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What are Bitcoin Volcano Bonds ?

Volcano Bonds

The president of El Salvador Nayib Bukele has been a strong supporter of Bitcoin, a legal tender in the country. At the end of last year, he announced his ambitious plan to create the world’s first “Bitcoin City ” at the base of the Conchagua volcano. This became possible when Blockstream arranged for Bitfinex and El Salvador to issue $1bn in tokenized U.S.-dollar denominated 10-year bonds carrying a 6.5% coupon. These Bitcoin Volcano Bonds are divided into two parts – half are to be used to buy Bitcoins and the other half to build volcano-powered energy infrastructure to Bitcoin mining and build the city. 

El Salvador’s Bitcoin Bonds have raised eyebrows across most developed countries, even going so far as to decrease El Salvador’s credit rating from B- to CCC. The non-crypto community generally responded in a negative way, stating that the corruption and misery in one of Latin America’s poorest countries would only get exacerbated. Indeed, El Salvador has experienced a substantial decrease in international investments this year. Many also argue that for the bondholders the coupon for 6.5% annual rate is “laughable“ and a “rip-off“. This move certainly comes at a price and clearly states El Salvador’s future aspirations, which for many are a step in the wrong direction. 

El Salvador’s national debt of 23,3 billion USD has been stressed out many times by the IMF and with the current Bitcoin-based solution, the relationship is virtually impossible. The IMF has been a strong anti-cryptocurrency supporter and an advocate against the adoption of blockchain technologies such as DeFi, which allow the trading, borrowing and lending of crypto assets with third-party intermediaries. So, President Nayib Bukele and Finance Minister Alejandro Zelaya have cut ties with the International Monetary Fund and Central Banks, in order to lead a liquid network-based Volcano BTC Bonds issuance economy rescue.

Adding to the uncertainty is the tumbling down of Bitcoin’s price of more than 70% from its November 2021 peak, and more than 55% from the time Mr. Bukele announced the volcano bonds. With the current conditions, the Salvadoran economy is projected by The World Bank to grow around 2,9% in 2022 and 1,9% in 2023 which would make the repayments of international debts an issue. In January 2023, El Salvador will have to repay maturing $800 million worth of Eurobonds, unable to secure other cheap loans and hesitant to receive investments due to its debt-to-GDP ratio of around 90%.

Furthermore to the largely cash economy, where almost 70% of citizens do not have bank accounts, credit cards or other financial services, implementing Bitcoin as legal tender in its digital form has not successfully convinced most locals. The government has created an application and encouraged its citizens to download and use it by providing $30 bitcoin bonus (pretty big incentive for a country where the monthly minimum wage is $365). Even though most citizens have downloaded the app, a report published in April by the U.S. National Bureau of Economic Research showed that only 20% of those who downloaded the wallet continued to use it after spending the bonus.

The 21st century ‘Port Royal

Haters gonna hate, right? Well, the crypto community embraced President Nayib Bukele’s Salvadoran Volcano Bonds with open arms, as well as his “cool” persona, earning him the nickname “coolest dictator in the world”. Some of the perks of the geothermal energy powered crypto utopian city would be that there would be no taxes on income, capital gains, property or any municipal tax. The only tax which will fund the Bitcoin city is a 10% VAT tax. Furthermore, investors will be offered citizenship via an effortless application process.

The country has attracted many bitcoin like-minded tourists and made many headlines across the world. All in all, this PR stunt will hopefully bring many crypto HODLers into El Salvador’s efforts over the years to come, stimulating its economy. As time passes, the value of Bitcoin should increase and so the willingness of Salvadorians to use the digital currency with more confidence.

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