El Salvador’s dollar debt dips following Bitcoin bond plan

Central American nation plans volcano-powered Bitcoin City

El Salvador’s dollar-denominated bonds sank to an all-time low at the start of this week as the country’s plan to establish a ‘Bitcoin city’ powered by volcanos failed to impress investors. 

Bitcoin City

Before a raucous crowd over the weekend, President Nayib Bukele vowed to build a city in the eastern region of La Union that will be powered by geothermal energy from volcanoes and funded by bitcoin-backed bonds. The renewable energy source will be used to power bitcoin mining. 

Led by Bukele, in September, El Salvador became the first nation in the world to adopt bitcoin (BTC) as legal tender. 

No tax will be levied in the new city except value-added tax (VAT). Half of the VAT will be used to fund the bonds issued to construct the city, while the other half will pay for municipal services such as rubbish collection.

Appearing on stage sporting a backward baseball cap, the 40-year-old leader jokingly compared himself to Alexander the Great, stating: “If you want bitcoin to spread over the world, we should build some Alexandrias.”

Under current plans, the country’s Bitcoin City will be circular, with an airport, commercial district and residential zones, and with the central plaza designed to resemble a bitcoin (BTC) symbol from above. 

Bitcoin bonds

The bitcoin bonds will pay 6.5% annual interest as well as 50% of El Salvador’s bitcoin profits, once initial investment costs have been recovered, with dividends paid in Tether (USDT) or in US dollars. 

Although El Salvador plans to issue the initial bonds in 2022 – perhaps as soon as mid-January – the news triggered an immediate negative reaction. 

On Monday, El Salvador’s US dollar bonds sank to $0.644, having risen as high as $1.10 only seven months ago. 

In addition to the announcement, Monday’s fall can also be attributed to a statement from the International Monetary Fund (IMF) that described the risks to El Salvador’s economic outlook as “sizeable”. 

Although it recognised the improvement in “financial inclusion” payment system engendered by the government’s introduction of public e-wallets, the IMF stated: “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. Staff recommend narrowing the scope of the bitcoin law and urge strengthening the regulation and supervision of the new payment ecosystem.”

By 14:00 (GMT), BTC had traded up 0.9% at $56,799, up by 9.7% since El Salvador’s adoption of bitcoin as legal tender in September. 

Bitcoin to US Dollar
Daily change
Low: 48814
High: 50933.9

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