“Volcanic bonds”, El Salvador’s president’s controversial bitcoin rate

The president saviorNaib Bukele plans to issue bitcoin-denominated debt to oxygenate government finances, but his so-called “volcanic bond” offering may not be attractive to investors, economists warn.

With the approval of the Digital Assets Law on January 11, the president opened the way for about $1,000 million in bitcoin bond issuance, although the former central bank president of El Salvador doubts they will be well received in the market.

“I don’t think there’s a big appetite,” economist Carlos Acevedo told AFP.

In November 2021, at the international Bitcoin forum, Bukele announced that he would issue cryptocurrency debt to build “Bitcoin City,” a city in the eastern part of the country that would be powered by geothermal energy from the Conchagua volcano.

But last week in its annual review of the situation in El saviorThe International Monetary Fund (IMF) has suggested caution.

“Given legal risks, financial volatility, and the largely speculative nature of cryptocurrency markets, the authorities should reconsider their plans to expand government exposure. [salvadoreño] to Bitcoin, including the issuance of tokenized bonds,” the IMF said in a statement.

In September 2021, Bukele evolved into El. savior in the first country in the world to accept bitcoin as legal tender, along with the dollar, which has been in circulation since 2001.

This was done in an effort to provide banking services to the 70% of the population excluded from the financial system and make it cheaper to send remittances from abroad to Salvadoran families, but the cryptocurrency has not gained much acceptance in the country.

In 2022 savior received $7,742 million in remittances, but only 1.6% of the total came in bitcoin, according to the Central Reserve Bank (BCR).

In addition, the price of bitcoin has plummeted: after trading at $68,000 in November 2021, it is now around $24,000.

“Failed Bet”

There are few bitcoin transactions in Salvadoran commerce.

“At first, out of every 20 people, 10 wanted to pay with bitcoin, but now there are two or three people in a week,” said Carlos Torres, who runs a cafeteria in the city center. Saint savior.

In addition, a survey by the University of Central America (UCA) showed that 74% of Salvadorans did not use Bitcoin in 2022.

Bitcoin “was a bad bet from a population perspective,” UCA vice-chancellor Omar Serrano told AFP.

This is the “only” measure bukele that this does not convince Salvadorans, despite the high support the president has received in his anti-gang crusade, he added.

For economist Rafael Lemus, bitcoin is a “failed” policy because “it does not meet the specific needs of the population.”

Paradoxically, according to Acevedo, insufficient recognition cryptocurrency freed Salvadorans from losses when its price collapsed. “The rescue [de la gente] was in the “failure” of bitcoin in the country, he said.

“Sleeping Millionaires”

Sale of bonds in bitcoins “It will depend on the interest rate” offered by the government, because the higher it is, “the more attractive it will be for those who buy,” said economist Ricardo Castaneda of the Central American Institute for Financial Studies (Icefi). AFP.

He also noted that bonds help build the first bitcoin city, “could have a positive impact on the crypto world as a whole” and should be taken into account “when issuing a loan.”

But Acevedo warned that the bonds would hit the market in an “unstable” environment. “At least for this whole year, I don’t see an opportunity to stimulate a favorable situation for issuing debt,” he said.

Meanwhile, Lemus claimed that El’s financial situation savior “it’s unsustainable”, with government debt equivalent to 80% of GDP, so “buying volcanic bonds is a speculative bet (and) you practically have to find sleeping millionaires.”

Bukele allocated $107 million to buy Bitcoin from September 2021 to October 2022. On November 17, he announced that he would buy one bitcoin per day, without specifying for how long.

El Salvador’s ambassador to Washington, Milena Mayorga, expressed optimism that “big companies” would buy the bonds, the president said.

“We have been in Europe talking to potential buyers and I think this will be important for the plans of President Bukele,” the diplomat told Salvadoran state channel 10. (AFP)