El Salvador is set to become the first country in the world to issue government debt, backed by its economy and taxpayers, on the bitcoin market.
This will mark the first time in 500 years since the invention of modern finance that a sovereign does not turn to banks to raise capital, but goes directly to the global public.
Samson Mow of Blockstream, the bitcoin dev studio, said the offering will be on the Liquid network, a little used bitcoin sidechain operated by Blockstream. He said:
“Today, the president of El Salvador and I have announced that they will be issuing a $1 billion US ‘Bitcoin Bond’ on the Liquid Network.
The $1 billion US raised will be split between a $500M allocation of bitcoin (BTC) and a $500M infrastructure spend for building out energy and Bitcoin mining infrastructure in the region.”
Little further detail is provided, like what interest rate should be expected. Currently, El Salvador pays a very high 7.75% on its bank issued bonds. On bitcoin bonds, they only mention dividends.
“The Bitcoin Bond will have special dividends dispersed on an annual basis generated by the staggered liquidation of bitcoin,” Mow said.
That suggests the plan is to buy bitcoin and hope it rises in price. If it does, then they can pay some of the gains in dividends. If it doesn’t?
For 2020 El Salvador’s economic data are distorted with a $2.2 billion deficit. For 2019 their tax intake was $5.1 billion, expenditure $5.5 billion, making it a deficit of $400 million.
Their GDP is at $25 billion, so their effective tax rate is 20%. Going back over the past decade, they’ve generally had a deficit of 1% to 2% of the GDP, so a minus $200 million to $400 million a year.
El Salvador can not print its currency because it doesn’t have a currency. This dollerized country has just $1.5 million in M0 dollar reserves. These constrains have led Fitch to give their bonds a B- rating. Junk bonds, but not the junkiest of junk as there are three more grades below and then D for default.
Are you buying bonds or are you buying bitcoin however, at least for half of it. Then there’s the investment in the Bitcoin City. Bitfinex, which is participating in this, describes it more as the “first debt security to build energy infrastructure for the development of bitcoin mining (i.e., the ‘Volcano Bond’).”
Does the bond get a stake in that mining or is the bond and its dividends guaranteed by that mining enterprise? If so, then these would be more a collateralized securities offering, rather than an unsecured bond back by the faith on the economy, or in US on the central bank.
These three entities also plan to set up a securities framework. Bitfinex being the market maker, Blockstream the protocol on which the security runs, and El Salvador providing the law as well as being the first issuer.
In this way, they’ll tap into a global market, a younger audience, retail investors, and a $3 trillion crypto economy.
Minimum investment is as low as $100, with its nature bringing different considerations from traditional bonds as it illustrates in performance the new capabilities of the crypto market, in this case that of actually being a market where you can raise funds, even as a government.
That’s a huge market globally. A highly regulated and restricted one in traditional bonds, but as a sovereign nation El Salvador can have its own laws and rules, and is also free to pioneer the first new fundraising method in five centuries.
That makes this a big deal. Unlike previous attempts with Venezuela’s Petro in 2018, this uses a proper network like bitcoin and it’s not an enemy country in Washington so Biden can’t just sanction the bond like Trump did for Petro.
Washington however is probably looking with interest, as is everyone you’d think. They probably share our ‘rabbit in the spotlight’ feeling in that it isn’t currently very clear what to make of all of this.
It’s an experiment at a national scale that is trying very new tools to do old things, raise capital from the market. They’ll be the first to openly and freely do so, and all of us will also be free to openly participate.
All governments are also probably interested to see what happens next. Banks are probably hating all this, but governments will probably not stand with them this time as these very indebted governments also want to find out if they have a plan b just in case banks stop marketing their bonds after demanding the debt now be paid, as they have previously done to New York.
Making this historic in illustrating that one can go directly to the public. So whatever happens is good for crypto because success or failure would be down more to execution than the technology which in this case does a simple, although until now not quite possible, function of allowing capital to be raised directly from the public without needing banks as intermediaries to issue them paper certificates or now their scanned digital representations in numbers.
Where execution is concerned, it’s a gamble because bitcoin is very volatile. It’s going up, but it can also go down. The bear will probably come at some point with it unclear whether they’ll be able to hold when it gets very tough.
The mining enterprise will at least leave some physical infrastructure, but many miners have gone bankrupt in this space because at some point during the bear they have to keep operating at a loss to establish a floor in price.
Looking at the past, both were a matter of holding out. Looking at the future, no one can quite predict much. One hopes the cycle might repeat and things like this might be the ground for it in establishing a new market, but no one knows.
So this is probably one of the most complex bond ever issued when evaluating it from an investment perspective because you have to account for whether others might buy it just because it is good for bitcoin, and it is also backed by taxes, and the bond market is non existent in this space so, is there pent up demand?
Making it exciting because things are starting to get a bit real as bitcoin grows up to now nock on the doors of Wall Street.