El Salvador could sell debt backed by Bitcoin for the first time this week in a closely watched move that could help it avoid a bailout by the International Monetary Fund.
The so-called $1 billion “volcanic bond” is said to be partly used to fund the creation of “Bitcoin City,” where digital coins are mined using geothermal energy in the latest bet of the Salvadoran President Nayib Bukele, 40.
“We think that between March 15 and 20 is the right time, we have the tools almost finished. But the international context will tell us… I did not expect the war in Ukraine”, said Finance Minister Alejandro. Zelaya told a local television station.
A successful issuance could open the country to a wider pool of foreign capital, diversify its finances away from the US dollar and potentially bypass the IMF, whose emergency loans come with often painful conditions.
“If it fails, a lot of doors close,” Carlos Acevedo, former president of the country’s central bank, was quoted by the newspaper as saying. Financial Times. “This question is going to define a lot of things.”
Bukele made bitcoin legal tender for all 6.3 million citizens in September, the first country to do so, in a bid to reduce reliance on US-sponsored institutions like the IMF and the note. green itself.
Latin American countries have a difficult history with the IMF. Bolivia is now looking to sue former interim president Jeanine Áñez and several of his top advisers for their role in securing a $327 million loan from the Washington, DC-based organization.
last august, Oxfam warned The austerity policies imposed on emerging markets by the IMF further exacerbate inequalities across the world by favoring rich creditor countries.
El Salvador itself was reportedly in talks last year on a $1.3 billion IMF emergency line of credit to fund its budget, with its shortfall in 2021 accounting for nearly 6% of its economy.
The fund, however, took a dim view of El Salvador’s adoption of bitcoin, arguing that it carries considerable risks for the country’s financial stability and consumer protection. It also prompted a rebuke from Bukele after he criticized his country’s finances as being on “an unsustainable pathwith public debt reaching 96% of GDP in 2026.
To avoid the often onerous austerity policies demanded by the IMF as a condition of a rescue loan, Bukele now plans to offer investors a 10-year bond with an initial coupon of 6.5%, about half of what the country would otherwise have to pay to raise such capital.
Of the $1 billion to be raised, $500 million will go towards infrastructure spending for the new Bitcoin City that will be powered by geothermal energy in hopes of make crypto mining more sustainable.
The other half will be invested in Bitcoin, with any potential capital gains five years later being split equally between the country and the bondholders as a special dividend.
The bond will be issued by the Salvadoran public energy company LaGeo on the Liquid network created by the Canadian company Blockstream and tradable on the Bitfinex platform.
Samson Mow, an architect of the bond, said demand came mostly from the crypto community such as Bitcoin whales and related hedge funds.
“Pension funds and institutional money will come later, everyone is watching to see how the first volcanic bond is doing,” Blockstream’s chief strategy officer said. told Coindesk.
Bukele attributed the idea to Bitcoin bull Max Keizer, a controversial finance figure who has criticized central banks for depreciating fiat currency with endless cycles of inflationary quantitative easing.
Some of the biggest proponents of cryptocurrencies argue that decentralized finance can free Third World countries from their dependence on the developed world, seen as perpetuating their dominant status through institutions like the IMF.
El Salvador’s decision to adopt Bitcoin as a competing currency to the US dollar prompted three US senators to ask the State Department to determine whether Bukele’s policy poses a risk to the US economy.
Bill Cassidy of Louisiana argued that this undermined Washington’s strategic interests and needed to be addressed to “preserve the dollar’s role as the world’s reserve currency”.
This story was originally featured on Fortune.com