El Salvador to issue ‘bitcoin bond’ in 2022

By November 23, 2021DeFi
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El Salvador is planning to issue next year $1 billion in bonds backed by bitcoin, the latest effort by the economically stressed Central American nation to attract crypto capital.

The country this year became the first to adopt bitcoin as a national currency. It plans to sell $1 billion in U.S. dollar-denominated 10-year bonds with a coupon of 6.5%. Half of that money would be used to buy bitcoin to hold for five years and the rest would fund construction projects related to bitcoin.

El Salvador will issue the bond in partnership with Blockstream, a digital assets infrastructure company based in Canada. The bonds would be issued on blockchain, the digital ledger that allows for trading without traditional intermediaries such as banks.

Some of the funds will go toward building a “Bitcoin City" near the Conchagua volcano that will have no taxes on income, property and capital gains, President Nayib Bukele said over the weekend.

The 41-year-old Mr. Bukele has previously encouraged bitcoin mining companies—which set up machines to solve puzzles to harvest bitcoin—to move to El Salvador. He has touted cheaper, renewable energy from El Salvador’s volcanoes as a solution to higher costs and criticism over the carbon footprint of mining. Bitcoin miners were recently kicked out of China and have faced scrutiny in other countries for high energy use.

“If this works, I wouldn’t be surprised if we see more emerging-market countries following suit," said Meltem Demirors, chief strategy officer at London-based asset management firm CoinShares.

The plans to raise debt tied to bitcoin carry significant risks for a $26 billion economy that is highly indebted and faces high borrowing costs.

Bitcoin’s dollar value is notoriously volatile, as it trades largely based on sentiment and can move sharply on positive or negative headlines. This also makes it very difficult to forecast where its valuation may be in five years’ time.

El Salvador is negotiating with the International Monetary Fund for a $1.3 billion financial aid program. The IMF has warned against adopting crypto assets as national currency, primarily because the privately issued tokens bypass authorities and central banks, which are tasked with preserving economic and currency stability.

A deal with the IMF was nearly complete before it stalled this year, after legislators of Mr. Bukele’s New Ideas party replaced the attorney general and magistrates of the Constitutional Court in May. IMF officials grew concerned about El Salvador’s weakening governance and rule of law, according to people familiar with the negotiations.

The court was then stacked with loyalists who opened the door for Mr. Bukele to seek another term in 2024, undoing a constitutional ban on reelection. The move fueled criticism by the U.S. amid a steady deterioration in bilateral relations.

“This decline in democratic governance damages the relation that the U.S. strives to maintain with the government of El Salvador," the State Department said in September.

Jean Manes, interim chargé d’affaires and the top U.S. diplomat in El Salvador, said Monday that she would leave her post and added that the Bukele administration is showing “no interest in improving ties with the U.S."

The announcement of a bitcoin-related bond issue “now almost accepts the reality that El Salvador is turning away from the IMF and turning instead towards their own funding/growth strategy," said Siobhan Morden, head of Latin America fixed Income strategy at Amherst Pierpont Securities, a U.S.-based brokerage. “However, innovative financing is not in itself a solution."

The IMF said Monday that El Salvador’s plans to use the proceeds of new sovereign-bond issuances to invest and trade in Bitcoin “will require a very careful analysis of implications for, and potential risks to, financial stability."

The tiny Central American country has less than $3.4 billion in foreign-currency reserves. It also has a wide budget deficit and significant debt payments, with close to $850 million due in the first quarter of 2022 and some $800 million due in 2023.

This story has been published from a wire agency feed without modifications to the text

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