El Salvador to issue Bitcoin Bond in 2022 to build ‘Bitcoin City’

The first nation to adopt Bitcoin as a national currency is now planning at some point in 2022 to issue $1 billion Bitcoin-backed bonds and use half of the funds to build a ‘Bitcoin City’ and mining operation in the Gulf of Fonseca, while the other half will be used to purchase more Bitcoin.

To the breathless excitement of Bitcoiners and we assume the seasoned skepticism of traditional finance, El Salvador’s President Nayib Bukele unveiled the plan on 20 November 2021 to a crowd with much fanfare. We couldn’t find an official Government press release so the official record of the proposals appears to have been uploaded to YouTube.

IMF’s Reaction

According to an International Monetary Fund (IMF) statement on 22 November 2021:

“The plans to issue sovereign bonds and use the proceeds to buy Bitcoin and fund infrastructure plans announced on November 20, occurred after the technical work of the [IMF] mission concluded, and were not discussed with the authorities.”

Ouch! El Salvador’s proposal involves using geothermal energy to power Bitcoin mining from the Conchagua Volcano in the eastern region of La Union (hence why they’re also being called Volcano bonds in addition to their official name as EBB1 or El Salvador Bitcoin Bond 1) and a Bitcoin shaped city have no income, capital gains, property, payroll, or municipal taxes, apart from a 10 percent sales tax.

Blockstream and Liquid Network

The sovereign-issued bond will have a minimum subscription amount of $100, would be formed with the help of Blockstream (a Canadian blockchain technology company), and issued on the Liquid Network (a Bitcoin sidechain settlement network that enables faster, more confidential Bitcoin transactions). The bonds will be US dollar-denominated over 10 years. It will pay investors a 6.5% yield, halving El Salvador’s current cost of funding with traditional bonds.

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Following a lock-up period of five years, El Salvador will start to sell its holdings and pay an added dividend to bondholders.

The government of El Salvador will apparently propose new securities laws to facilitate the issue of the bonds, and the first license to operate an exchange to purchase the bond is proposed to go to Crypto exchange Bitfinex.

Whether El Salvador’s Bitcoin bonds succeed or prove to be a flop, the fact that they have even been proposed is truly revolutionary in itself. Blockstream’s chief strategy officer, Samson Mow, believes other countries may launch similar Bitcoin bonds which could be quite bullish for the price of Bitcoin given the need to lock up large amounts of the crypto for several years at a time.