150 Questions About El Salvador’s Bitcoin-Backed ‘Volcano’ Bond

An open letter calling on El Salvador’s authorities to disclose basic information

Dear President Bukele and Finance Minister Zelaya,

Reuters recently reported that El Salvador’s bitcoin-backed ‘volcano’ bond was scheduled for issuance on March 15-20. The Financial Times also reported that state-owned energy company LaGeo would be the issuer, not the Republic of El Salvador. 

Despite this news, I have not been able to find any written information about the bond from official sources. As far as I’m aware, a prospectus has not been made available to the public and the local legal framework that is meant to govern the bonds has not been approved by El Salvador’s congress.

This is alarming. I worry that El Salvador – which is already highly indebted, priced out of traditional financial markets and close to debt default – will issue a $1 billion liability worth 4% of GDP without adequate documentation, legal grounding and due process. I’m also concerned about the precedent this would set for subsequent planned bitcoin-backed debt issuances worth another 16% of GDP.

I prepared a list of 150 basic questions about the bond below. The people of El Salvador, the general public, and potential investors would greatly benefit from a bond prospectus and legal framework containing answers.

Sincerely,

Frank Muci

General Questions:

1. Will an offering circular, prospectus or whitepaper be made public before the issuance?

2. If so, where can buyers find it? Currently, no official documents can be found on LaGeo’s website, LaGeo’s page on El Salvador’s securities exchange, the ministry of finance’s webpage, bitfinex’s webpage, or blockstream’s website. 

3. Should buyers expect a new local legal framework for the bitcoin bonds to be passed by El Salvador’s congress prior to issuance? 

4. If not, will the bond be governed by El Salvador’s current public debt and securities laws? Are current laws in El Salvador appropriate for tokenized bond issuances? 

5. Are draft versions of the 20 bills that were being prepared by the finance ministry to be sent to congress in January available to the public?

6. What is the current state of those bills and their passage through congress?

7. Finance Minister Zelaya said in an interview that the bitcoin bonds were to be issued between the 15th and 20th of March. Was the Finance Ministry planning to issue the bitcoin bond before releasing a prospectus and before congress passed the new legal framework for the bitcoin bonds?

8. If the plan was or is to issue the bonds without a prospectus or other official documentation, is the bond contract and governing law of the bonds going to be on-chain? 

9. If so, how and where can potential bondholders extract this information from the chain to learn about the bond’s risk factors, covenants, legal provisions, etc? Is so, which is the relevant chain?

10. Who are the intended buyers of the bond if United States persons are prohibited from using bitfinex? Is there enough demand outside the U.S. for a $1bn issuance?

11. Is this self-described ‘bond’ a security that should be subject to securities regulation in most jurisdictions, including the U.S., U.K. and Europe?

12. What risks and obligations, if any, would registering the bitcoin-bond as a security in relevant jurisdictions impose on the issuer? 

13. What penalties, if any, could be imposed on the issuer if the bitcoin-bond is classified as a security by applicable regulators after the issuance?

14. Are there any AML / KYC risks associated with issuing tokenized bonds through Bitfinex on the Liquid network? If so, what measures are necessary to address these risks?

15. Who will the trustee and payment agent of the bond be, if any? 

Debt Issuer:

16. In November, President Bukele announced plans for the bitcoin bond to be issued by the Republic of El Salvador. Why is LaGeo, a state-owned energy generator, reportedly now issuing the bond rather than the Republic?

17. Can buyers expect Moodys / S&P / Fitch to rate LaGeo before or after the issuance?

18. When can buyers expect the 2021 audited financial statements to be released? (so far, only unaudited financials are available)

19. Why was the auditor of LaGeo’s financial statements changed in November 2021 from ARG Audit and Consulting S.A. de C.V. to Auditores y Consultores de Negocios S.A. de C.V.?

20. With $135m in annual revenue and $35m in profit, how will LaGeo have the cashflow to make an additional $65m per year in interest payments?

21. Does LaGeo have the debt-bearing capacity to sextuple its long-term debt from $200m to $1.2bn?

22. Have the holders of LaGeo’s notes issued in 2017 and the debt issued in 2014 been consulted about the new $1 billion bitcoin-bond liability?

23. Will the bitcoin-bond be senior, junior or equal in seniority to those liabilities? 

24. Will LaGeo receive transfers or capitalizations from the Government to make debt payments?

25. If so, will these transfers be discretionary or automatic (built into the budget)? 

26. If such transfers do occur, will the central government incur liabilities with LaGeo? 

27. If LaGeo does not receive these transfers, how can LaGeo be expected to generate an additional $65 million per year to make interest payments?

