Explainer: What we know so far about El Salvador’s volcano-powered bitcoin bond

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MIZATA, El Salvador/London, Nov 22 (Businesshala) – El Salvador plans to build the world’s first “Bitcoin City” with money from $1 billion worth of bitcoin-backed bonds, the country’s President Nayib Bukele said on Saturday.

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Here’s what we know about the proposed bond and some details that still need to be filled.

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what do we know

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Bukele said El Salvador plans to issue the bonds in 2022, suggesting it could happen at the earliest in 60 days’ time.

Half of the $1 billion amount will be converted into bitcoin and the other half will be used for infrastructure and bitcoin mining.

Samson Mo, chief strategy officer of blockchain technology company Blockstream, who was on stage with Bukele, said the ‘volcano bond’ – the new city will be powered by geothermal energy from a nearby volcano – will be a US dollar-denominated 10-year bond. And have a coupon of 6.5%.

This is well below the 13.5% interest rate yield El Salvador’s 10-year bonds are currently trading at. Premium investors seeking to hold El Salvador bonds instead of ultra-secure US government bonds have more than doubled since June, when Bukele pushed for bitcoin to be legal tender. (.JPMEGDLSR)

There are also plans for more bitcoin-backed bonds and Moe said he expects other countries to do the same. He also speculated that the move would absorb enough bitcoin to increase the value of the cryptocurrency. This would allow El Salvador to pay off the bond again with profits from selling bitcoin.

A man stands next to a sign saying “Bitcoin accepted”, outside a Moto repair shop on October 6, 2021 in Aguilares, El Salvador, where the cryptocurrency is accepted as a payment method. The picture was taken on October 6, 2021. Businesshala/Jose Cabezas/File photo

Mo said that after a five-year ‘lock-up’, El Salvador could start selling some bitcoin to investors to offer “extra coupons” every year.

Crypto exchange Bitfinex was listed as the book runner for the bond at a presentation shown on a large screen on stage. The bonds would be sold in $100 tranches for “democratic access”.

According to one, the bonds will be able to be traded 24/7 alongside other assets such as stablecoins. blog post From Blockstream, Mo’s company that plans to issue bonds.

what we don’t know

It is not known when the bond will launch next year or when El Salvador will buy $500 million worth of bitcoin, which is crucial to the plan.

The legal rights of potential buyers have also not been detailed yet. Most government bonds are strict legal contracts, meaning the government is held accountable if the debt is not repaid in full and on time. Those sold in dollars on international bond markets are often issued under widely trusted US or British laws.

It is also not known what will happen to the new bonds if the country defaults on its existing traditional bonds. The government’s next bond deadline is $800 million in January 2023. That bond is currently trading at about 20% off its face value due to El Salvador’s debt problems.

The International Monetary Fund, which El Salvador needs to ease its problems, has yet to comment on the Volcano Bonds plan. Earlier in the year it stated that there were both economic and legal concerns about El Salvador making bitcoin legal tender.

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Reporting by Mark Jones in London and Sarah Kinosian in Mizata, El Salvador; Editing by Lincoln Feast.

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