El Salvador plans to build the world’s first “Bitcoin City” with funds from $1 billion worth of bitcoin-backed bonds, the country’s President Nayib Bukele said Saturday.
Here’s what we know about the proposed bond, and some details still need to be filled in.
What we know
Bukele said El Salvador plans to issue the bonds in 2022, suggesting it could be as early as 60 days.
Half of the $1 billion will be converted into bitcoin and the other half used for bitcoin mining and infrastructure.
Samson Mow, chief strategy officer of blockchain technology firm Blockstream, who was on stage with Bukele said that ‘volcanic bonds’ – the new city will be powered by geothermal energy from a nearby volcano that – would be a 10-year U.S. dollar bond and carry a coupon of 6.5 percent.
This is much lower than the 13.5% yield on which El Salvador’s 10-year bonds are currently trading. High-profile investors’ claims to hold El Salvador bonds instead of ultra-safe US government bonds have also more than doubled since June when Bukele’s push for a bitcoin legal tender began.
More bitcoin-backed bonds are also planned, and Mow said he expects other countries to do the same. He also speculates that these moves will absorb enough bitcoin to push up the value of the cryptocurrency. That would allow El Salvador to then pay the bond with the profits from the resale of the bitcoins.
After five years of ‘lockdown’, El Salvador could also start selling some bitcoin to give investors an “additional coupon” each year, Mow said.
Cryptocurrency exchange Bitfinex was listed as the lead for the bond in a presentation that was shown on a large screen on stage. The bonds will be sold in $100 tranches to “democratize access” to them.
The bonds will be tradable 24/7 against other assets like stablecoins, according to blog post https://blog.blockstream.com/el-salvador-to-issue-1b-in-tokenized-bonds- on-the-liquid-network from Blockstream, Mow’s company plans to issue a bond.
What we don’t know
It is not known exactly when next year the bond will be launched, or when El Salvador will buy $500 million worth of bitcoin, which it considers crucial to the plan.
The legal rights of those who will be buyers have also not been detailed. Most government bonds are strictly legal contracts that mean the government is liable if the debt is not repaid in full and on time. Bonds that are sold on the international bond market in dollars are typically issued under widely held US or UK law.
It is also not known what will happen to the new bonds if the country defaults on existing traditional bonds. The government bond’s next maturity is a repayment of $800 million due in January 2023. That bond is currently trading at a discount of nearly 20% off par due to El’s debt problem. Salvadoran.
The International Monetary Fund, whose help El Salvador is said to need to deal with its problems, has yet to comment on the volcanic bond plan. Earlier in the year, they said they were concerned both economically and legally about El Salvador making bitcoin legal tenders.
