El Salvador's Volcano Bond Might Have Documents and a Legal Framework After All
Also, LaGeo is cancelled and the bond will be a security.
El Salvador is preparing to tokenize and sell a ‘bitcoin backed’ volcano bond on a blockchain through crypto exchange Bitfinex, even as the country inches towards a sovereign debt crisis with an implied default probability1 of 43% on its $800M bond due next January. The plan is still to borrow a billion dollars to buy $500M in bitcoin and spend another $500M on geothermal energy projects and the development of the new, so-called bitcoin city.
The volcano bond was supposed to be sold between March 15 and 20 this year when the only official information about it was iPhone pictures of a PowerPoint slide from a November 2021 event, but the sale was apparently postponed due to market conditions related to Russia’s invasion of Ukraine and to prioritize pension reform. Anyways, of all people, Bitfinex’s CTO Paolo Ardoino recently gave an interview where he offered surprisingly reasonable updates about the issuance —>
LaGeo is cancelled
The original picture of the PowerPoint slide said the bond would be issued by the Republic of El Salvador, but then the FT reported and the Finance Minister confirmed that state-owned energy company LaGeo was going to issue the bond.
I wrote that the change of plan was absurd because LaGeo has just $135M in revenue, $35M in profits and the 6.5% interest billion-dollar bond would saddle it with $65M in annual interest expenses and sextuple its long term debt.
Anyways, Bitfinex’s CTO is now saying that the issuer will be the Government of El Salvador again, as Bukele originally announced, not LaGeo. Progress!
They are using documents!
The original plan was to issue the bond in March without any legal documents like a prospectus or even a whitepaper or website. But now, according to Bitfinex’s CTO:
[The government of El Salvador] have to produce a key information document with all the guarantees and all the technicalities
Good news — having documents for a billion-dollar soverign debt issuance is a step in the right direction!
They are even passing laws?!
There was some discussion in January about sending draft laws to El Salvador’s congress to update the local legal framework for crypto and the volcano bond. It seemed important given that the instrument is entirely novel and will be governed by local law, not New York law like El Salvador’s the other bonds.
Bukele’s government apparently disagreed since they planned to issue in March before any of the bills were discussed or passed. Anyways, here’s Ardoino again:
The government has announced in the past weeks it has 52 new laws that they want to pass […] My understanding is that in the next two to three weeks it is likely that these laws will be evaluated by congress and passed […].
Great — passing bills that clarify the unknown local law status of the first-ever tokenized sovereign bond issuance is also probably important!
It will be a security
All bonds have the legal status of a security, and the volcano bond is supposed to be a bond. So my guess is that the tokenized volcano bond should also be a security? Surprisingly, Bitfinex agrees:
One of the imporatnt parts of the volcano token is that it’s a security. It will be traded by Bitfinex Securities […] The underlying blockchain on which this token will be issued will be [Bitcoin sidechain] Liquid for the specific reason that Liquid has a whitelisting feature. Since this will be a security, you really don’t want this token to be trading on [decentralized exchanges] DEXs because there is the strong KYC/AML requirement from regulators. Of course, we have to exclude certain jurisdictions […]
Interesting! On a conceptual level, crypto is meant to be about freedom from government, but it looks like this issuance isn’t?
Potential U.S. buyers, which make up a massive share of the global crypto market, are ineligible to buy volcano bonds since Bitfinex is banned in the United States. Also, potential buyers outside the U.S. will have to submit paperwork to pass know-your-customer (KYC) and anti-money-laundering (AML) requirements to join Bitfinex’s securities whitelist and place buy orders.
So much for freedom from regulation!
~~🌷Vibe shift🌷~~~
The plans for the volcano bond have flip flopped so many times already that I wouldn’t take any of this too seriously. It was the CTO of Bitfinex speaking in the interview, not the President of El Salvador, who ultimately calls the shots.
All I can say is that I detect a subtle vibe shift.
When Bukele went on stage with a backwards baseball cap last November to unveil the volcano bond, he appealed to the retail crypto crowd. He pitched adventure, community, the radical aesthetic of volcano-powered bitcoin mining and the fIrST-eVeR bItcOIn-bAckeD soVereiGN bOnD. Since then, the bull thesis grew into a faith-based “this will be a historic and important asset” even though nobody has seen a term sheet YOLO.
