El Salvador may sell debt backed for the first time ever by Bitcoin this week in a closely watched move that could help it avoid a rescue by the International Monetary Fund.
The so-called volcano bond, amounting to $1 billion, would be in part used to finance the creation of “Bitcoin City,” where the digital coins are mined using geothermal energy.
A successful issue could open the country up to a broader pool of foreign capital, diversify its finances away from the U.S. dollar, and potentially circumvent the IMF, whose emergency loans come with often painful strings attached.
“If this is a failure, a lot of doors close,” Carlos Acevedo, a former president of the country’s central bank, told the Financial Times. “This issue is going to define a lot.”
Bukele made Bitcoin legal tender for El Salvador’s 6.3 million citizens in September, the first country ever to do so, in a bid to reduce dependency on U.S.-sponsored institutions like the IMF and the U.S. dollar.
Why 3rd countries need to have Bitcoin choice
Latin American countries have a difficult history with the IMF.
Bolivia is now looking to prosecute former interim president Jeanine Añez and several of her key advisers for their role in agreeing to a $327 million loan from the Washington, D.C. based organization.
El Salvador itself reportedly had been in talks last year over an emergency $1.3 billion IMF credit line to fund its budget with its 2021 revenue shortfall amounting to nearly 6% of its economy.
The fund has however taken a dim view of El Salvador’s adoption of Bitcoin, arguing it entails considerable risks to the country’s financial stability and consumer protection. It also provoked a rebuke from Bukele after it criticized his country’s finances as being on “an unsustainable path,” with public debt hitting 96% of GDP in 2026.
To avoid the often onerous policies of austerity demanded by the IMF as a condition of a rescue loan, Bukele is now planning to offer investors a 10-year bond at an initial 6.5% coupon, roughly half what the country would otherwise need to pay to raise such capital.
Investment by The Fund
Of the $1 billion to be raised, $500 million will go toward infrastructure spending on the new Bitcoin City to be powered by geothermal energy in the hopes of making crypto mining more sustainable.
The other half will be invested into Bitcoin with any eventual capital gains five years later being split evenly between the country and bondholders as a form of special dividend.
Issue and Trade
The bond will be issued by El Salvador’s state-owned energy company LaGeo on the Liquid Network, created by Canada-based firm Blockstream and tradable on the Bitfinex platform.
Demand Forecast
EL Salvador expect the demand mainly come from the crypto community such as Bitcoin whales and related hedge funds.
“Pension funds and institutional money will come later. Everyone’s watching to see how the first volcano bond goes,” the chief strategy officer of Blockstream told CoinDesk.
What will happen next
Some of the largest proponents of cryptocurrencies argue decentralized finance can liberate third-world countries from their dependency on the developed world, seen as perpetuating its dominant status through institutions like the IMF.
El Salvador’s decision to adopt Bitcoin as a competing currency to the U.S. dollar prompted three American senators to request the State Department determine whether Bukele’s policy poses a risk to the U.S. economy.
Louisiana’s Bill Cassidy argued it undermined Washington’s strategic interests and must be dealt with to “preserve the role of the dollar as a reserve currency of the world.”
Source: Fortune