28. Who is the CEO of LaGeo? How were they appointed and with what criteria? (It is not listed on their webpage) 

29. Who sits on the board of LaGeo? How are board members selected? 

30. Are LaGeo’s C-level executives political appointees or career public administrators?

Debt Issuer Shareholders:

31. What entities own LaGeo? What is the ownership structure?

32. What obligations does LaGeo have to its shareholders (e.g. annual dividend), if any?

33. Are these obligations junior to debt repayments?

34. Can the holding company or shareholders withdraw capital from LaGeo? If so, how would such a transfer be booked?

35. Would such a capital withdrawal be allowed under the terms of the bond?

36. What operational or financial links exist between LaGeo and its holding company?

Business and Macroeconomic Risks:

37. Where can potential bondholders find a list of the main risks associated with geothermal energy production by LaGeo?

38. How exposed is LaGeo to adverse macroeconomic developments in El Salvador, such as a recession, inflation, rising commodity prices, or rising interest rates?

39. Is the price of electricity regulated in El Salvador? 

40. If so, can the government lower the price at which LaGeo sells energy to transmission/distribution companies? What rules, procedures or formulae must be followed by the government, if any, to change electricity tariffs?

41. Can the geothermal energy sources underground be ‘degraded’ or ‘depleted’? If so, what investments are required to mitigate this deterioration in asset quality?

42. Can seismic activity interrupt or damage LaGeo’s fixed investments? Is LaGeo insured against seismic events?

43. What policies and procedures are in place to mitigate LaGeo’s main business risks?

44. Does LaGeo or its holding company have any ongoing litigation that could materially affect its ability to repay the bitcoin bond?

Bond Economics and Bitcoin Dividend: 

45. The coupon is set at 6.5%, but the already-issued 2032 El Salvador bond is yielding 19% on the secondary market. Will the coupon be raised prior to issuance?

46. How will the bitcoin dividend work? Will bondholders incur losses if the price of bitcoin trends downward (or to zero) after the $500m purchase?

47. Suppose the Bitcoin position is worth $600m in year 5. What will the bitcoin dividend be? Half of the total upside ($50m)? Or $10m, half of the upside divided by five years? 

48. Will the volcano bond be “secured” or collateralized by the $500m BTC purchase? Can bondholders automatically seize and liquidate the position in the event of default?

49. If the bond is collateralized by the $500m bitcoin purchase, and the collateral is executed in the event of default, what happens to bondholders’ claim on the bitcoin dividend?

50. If applicable, what is the public policy rationale for El Salvador to bear all of the downside risk of the $500m purchase but only half of the upside potential? 

51. Will bondholders be able to “strip” or “unbundle” the traditional bond from the claim on the bitcoin dividend and sell them independently of one another?

52. If so, will two new types of tokenized instruments be created on the blockchain? (One token for a vanilla 2032 bond without BTC-linked payments and one token for the claim on the bitcoin dividend).

53. Is the Liquid network equipped to support this kind of unbundling?

Use of Funds:

54. Is the plan still to use half of the $1b in proceeds to purchase bitcoin and the remaining half on an “infrastructure build”? Can potential bondholders find written confirmation of this anywhere? 

55. What does “infrastructure build” refer to, specifically? Non-energy infrastructure for the so-called bitcoin city? Or renewable energy infrastructure for LaGeo? Both?

56. Will LaGeo directly contract or execute non-energy infrastructure projects for bitcoin city with the proceeds from the bond issuance? Or will it invest in renewable power infrastructure? Or both? 

57. If LaGeo will invest in both energy infrastructure and non-energy infrastructure for Bitcoin city, in what proportion will these investments occur?

58. Have any non-energy or energy projects already been prepared with feasibility studies, engineering studies, etc, or are they at an earlier state in the preparation process?

59. Where can potential bondholders find the basic project descriptions, budgets and timelines? Have any been made public?

60. Will any of the funds from LaGeo’s issuance be transferred to the Central Government for general budgetary spending (wages, pensions, health, etc)? If so, what share of the total proceeds?

61. If so, how will these transfers be accounted for? Will they generate a debt from the Central Government to LaGeo?

62. How will the bitcoin bond issuance generate revenue for LaGeo to repay the bond?

Bitcoin City:

63. What is the state of development at bitcoin city? Is there already water / sewage / electricity / road connections / police stations / telecoms / existing homes / existing businesses or does this need to be constructed with public and private investment?

64. How many residents and businesses does the government expect to move/set up in bitcoin city? In what timeline? What data and evidence lend credibility to these estimates? 

65. With no income tax or sales tax or other taxes, how will bitcoin city generate revenue to fund public services on an ongoing basis?

66. What municipal authority will oversee the public services (schools, police, street lights) in bitcoin city? An existing local government entity or a new one?