Now, it looks like the country might actually produce contractual documents with terms and conditions, update the legal framework to clarify the instrument’s local legal status, try to comply with global securities regulation and issue through the government, not a random state-owned enterprise. Vibe shift!
Even with all these things, the volcano bond will still offer extremely limited investor protection. Holders will still need to resolve legal disputes not in New York but in El Salvador, where the supreme court was packed last May. Good luck!
Saddling the country with 4% of GDP in debt to buy bitcoin and fund unnecessary infrastructure is not ideal, particularly when the government needs spending cuts to regain financial sustainability, access to capital markets and avert a debt crisis. But look at the bright side: if we squint and believe Bitfinex’s CTO for a second, this giant, silly sovereign liability might be acquired properly and legally after all!
The bond is trading for 78 cents and has an assumed recovery value of about 40 cents. It will pay 100 cents plus 5.8 cents in interest in the 9 months remaining to maturity. The implied default probability p can be solved out of this equation: 78 = (1-p)*(100+5.8) + p*40. It comes out to 43%.
as you have probably already discovered through your own research to write this post, the president of el salvador and his government are very corrupt and very deceitful and thus it is very difficult to believe anything they say and take them seriously on anything, except perhaps their push to accumulate more power and amass more wealth illegally.
with that being said let's move toward what has become of the bitcoin experiment in the country where in practiced things have not turned out according to the hype and expectations created by the president when the law went into effect. adding to this fiasco is the failure of the government to launch the so called 'bitcoin volcano bonds'. this whole ordeals seems more like fake hype and smoke curtains to steal public money and create a perfect money laundering scheme to benefit current government officials and allies to cleanse their dollars obtained from corruption and organized crime. it is very unlikely the issuance of the volcano bonds will go through successfully and it appears like yet another publicity stunt by the bukele administration which thrives on propaganda, exagerated public relations strategies and an obsession for controlling everything that may expose their network of dark political operators to keep their public support high.
recently a salvadoran historian tweeted an interesenting story about a scottish charlatan who tricked hundreds or even thousands of people exactly 200 years ago by presenting a fictional place called poyais and selling government bonds and land titles to hopeful investors. so after reading that story i came to the conclusion that history is repeating itself. when you hear 'bitcoin city' think the imaginary, made up republic of poyais. when you hear nayib bukele think gregor macgregor, the scottish swindler to sold government bonds and land titles to unsuspecting investors and ruined them, some to death even. when you hear 'bitcoin volcano bonds' think about those valueless poyais government bonds with no legal framework nor real economy to back them up and thus worthless fools bonds based on faith alone and nothing else. and when you hear 'bitcoin bond holders' think of the naive poyaisian emigrants who invested their money and lives into a con scheme fooled by this easy talking charlatan on the promise of future gains but with unsubstantiated credibility lacking the legal, technical and economic basis to sustain such a risky enterprise. in my opinion the bitcoin volcano bonds do not make any sense for anybody except for the corrupt president of el salvador and his heavily indebted government that is on the brink of financial collapse and imminent default.
like one salvadoran economist recently pointed out, if someone wants to invest in bitcoin then might as well purchase it through their own means with a non-custodial digital wallet, keeping in line with the basic core principle and concept of bitcoin as a decentralized, peer-to-peer digital asset of exchange. and not to trust a proven corrupt president and government that may or may not use the money obtained from the sale of those bonds to purchase bitcoin in the first place nor will provide any significant guarantees to repay that money back and any potential gains given they run the judicial system of the country where judges do exactly what the president says, even if it's against the law, or else. and lastly because the value of that bitcoin under government custody will fluctuate during the five year hold period and at the end of the deal there may be no gains but losses if the price is lower than when the government bought, similar to el salvador's current bitcoin portfolio valued at tens of millions less than what the president paid for originally, thus losing money. the promise of the 6.5% interest yield on the bonds is not worth the risk of losing money if the price of bitcoin goes down during the maturity period of the bonds where investors do not have access to decide when to buy or sell their bitcoin according to market conditions to increase gains and minimize losses, therefore if one wants to speculate with bitcoin might as well do it yourself and skip the shadowy and corrupt government of el salvador serving as your broker/middle man and bringing all the liability and risk that carries onto yourself.