El Salvador relies on bitcoin mania

Is Bitcoin Buzz All It Takes to Awaken Hipster Investors’ Animal Spirits? Or does a project with the cryptocurrency name also have to make financial and economic sense? El Salvador’s “volcanic bond” may one day provide the answer – if it ever goes to market.

Last fall, President Nayib Bukele and his team of cryptocurrency experts announced that El Salvador would soon offer a 10-year, $1 billion 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 at a site near Conchagua Volcano. The other half of the money would be used to buy bitcoin. Investors would receive a coupon of 6.5% and, after five years, would participate in the increase in value of Bitcoin via a dividend. The proposed bond will be traded on Bitfinex, an exchange closed to Americans.

The details of the bond remain uncertain as there is no prospectus or prospectus yet. Still, the chief strategy officer of the tech company handling the bid told the Wall Street Journal in February that El Salvador already had $500 million in verbal commitments. He expressed confidence that the government’s decision to adopt Bitcoin as legal tender last September would generate the fizzle needed to muster the rest.

The bond should go on sale this month. But on Tuesday Finance Minister Alejandro Zelaya announced it would be postponed due to unfavorable market conditions. Perhaps that’s an elegant way of saying that after the hype died down, investors did the math and got out.

Let’s state that there is value in Bitcoin’s rules-based regime, which removes central bank discretion in money creation. More broadly, the blockchain technology that cryptocurrencies use to record ownership of an asset on a decentralized ledger is an extremely useful innovation that goes well beyond the realm of money.

However, El Salvador’s new law, which requires 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’re required to accept can exchange it for a government-issued stablecoin backed by El Salvador’s full trust and credit rating — shines defeating the purpose of using a cryptocurrency to escape the central bank.

The nation resisted. A January survey of small and medium-sized businesses by the El Salvador Chamber of Commerce and Industry found that 86% of respondents said they had not made any sales in Bitcoin. Not surprisingly, most people don’t want to keep next month’s rent in it or in Mr. Bukele’s digital fiat money.

Mr. Bukele’s bond looks rather unsavory even for those who want to speculate on Bitcoin or hold it for long-term appreciation.

First of all, El Salvador’s country risk is sky high. Mr Bukele, who took office almost three years ago, says the country will pay its debts. But the markets are not so sure. The $2032 bond returned over 19% last week. In downgrading El Salvador’s long-term foreign currency default rating to junk last month, FitchRatings noted that “rising risks due to high and growing funding needs” are estimated to reach $5.4 billion, or 18% of gross domestic product, in 2023.

Last week, Mr. Zelaya confirmed that the Bitcoin bond will not be issued by the El Salvador government. Instead, he said, it’s debt from a small geothermal company called LaGeo, a subsidiary of state electric company CEL.

Don’t pay attention, Mr. Zelaya insisted. Whether it’s “issued by LaGeo or by the Salvadorian state, in the end it’s always a debt of the state.” He didn’t mention that with LaGeo as a creditor, El Salvador avoids adding to its balance sheet, which already has a debt ratio of 85% add liabilities.

Mr. Zelaya also reiterated his expectation that the offering will be oversubscribed. But when the written bond deal that hasn’t yet materialized is the same one the government has verbalized, it’s hard to see the benefits for bond investors with legal means to deploy. They will have no equity interest in Bitcoin City, so even when it’s booming, their best outcome remains dependent on the coin’s price and the credibility of the debt issuer.

Investors can bet on bitcoin elsewhere without taking the Salvadoran risk and with little compensation. Also, as economist Frank Muci of the London School of Economics noted on March 16, the bonds “will be governed by El Salvador law, not New York law, which is bad considering President Bukele just passed the grabbed his country’s Supreme Court”.

In other words, good luck collecting if the bitcoin bond goes bust.

Write to O’Grady@wsj.com.

Journal Editor’s Report: The Best and Worst of the Week by Kim Strassel, Jason Riley, Jillian Melchior and Dan Henninger. Images: Zuma Press/AFP/Getty Images Composite: Mark Kelly

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https://www.wsj.com/articles/el-salvador-bets-on-bitcoin-mania-volcano-bond-currency-legal-bukele-nayib-fiat-11648407965 El Salvador relies on bitcoin mania

Ethan Gach

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