El Salvador prepares to launch bitcoin bond: “If it fails, a lot of doors close”

El Salvador prepares to launch bitcoin bond: "If it fails, a lot of doors close"

Josué País, owner of a Salvadoran taxi company that accepts bitcoin payments from tourists using the service, enthusiastically supports the country’s latest plan to cash in on the cryptocurrency craze.

“Curiosity is what attracts me,” said País, 36, who planned to buy about $200 of the Central American country’s “bitcoin bond” set to launch this week. “First, I will do it to support the country. Number two, because it’s an attractive big bet.

The country’s millennial president, Nayib Bukele, is counting on interest in the bitcoin-backed bond from País and retail investors around the world. It was one of the few options left to help the nation out of its financial hole, analysts said, but with institutional investors reluctant to participate and the price of bitcoin falling, the launch may not be a success. success.

Six months after El Salvador became the first country to make bitcoin legal tender, the government is scrambling to find funds to repay and refinance expiring debt. Its sovereign bonds have fallen to junk status over the past year as investors feared that the budget deficit, IMF says could reach 5% this year, is unsustainable. The fund urged El Salvador to revoke bitcoin’s status.

The 10-year bond is a key part of Bukele’s bold economic experiment. He hopes to raise at least $1 billion to boost the country’s bitcoin stocks and fund a new “bitcoin city” near the Honduran border powered by geothermal energy from a nearby volcano. Any additional funds raised could help it avoid a harsh IMF program or sovereign debt restructuring, experts said.

“If it fails, a lot of doors close,” said Carlos Acevedo, former president of El Salvador’s central bank. “This show is going to define a lot.”

Several institutional investors said they were watching the bond with interest but would not participate, noting that buyers were more likely to be retail crypto investors. Some analysts believe the launch will be delayed, but Bukele’s tight control over Congress means relevant legislation can be passed quickly – the bill to make bitcoin legal tender was passed within hours.

Anti-bitcoin graffiti in San Salvador: 70% of Salvadorans have little or no confidence in bitcoin, poll finds © Jose Cabezas/Reuters

For Bukele, crypto adoption has produced limited results. The government had argued that El Salvador’s large migrant workforce would find bitcoin a cheaper and better way to send money home. But central bank data showed that just 2% of remittances in January were sent using digital wallets.

Seventy percent of Salvadorans have little to no confidence in bitcoin and believe it primarily benefits foreigners, such as crypto enthusiasts visiting the country, business leaders, and the wealthy. survey by the University of Central America from December showed.

“I don’t really know how to use it, it scared me that it goes up and down, it’s very volatile,” said Alejandro Jiménez, 23, who works at a call center in the capital. San Salvador. “It’s quite a risky bet on the part of our government.”

A senior executive from a bank said less than 0.01% of debt payments were made in bitcoin, while another from a rival said he saw an “irrelevant” number of transactions.

Tourism remains depressed, with visitor numbers in 2021 well below pre-pandemic years, official data show. But the government said tourism had increased in November and December and estimated that 20% of transactions in the sector were in bitcoin.

The cost of the crypto experiment, including contracts relating to Chivo – the official bitcoin app which has 2 million active users according to the government – ​​or how Bukele buys the country’s bitcoin have not been made public. . Investors trying to understand economic policy seek encounters with Bukele’s brothers, who are key figures in a small circle of policymakers.

President Nayib Bukele
President Nayib Bukele introduces himself as the “CEO of El Salvador” on Twitter © Camilo Freedman/Getty

“The clearest government policy is opacity with public money,” said Ruth López, anti-corruption director of the nonprofit Cristosal. “Especially in government procurement and ecosystem development to safeguard bitcoin and government enforcement.”

The government did not respond to requests for comment on the bitcoin bond. Finance Minister Alejandro Zelaya said in an online interview last month that there was “zero percent” risk of default on its sovereign bonds and that the crypto bond issuance would be in line with “know your customer” rules to prevent money laundering.

Several factors could limit interest in the bond. With bitcoin trading at around $40,000, the cryptocurrency is around 20% below where it was the day before it became legal tender in El Salvador.

The bond sale also comes as cryptocurrency exchanges try to resist pressure to block transactions from Russia, as crypto investments make it easier to evade sanctions. El Salvador abstained in a recent UN vote to condemn Russia’s invasion of Ukraine, and Bukele is planning a trip to Moscow in July.

The cryptobond will be issued by national thermal energy company La Geo, according to investors and bankers. Americans will not be able to buy the bonds because they are prohibited from using Bitfinex, the trading platform that will sell them. In El Salvador’s original presentation, it was stated that investments would be allowed in dollars, bitcoins and tether.

The bond’s financial appeal was limited, analysts said. The bond offers an annual coupon of 6.5% – well below the yield currently available on El Salvador sovereign bonds – plus 50% of bitcoin’s price gain after five years. This made it more suitable for investors who want to back El Salvador’s broader crypto experiment rather than seek the best profit, analysts said.

“If El Salvador had solid public finances. . . this [the bitcoin bond] might be a different story,” Acevedo said. “Anyone doing a cold scan will just buy bitcoin directly.”

Additional reporting by Jonathan Wheatley