67. What happens if there is low residential and business demand for bitcoin city? How would this affect the city’s finances?

68. Who owns the land where bitcoin city will be built? The government? Private persons? Both? Are there risks involved with eminent domain / expropriation? 

69. What evidence is there of new cities being successfully created by government entities in the world? What lessons can be drawn for El Salvador from those experiences?

70. What government entity will be tasked with coordinating public sector entities and efforts for the creation of Bitcoin city? 

Non-energy Infrastructure:

71. Does LaGeo have any specific expertise or experience in developing non-energy infrastructure projects to set up general public services in cities?

72. Or, rather, is the plan for all or part of the funds from the issuance to be transferred to other government entities to contract or carry out the non-energy infrastructure projects? 

73. If so, which government entities? How would these intra-government transfers be accounted for? Would they generate intra-government debt? 

74. What is the total additional public investment that will be required to provide minimal public services in bitcoin city (electricity, water, sewage, policing, roads, etc)? 

75. Will half of the expected proceeds from LaGeo’s bond issuance ($500m) be enough to fund the required public investments to provide minimal services? 

76. If required investments are more than $500m, how will the Government of El Salvador or other public entities fund them? Budgetary reallocations, net additional public spending, or net new debt issuances?

77. Will bitcoin city non-energy infrastructure generate revenue to repay LaGeo’s bond?

78. At what stage of project development are these non-energy infrastructure projects? Do or will potential investors have access to a list of project descriptions, budgets and timelines?

Energy Infrastructure:

79. What are the key energy infrastructure projects for bitcoin city? Where will the new powerplant(s) be located, if any? 

80. By how much will LaGeo’s installed generation capacity increase due to these energy infrastructure investments?

81. Is there demand for additional energy in El Salvador? Can the country export excess energy supply?

82. In what time-frame are these energy investments expected to be operational and produce revenue to repay the bond?

Multiple Currencies:

83. What currency will the bond be sold in? USDT? Bitcoin? USD? (The powerpoint slide from November suggested all three).

84. Will buyers be able to choose the currency of the purchase? If so, how will buyers notify LaGeo/Bitfinex of their choice?

85. If LaGeo accepts purchases in USD, to what account / intermediary should buyers send the USD?

86. If the bond is available for purchase with various currencies, what reference exchange rate will be used for USD to USDT and USDT to BTC?

87. What currency will the principal and 6.5% interest be paid in? USD, USDT, or bitcoin? Can buyers select the currency? 

88. If so, how will bondholders notify LaGeo of their preference? 

89. Does LaGeo have the infrastructure and payment rails to make payments in USD, or will it need to use the services of Clearstream or Euroclear?

90. If LaGeo uses Clearstream or Euroclear to pay principal, interest and other payments in USD, will the bitcoin bond need to be both on the blockchain and in traditional financial record-keepers? How would this work?

91. If applicable, have Clearstream and/or Euroclear been consulted or signed a Memorandum of Understanding (or other contract) to assist with the issuance? 

Stablecoin Token Risks:

92. Suppose the Tether’s 1:1 peg to the U.S. dollar breaks. In that case, can the bitcoin-bond continue paying principal/interest in USDT?

93. If USDT’s peg breaks, can the bitcoin-bond make payments in other stablecoins? If so, which ones? 

94. What processes and procedures would determine eligible stablecoins for ongoing principal, interest and ‘bitcoin dividend’ payments?

95. Would bondholders be consulted about potential stablecoin alternatives?

96. What entity or criteria would determine if USDT’s peg to the USD is in fact broken? 

97. What criteria would this entity use to determine if the peg is broken?

98. Would bondholders have a voice or vote in the selection of this entity and the criteria to determine if the peg is broken?

99. Would a break of the USDT:USD peg constitute an event of default?

100. Is Ifinex, Bitfinex, or Tether liable if USDT:USD parity breaks? Would bondholders be entitled to compensation if the peg breaks?

Network and Network Risks:

101. If a bondholder has their tokens stolen, can the stolen tokens be “invalidated” or “nullified” on the Liquid network? If so, can the victim of the theft be made whole by the issuer with new tokenized bonds?

102. If so, how would this work? What entities would certify that a hack has occurred and with what criteria and procedures?

103. What party or parties must pay transaction costs (if any) associated with using the Liquid network to receive principal, interest and other payments?  

104. What happens if the quality of Blockstream’s Liquid network deteriorates or the network stops working altogether?

105. Are there contingency plans to “migrate” the tokenized bitcoin-bonds to other networks?

106. Would bondholders or LaGeo incur the costs of this migration, if any? Or would LaGeo incur these costs?

107. Under what circumstances would the Liquid network be deemed “unusable”?

108. What entity would make this determination and with what criteria?

109. Would bondholders have a voice or vote in the selection of the entity and criteria?

110. Would the failure or sufficient deterioration of the Liquid network constitute an event of default?

111. Is Blockstream legally liable for network deterioration or failure?

112. Will potential buyers need a specific type of “wallet” or “account” to be able to purchase the bonds? Where can investors find information about how to use the Liquid network?  

