- On September 7 2021, El Salvador became the first country to adopt Bitcoin as a legal tender
- El Salvador President Nayib Bukele announced an entire city to be built funded with a $1 billion Bitcoin Bond
- However, the IMF (International Monetary Fund) has warned El Salvador about the risks of using Bitcoin as legal tender
On November 20th, El Salvador President Nayib Bukele announced plans to build and fund an entire city with a $1 billion Bitcoin Bond. The city would be located along the Gulf of Fonseca and use geothermal power from the nearby Conchagua volcano. This energy would fuel cryptocurrency mining and the city. There would be no carbon dioxide emissions generated in the city. The city is proposed to be designed in a circular shape with commercial and residential areas. The residents of the city would not be subjected to municipal, property or income tax.
Blockstream: Volcano Bond
Bukele also announced the issuance and management of a Bitcoin bond worth $1 billion through Blockstream. Half of this amount would be spent on building the infrastructure for energy and mining and the other half would be spent to buy more Bitcoins.
Blockstream’s CSO Samson Mow says,
“Since we’re using the Liquid Network and Blockstream AMP, we’re also able to easily accept investments as small as $100 to democratize access to the bond.”
“Once 10 such bonds were issued, $5 billion in Bitcoin would be taken off the market for several years, and if you get 10 more countries to do these bonds, that’s half of Bitcoin’s market cap right there.”
The company also said that,
“The Bitcoin Bond represents the start of a reformation of capital markets, built on Bitcoin and layer-2 technologies like the Liquid Network. Now, investment capital can flow in from around the globe without friction. Dividends can be distributed to investors instantly, with built-in cryptography to maintain confidentiality. Bonds can be traded 24/7 with other assets like stablecoins, using protocols that help eliminate the need for trust.”
The bonds would be in a lock-in period for five years, after which El Salvador would start selling them and paying investors extra dividends. If the growth trajectory of Bitcoin sustains for five years, the country stands to make a huge sum of money.
Bitfinex announced that iFinex Inc., the parent company of Bitfinex has entered into an agreement with the Government of El Salvador to “collaborate on the creation of digital assets and securities regulatory framework to regulate, issue, and operate digitized financial instruments in El Salvador.”
IMF’s Words Of Caution
However, the IMF’s concluding statement about a mission in the country throws a wet blanket on cryptocurrency as legal tender in El Salvador. The statement states that while financial inclusion and growth are important, there are risks involved in using Bitcoin as legal tender, and they should be addressed. Here are some excerpts from the concluding statement:
Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities. Because of those risks, Bitcoin should not be used as a legal tender.
Stronger regulation and oversight of the new payment ecosystem should be immediately implemented for consumer protection, anti-money laundering and counter financing of terrorism (AML/CFT), and risk management.
Recently announced plans to use the proceeds of new sovereign bond issuances to invest in Bitcoin, and the implications of trading more broadly in Bitcoin, will require a very careful analysis of implications for, and potential risks to, financial stability.
The Future Of The Volcano Bond And Crypto-Based City
There is no concrete timeline that has been detailed for the development and construction of the city. Bukele’s popularity aside, there have been misgivings expressed within the country about his preference for Bitcoin. Bukele responded to the IMF statement by highlighting all the positives in it. The statement praised many other achievements of the government.
El Salvador is also in talks with the IMF about a $1.3 billion loan agreement. All eyes are focused on El Salvador to see how the IMF, other countries and the citizens of El Salvador react to the announcement of the Bitcoin city and the ‘Volcano Bond’.