El Salvador Prepares Bond Issuance to Fund Bitcoin City

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(Spanish CNN) — Bitcoin celebrates six months of being legal tender in El Salvador on Monday, and according to Alejandro Zelaya, Minister of Finance, the government of Nayib Bukele is preparing the first bond issue in cryptocurrency.

“The first 15 days of March, we have to complete everything necessary for the bond to be issued. We take all the guarantees, ”assured Zelaya in a television interview.

The issuance of “Volcano Bonds” will be used, according to the government, to finance the Bitcoin City project, announced by Bukele in November 2021 during the closing of the Bitcoin Week event, which took place in the country.

The city of bitcoin, according to the president, will be built near the Conchagua volcano, in the department of La Unión, to take advantage of its energy to supply the city and the mining of bitcoin, since the city will have residential and commercial areas, and will be equipped with services, entertainment areas, restaurants, airport, port and train station.

“Thanks to bitcoin, you’ve seen the number of investors, the number of tourists, the number of people who even come to live in El Salvador,” Bukele said at an event where he inaugurated the expansion of the building. international airport in early February. . .

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On February 20, Bukele announced on his Twitter account that he had sent a list of reforms related to new investments to the Legislative Assembly.

“I am sending 52 legal reforms to Congress to eliminate bureaucracy, create tax incentives, citizenship in exchange for investments, new securities laws, stability contracts,” the president wrote. However, the Legislative Assembly has yet to approve the reforms, despite Nuevas Ideas, the president’s party, having a large majority.

This lack of approval of the legal framework that will regulate the issuance and sale of bonds can generate uncertainty for potential investors, says Ricardo Castaneda, economist and coordinator for El Salvador and Honduras of the Central American Institute for taxes (Icefi).

“It’s not clear if some kind of stock exchange is going to be created in El Salvador where these bonds would be issued or in which other country it’s going to be,” Castaneda told CNN.

First bitcoin bond issue

The bitcoin bond issue prepared by the Salvadoran government is the first to be carried out, but it will respect what is necessary to guarantee the security of investors, authorities say.

“You must comply with all regulations for the issuance of securities, a sovereign bond; there is verification of the cash flows of the buyers of the bonds because I cannot sell my sovereign bond to someone who is involved in an illicit activity”, explained the head of the Treasury during an interview with Salvadoran media.

Bitcoin bonds could open up a new financing route for El Salvador or make things much more difficult if their sale fails, Castaneda says.

“If the demand for these bonds doubles or triples their supply, it will be a way to measure their effectiveness. In other words, if the issue is going to be 1,000 million, there should be at least two or three billion people willing to buy them,” Castaneda says.

For this economist, if this scenario materializes, it would show that El Salvador has found an alternative source of funding to multilateral organizations. “Otherwise, I would have to exclude this option and the red alerts of a possible default would go off, since this year and the next the country must repay international loans,” warns Castaneda.

Currently, the government of El Salvador is also negotiating a $1 billion loan with the International Monetary Fund, with no disbursement agreement so far.

Indeed, the IMF considers that the use of bitcoin as legal tender involves “great risks” due to its high volatility, which is why it suggests “limiting the scope of the law” and strengthening ” urgently” the regulation and supervision of the system. . of payments. The government of El Salvador said it disagreed with this assessment.

In a November 2021 report, the multilateral organization warned the government of the possible growth of public debt exceeding 95% of gross domestic product (GDP) by 2026 due to “the absence of policy measures decisive economic measures to correct budgetary imbalances and alleviate these constraints”. to growth.

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