wondering? Well, it all traces back to the enactment of the “Bitcoin Law” on September 7, 2021.[1] With the passage of this law, El Salvador became the first, and still the only, country to designate Bitcoin as legal tender.[2] This meant that every Salvadoran business was obligated to adopt Bitcoin for transactions, taxes could be settled using Bitcoin, and the government had the capacity to disburse subsidies in the cryptocurrency.[3] To complement this law, El Salvador launched a network of 200 Bitcoin ATMs, unveiled a new digital wallet app called Chivo, and distributed thirty US dollars’ worth of Bitcoin to each citizen to initiate the transition.[4]
In addition to adopting Bitcoin as legal tender, Bukele unveiled his vision for a “Bitcoin City”—a futuristic concept to be realized on a oceanside parcel of land situated at the foot of a volcano.[5] He went on to say that the city will be circular in design, and it will feature an airport, residential and commercial districts, and a central plaza that “will look like the Bitcoin symbol.”[6] Moreover, Bitcoin City will operate primarily as a tax-free zone, with the exception of value-added tax (VAT).[7] It will be powered by geothermal energy harnessed from nearby volcanoes, with a specific emphasis on utilizing this energy for bitcoin mining operations.[8] Put simply, Bitcoin City will be “a fully ecological city that works and is energized by a volcano.”[9]
Despite Bukele’s ambitious vision for Bitcoin City, he has a clear plan for its funding.[10] The initial development costs will be financed through a “Bitcoin bond,” appropriately dubbed “volcano bonds” due to the city’s location.[11] Specifically, the raised capital “will address sovereign debt, contribute to the construction of Bitcoin City, and foster the development of Bitcoin mining infrastructure.”[12] Regarding the bond's details, it will be denominated in US dollars and will provide a 6.5% annual return for ten years with a five-year lock-up period, during which bondholders cannot transfer or sell their shares.[13] This lock-up was included because half of the raised capital will be used to purchase Bitcoin tokens that will be held for five years before being gradually sold over the subsequent five years.[14] As for the security of the bonds, they will be collateralized by the revenue generated from the city’s sustainable mining operations.[15]
Bukele initially intended to sell these bonds in 2022, however, their issuance encountered multiple delays.[16] The former finance minister of El Salvador attributed these postponements to market instability and the conflict between Russia and Ukraine.[17] Despite these initial setbacks, it was announced on Monday, December 11, 2023, that the volcano bonds will be issued in the first quarter of 2024, with their proceeds primarily designated for the development of Bitcoin City.[18] “‘The Volcano Bond has just received regulatory approval from the Digital Assets Commission (CNAD). We anticipate the bond will be issued during the first quarter of 2024,’ the National Bitcoin Office, which manages all cryptocurrency-related projects, said on X” on December 11, 2023.[19] In another tweet, made less than two hours later, the National Bitcoin Office also made it known that the bonds will be issued on Bitfinex Securities,[20] a regulated division of crypto-asset exchange Bitfinex.[21]
The success of El Salvador's cryptocurrency-focused capital raise carries significant implications for the future of fundraising by emerging nations. If this strategy proves successful, emerging countries may no longer need to rely on Wall Street investment banks to create, market, and issue sovereign debt securities, thereby avoiding substantial consulting and underwriting fees. Similarly, these countries will also have an alternative to borrowing from the International Monetary Fund (“IMF”), which will likely be welcomed given that IMF loans often come with mandatory conditions attached.[22] “When a country borrows from the IMF, the government agrees to adjust its economic policies to overcome the problems that led it to seek financial assistance.”[23]
El Salvador’s Bitcoin-dependent bond issuance, however, does come with significant risks. Among these, the most obvious and potentially destructive is the price volatility of cryptocurrencies. One of the major factors contributing to Bitcoin's substantial price fluctuations include its relatively small market size, which means that even minor trades can significantly sway prices. Additionally, speculative trading intensifies Bitcoin’s price vulnerability to media coverage, social media hype, and the sentiments of retail investors. Furthermore, regulatory changes in various countries, such as the Securities and Exchange Commission’s approval on January 10, 2024, of “the listing and trading of a number of spot bitcoin exchange-traded product . . . shares,” further contribute to this volatility.[24]
Despite these risks, if the price of Bitcoin continues to rise, El Salvador stands to accomplish two major feats: funding its Bitcoin City and generating substantial profits from the Bitcoin tokens purchased with half of the volcano bonds capital raise. Essentially, El Salvador will benefit from the difference between the capital appreciation of its Bitcoin inventory and the 6.5% interest payments associated with its bonds. Furthermore, a surge in Bitcoin price will boost the value of its planned geothermal bitcoin mining operations as successful bitcoin mining is rewarded with bitcoin tokens.
Indeed, El Salvador is pioneering what many view as the dawn of a new era in finance. Should its volcano bonds prove successful, El Salvador might well have established a blueprint for other emerging nations worldwide to tap into the international capital markets.
Douglas Notaris is a Staff Editor at CICLR.