113. Will the tokenized bond be able to move between chains? If so, what are the risks associated with this?

Bitcoin Custody:

114. Will LaGeo have the keys to the wallet with the bitcoin position from the $500m purchase? 

115. If so, what person, specifically, will have the keys? The CEO? President Bukele?

116. Will anyone else have the keys to the wallet? Will it be multi-signature?

117. What processes and procedures will be in place to ensure the BTC is not misappropriated by these people?

118. What happens if the wallet gets hacked? Will there be insurance?

119. Or will the wallet be held by a third party? 

120. If so, who will this third party be? How will they be selected? How much will they be paid for the custody service? What contingency plans are in place for the event that this custodian stops providing custodial services? 

121. Will the BTC in the wallet be loaned, staked or otherwise deployed to produce yield for LaGeo?

122. If so, what people and processes decide what yield-generating alternatives are appropriate?

123. Will there be processes/procedures in place to ensure these yield-generating opportunities are diversified?

124. Will bondholders be entitled to any upside from yield-generating activities (if any), through the bitcoin dividend or otherwise?

125. What happens if some of the BTC is lost while loaning, staking or otherwise producing yield? Will LaGeo need to put in new money to make up the capital losses? Or will bondholders take the loss?

iFinex, Bitfinex, Tether, Blockstream:

126. What contracts and financial arrangements does the Republic of El Salvador and LeGeo have with iFinex, Bitfinex, Blockstream and other entities involved in the issuance? Are these arrangements public?

127. Bitfinex, a key partner for the issuance, has faced significant regulatory scrutiny for several years, in particular because of the lack of disclosures about its reserves. Did authorities consider using another platform?

128. If so, why was Bitfinex ultimately selected over the alternatives? 

129. Samson Mow, the former chief strategy officer at Blockstream and self-described ‘architect’ of the bitcoin bond left the firm on March 1st. Does he have any ongoing role with the preparation of the issuance? If so, what?

130. Why did Mr. Mow leave Blockstream so close to the bond issuance?

Events of Default:

131. Will the International Swaps and Derivatives Association (ISDA) be in charge (or play any role) in certifying when and if a debt default has taken place?

132. Will the failure to make scheduled principal and interest payments trigger default immediately? Or after 30 days?

133. Will the failure to perform any other obligation in the bond contract (such as bitcoin custody, insurance, etc) trigger default? 

134. Will a certain % of bondholders need to notify LaGeo in writing that an obligation has not been met to trigger default? 

135. If so, what share of bondholders? After what period of time would default be triggered? 30 days? 60 days?

136. Will a default of LaGeo’s 2014 or 2017 notes trigger default on the bitcoin-bond?

137. Will a declared moratorium by the Republic or LaGeo on the external debt trigger a default on the bitcoin-bond?

138. Will a denial, contestation or repudiation of the bitcoin bond by LaGeo or the Republic of El Salvador trigger default? 

139. Will a default in the Republic of El Salvador’s vanilla bonds trigger a default in LaGeo’s bitcoin-bond?

140. Will a default on LaGeo’s bitcoin bond trigger a default in the Republic of El Salvador’s vanilla bonds?

141. If LaGeo fails to produce audited financial statements every quarter, will that trigger default?

142. Will there be any bond covenants that force LaGeo to maintain certain metrics? i.e. debt/EBIDA, EBIT to debt service? Would violation of these metrics trigger default?

143. Will an attempted or successful privatization of LaGeo constitute default?

144. What happens in the event of default? Can bondholders “accelerate” the bond, making the principal outstanding immediately due and payable? 

145. If so, what % of bondholders need to agree to “accelerate” the bond? Would this notification happen on-chain? If so, how?

Collective Action and Modifications:

146. Will the bond have collective action clauses (CACs)?

147. What changes to the bond contract would require CAC approval? The date the principal is due? The interest rate? The currency? The governing law? The claim on the bitcoin dividend? The ownership of LaGeo?

148. What will the threshold for collective action be? 50%? 75%?

149. How will votes on potential changes subject to a CAC vote take place? On-chain? Off-chain? How will bondholders notify the ‘trustee,’ if any, of their vote? 

150. What changes to the bond contract would not require CAC approval?

President Bukele and Finance Minister Zelaya, I urge you to publish a prospectus and pass a legal framework providing answers before creating a $1bn sovereign liability for El Salvador.

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