El Salvador bets on Bitcoin Mania
Is bitcoin buzz enough to stoke the spirit animal of hipster investors? Or should a project with the name of the cryptocurrency be attached to also make financial and economic sense? El Salvador’s “volcanic bond” may one day provide the answer, if it ever hits the market.
Last fall, President Nayib Bukele and his team of cryptocurrency experts announced that El Salvador would soon offer a $1 billion 10-year bitcoin-linked bond. According to the pitch, half of the proceeds would be used to build “Bitcoin City” infrastructure, powered by low-cost geothermal electricity that could be used to mine bitcoin from a location near the Conchagua Volcano. The other half of the money would be used to buy bitcoin. Investors would receive a 6.5% coupon and, after five years, they would participate in bitcoin’s appreciation via a dividend. The proposed bond is supposed to be traded on Bitfinex, an exchange not accessible to Americans.
Details of the bond remain unclear as there is still no prospectus or offering circular. Nonetheless, in February, the chief strategy officer of the tech company leading the bid told the Wall Street Journal that El Salvador already had verbal commitments of $500 million. He said he was confident that the government’s decision to adopt bitcoin as legal tender last September would generate the sizzle needed to raise the rest.
The bond was expected to hit the market this month. But on Tuesday Finance Minister Alejandro Zelaya announced it would be delayed due to unfavorable market conditions. Perhaps that’s a fancy way of saying that once the hype died down, investors did the math and pulled out.
Let’s say bitcoin’s rules-based regime, eliminating central bank discretion in money creation, has value. More broadly, the blockchain technology that cryptocurrencies use to record ownership of an asset on a decentralized ledger is a very beneficial innovation that goes far beyond the monetary realm.
That said, the new Salvadoran law requiring merchants to accept bitcoin as payment, despite its volatility, smacks of authoritarianism. The government’s Chivo wallet — where Salvadorans who don’t want to hold the bitcoin they are forced to accept can exchange it for a government-issued stablecoin backed by the full faith and credit of El Salvador — would seem to go defeating the purpose of using a cryptocurrency to evade the central bank.
The nation resisted. A January survey of small and medium-sized businesses by the Chamber of Commerce and Industry of El Salvador found that 86% of respondents said they had made no sales in bitcoin. Unsurprisingly, most people don’t want to hold next month’s rent there or in Mr. Bukele’s fiat digital currency.
Mr. Bukele’s bond looks rather unappetizing even for those who wish to speculate in bitcoin or hold it for long-term appreciation.
For starters, El Salvador’s country risk is very high. Mr Bukele, who took office nearly three years ago, says the country will pay its debts. But the markets are not so sure. The 2032 dollar bond was yielding better than 19% last week. In downgrading El Salvador’s long-term foreign currency default rating to junk last month, FitchRatings noted that “increasing risks from high and growing funding needs” are expected to reach $5.4 billion, or 18 % of gross domestic product, in 2023.
Last week, Zelaya confirmed that the bitcoin bond would not be issued by the government of El Salvador. Instead, he said, it will be the debt of a small geothermal company called LaGeo, a subsidiary of state-owned power company CEL.
Pay no attention to that, Mr. Zelaya insisted. Whether it is “issued by LaGeo or by the Salvadoran state, in the end it is always a state debt”. He did not mention that with LaGeo as a creditor, El Salvador avoids adding more liabilities to its balance sheet which already has a debt to GDP ratio of 85%.
Mr. Zelaya also reiterated that he expected the offering to be oversubscribed. But if the written bond contract, which has not yet materialized, is the same one announced by the government, it is difficult to see the benefits for bond investors with legal funds to put to work. They won’t have a stake in Bitcoin City, so even in the event of a blowout, their best outcome is still dependent on the price of the coin and the credibility of the debt issuer.
Investors can bet bitcoin elsewhere without taking Salvadoran risk and earning barely any compensation. Moreover, as economist Frank Muci of the London School of Economics observed on March 16, the bonds will be “governed by Salvadoran law, not New York law, which is bad given that the President Bukele has just filled his country’s Supreme Court”.
In other words, good luck collecting if the bitcoin bond fails.
Write to O’Grady@wsj.com.
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