Bitcoin city dreams

Interest in El Salvador’s ‘volcano bonds’ is likely to remain dormant.

The bitcoin freefall continues. The coin’s value is now down 50% from its peak. In El Salvador where the government of president Nayib Bukele (“Bukele”) continues to believe – despite all evidence to the contrary – that the digital currency will turn the small nation into the crypto El Dorado – the administration now sets its sights on a gleaming new ‘bitcoin city’. Indeed, Bukele took advantage of the recent drop in bitcoin price to purchase another 500 tokens earlier this month – does he know something we don’t? 

Earlier this month, the government announced the construction of the bitcoin city near Conchagua volcano on the Gulf of Fonseca in the south-east of the country. The construction will be financed by crypto-currency backed securities. According to the proposal, the city will not levy taxes besides VAT. Half of the taxes levied will be used to fund the bonds issued to build the city, the other half will pay for services including garbage collection.  

However, the ‘volcano bonds’ – intended to raise some USD 1 billion – are yet to come to fruition and are unlikely anytime soon, according to our sources.  

An expert in macroeconomics and bitcoin based in El Salvador explained, “The volcano bonds will most likely not be issued in the near future and the opportunity to issue them will likely close in January 2023. My expectation is that they cannot be issued because the market and the incentives changed with the decisions of the Federal Reserve of the United States and the decisions of the Salvadoran government not to create the necessary laws, so these bonds would no longer have a sovereign guarantee from the State.”

“The volcano bonds will most likely not be issued in the near future and the opportunity to issue them will likely close in January 2023.”

An expert in macroeconomics and bitcoin based, El Salvador

Volcano bonds aside, the adoption of bitcoin as legal tender has been an objective failure in El Salvador. Between January and April 2022 only 1.6% of total family remittances have been sent in bitcoin. Keep in mind that the administration had claimed that bitcoin adoption would mean that the vast majority of family remittances would be transmitted free of charge to the country.  

The failure in the implementation of the government’s electronic wallet called “Chivo Wallet” generated a lot of mistrust, and its use is very low. A very small percentage of daily purchase and sale transactions in the country are made in bitcoin, according to surveys by the Chamber of Commerce and Industry of El Salvador and the Salvadoran Foundation for Economic and Social Development. 

What about relations with the IMF with whom the administration is currently in negotiations with? “The relationship with the IMF was ‘broken’ in December 2021 when the government decided to launch bitcoin bonds, without letting the IMF know in advance, when they were in the middle of negotiating a possible support programme from the Fund,” added the expert.   

“The relationship with the IMF was ‘broken’ in December 2021 when the government decided to launch bitcoin bonds, without letting the IMF know in advance…”

An expert in macroeconomics and bitcoin based, El Salvador

The fall of bitcoin has significantly affected the Salvadoran government’s bitcoin city dreams because a bond that would pay an interest rate of 6.5% has become less attractive when the risk of El Salvador is greater and the return would come from the expectation that the price of bitcoin would reach USD 1 million in the next 5 years – is that a risk that potential bondholders would be willing to take? Unlikely.  

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