[1] Cecilia Quirk, El Salvador’s Bitcoin Law: Contemporary Implications of Forced Tender Legislation, Princeton Legal J. (Nov. 29, 2021), https://legaljournal.princeton.edu/el-salvadors-bitcoin-law-contemporary-implications-of-forced-tender-legislation/ [https://perma.cc/GPZ8-UTQX].
[2] El Salvador to Issue Bitcoin Bonds in First Quarter of 2024, Barron’s (Dec. 12, 2023), https://www.barrons.com/news/el-salvador-to-issue-bitcoin-bonds-in-first-quarter-of-2024-b507729c [https://perma.cc/G9NU-SN77].
[3] Quirk, supra note 1.
[4] Id.
[5] Albinson Linares, A ‘Bitcoin City’ in El Salvador Inspired by Ancient Greeks? Here’s a Reality Check, NBC News (last updated Nov. 30, 2021, 10:38 AM), https://www.nbcnews.com/news/latino/bitcoin-city-el-salvador-inspired-ancient-greeks-s-reality-check-rcna6944 [https://perma.cc/6YP7-MTUD].
[6] Tim Hakki, Volcano-Powered ‘Bitcoin City’ Coming to El Salvador, Says President Bukele, Decrypt (Nov. 21, 2021), https://decrypt.co/86529/volcano-powered-bitcoin-city-coming-to-el-salvador-says-president-bukele [https://perma.cc/2DL5-XL9S].
[7] Value-Added Tax (VAT) is a consumption tax imposed on the value added at every production stage of a product or service. Each business involved in the value chain is granted a tax credit for the VAT previously paid. However, the end consumer is not eligible for this credit, effectively making VAT a tax levied on final consumption. Value-Added Tax (VAT), Tax Foundation, https://taxfoundation.org/taxedu/glossary/value-added-tax-vat/ [https://perma.cc/X35V-VGTP]; Hakki, supra note 6.
[8] Bitcoin mining involves generating new bitcoins through the solving of highly intricate mathematical challenges that authenticate transactions within the currency. Upon successful mining of a bitcoin, the miner is awarded a predetermined quantity of the cryptocurrency. Brian Baker & James Royal, What is Bitcoin Mining and How Does it Work?, Bankrate (Nov. 17, 2023), https://www.bankrate.com/investing/what-is-bitcoin-mining/# [https://perma.cc/FBC7-A66T]; Hakki, supra note 6.
[9] Hakki, supra note 6.
[10] See id.
[11] Stephen Graves, El Salvador’s Bitcoin ‘Volcano Bonds’ Receive Regulatory Approval for Q1 2024 Issuance, Decrypt (Dec. 12, 2023), https://decrypt.co/209418/el-salvadors-bitcoin-volcano-bonds-receive-regulatory-approval-for-q1-2024-issuance [https://perma.cc/4ZYU-ACDR].
[12] El Salvador Launches Bitcoin Bonds: A Paradigm Shift in Financial Evolution, Medium (Jan. 5, 2024), https://medium.com/coinmonks/el-salvador-launches-bitcoin-bonds-a-paradigm-shift-in-financial-evolution-76df294799d5 [https://perma.cc/X5BQ-X9F5].
[13] Id.
[14] Ekin Genç, El Salvador’s $1bn Volcano-Powered Bitcoin Bonds Greenlit for Launch in Early 2024, DLNews (Dec. 12, 2023), https://www.dlnews.com/articles/markets/el-salvador-bitcoin-volcano-bonds-set-to-launch-in-early-2024/ [https://perma.cc/XZ9X-WY5P].
[15] El Salvador Launches Bitcoin Bonds: A Paradigm Shift in Financial Evolution, Medium (Jan. 5, 2024), https://medium.com/coinmonks/el-salvador-launches-bitcoin-bonds-a-paradigm-shift-in-financial-evolution-76df294799d5 [https://perma.cc/X5BQ-X9F5].
[16] Graves, supra note 11.
[17] Id.
[18] El Salvador to Issue Bitcoin Bonds in First Quarter of 2024, Barron’s (Dec. 12, 2023), https://www.barrons.com/news/el-salvador-to-issue-bitcoin-bonds-in-first-quarter-of-2024-b507729c [https://perma.cc/G9NU-SN77].
[19] Id.
[20] Graves, supra note 11.
[21] Shaurya Malwa, World’s First Bitcoin Bonds Receive Regulatory Approval in El Salvador, CoinDesk (Jan. 26, 2024, 11:01 AM), https://www.coindesk.com/markets/2023/12/12/worlds-first-bitcoin-bonds-receive-regulatory-approval-in-el-salvador/ [https://perma.cc/D8EL-TU4D].
[22] IMF Conditionality, International Monetary Fund (Mar. 2023), https://www.imf.org/en/About/Factsheets/Sheets/2023/IMF-Conditionality [https://perma.cc/4P8N-GJHH].
[23] Id.
[24] U.S. Sec. & Exch. Comm'n, Statement on the Approval of Spot Bitcoin Exchange-Traded Products (Jan. 10, 2024), https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023 [https://perma.cc/N4EJ-5S2D].