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El Salvador’s Bid for Bitcoin Bonds Sinking as IMF Deal 'Practically Dead': Former Central Bank President

The promise of a Volcano-powered, tax-free city built with Bitcoin-backed bonds may sound exciting, but experts have their doubts.

3 min read
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El Salvador's efforts to harness Bitcoin to boost its economy are falling short of what the BTC maximalists had hoped for.

Finding common ground with the International Monetary Fund, which has asked El Salvador to reverse its Bitcoin law and which could withhold financial assistance, has not happened. Many critics doubt it will, and counted among them is the nation’s former Central Reserve Bank president.

Speaking on Monday with ElSalvador.com, Carlos Acevedo, who served under Mauricio Funes from 2009 to 2013, said that stubbornly chasing a Bitcoin-based solution has cost the country dearly, “killing” relations with the IMF and making such a bond issuance virtually impossible.

“The negotiation with the fund is practically dead. It would need to be revived,” Acevedo said, referring to the country’s efforts to renegotiate its debt with the IMF. He added that “the issuance of the volcano bonds is another issue that is getting complicated for the president.”

The IMF hasn’t exactly been crypto-friendly. In a report from April, it concluded that decentralized tools like Bitcoin and DeFi could destabilize markets, especially if the adoption of crypto products and services expands. DeFi refers to blockchain-based products that enable the trading, borrowing, and lending of crypto assets without third-party intermediaries, such as banks. “DeFi lending,” according to the report, “could soon be expanded to broader financial activities, such as mortgage lending, consumer finance, and so on.” 

President Nayib Bukele, who assumed power in June 2019, is seeking to issue about $1 billion in Bitcoin bonds, or so-called volcano bonds. Those public debt securities, which would pay an annual interest rate of 6.5% and have a five-year lockup, would be secured with Bitcoin instead of a fiat currency.

Although some Bitcoin backers initially seemed excited by the idea, it’s a somewhat contradictory investment strategy: Government bonds typically are considered safe investments because they’re low risk, with low volatility. A significant drop in the price of Bitcoin means there’s a strong possibility of default. (Moody’s downgrading El Salvador's credit rating three months ago did not help matters.)

In other words, conservative investors otherwise attracted to fixed income instruments may look elsewhere, leaving El Salvador to seek out venture capitalists or other investors with greater risk appetites.

The issuance of the Bitcoin bonds was scheduled for March but postponed until roughly September. Although the country’s own finance minister, Alejandro Zelaya, explained that the delay is due to a lack of favorable conditions, Bukele assured that it is just because other legal reforms were being prioritized.

Acevedo doesn’t see it that way.

“First they said in January, then in March, then they said that the Digital Assets Law was not ready, then that pensions were a priority, now the security issue,” he said. “I believe that the government has realized that there is not enough interest in the markets to acquire this issue.”

Kevin Dalu, a portfolio manager at Aberdeen Standard Investments, told Fortune last week how many in the world of finance view El Salvador’s potential Bitcoin bond issuance: “The market is basically saying, ‘You’re at high risk of default. It is something everybody is talking about.’”

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