With its Volcano Bonds proposed mid-March launch approaching fast, the success or failure of El Salvador’s bitcoin-backed securities will be a key test of President Nayib Bukele’s embrace of the cryptocurrency.
Bukele’s June decision to make bitcoin legal tender in the Central American nation alongside the U.S. dollar has garnered almost unanimous criticism in the financial industry. Most notably, it appears to be keeping the International Monetary Fund (IMF) from approving a badly needed $1.3 billion loan that would prevent the country from defaulting on a $800 million bond payment due in early 2023.
Beyond bitcoin’s price volatility, with the Russian invasion of Ukraine roiling the financial markets and sending investors running for cover, the appetite for risk in general is falling. Which is not good news for the risky Volcano Bond, a nickname derived from the intended use of the funds to build a geothermal-powered Bitcoin City on the slopes of a volcano.
With the bond’s return predicated on the price of bitcoin rising substantially over its lifetime, that’s also bad news for President Bukele personally, who is betting a substantial amount of political capital on the project, said Ricardo Castañeda, an economist at the Central American Institute for Fiscal Studies (ICEFI).
“If the placement of these bonds is a success, the Government will effectively be able to laugh at the multilateral organizations, because it would have found an alternative source of resources,” Castañeda told industry news outlet BeInCrypto on Feb. 28.
If it fails, the IMF loan the country is seeking would force Bukele to compromise on the bitcoin project, weakening the crypto-as-legal-tender experiment at least.
“The fact that bitcoin prices are falling so much, added to the fact that there is no certainty about the regulatory framework in which these are going to be developed, creates an inadequate context for the Government to be able to have a successful placement,” Castañeda told another local outlet, TN.
A vote of confidence in the project came this week from Blockstream Chief Strategy Officer Samson Mow, an architect of the Volcano Bond project and Bitcoin City. On March 1, Mow announced that he had left the firm, saying on Twitter that he had decided to focus his attention full time to national adoption of bitcoin.
“With everything happening at light speed in El Salvador, and more and more countries interested in adopting #Bitcoin, I found my time each day just no longer enough anymore,” he said.
Last month, Mow said that he had commitments for $500 million worth of the $1 billion bond, but has not updated the figure since.
Little Interest Locally
Despite the popular Bukele’s strong support of the bitcoin project, it has still not managed to get much traction with the Salvadoran people, who have been frustrated by problems with the Chivo digital wallet the administration used to give $30 worth of BTC to any citizen who downloaded it.
On Feb. 25, the president of the Salvadoran Banking Association (ABANSA), Raúl Cardenal, told La Prensa Grafica that banks had not seen any significant uptake of bitcoin. He noted that while banks have been required to accept bitcoin to pay off loans and for other services, as of the end of the year the association’s members had seen “no large number of transactions from customers to [pay off] any type of loans.”
Nor have they seen customers adopting the cryptocurrency for payments and other day-to-day transactions. In in the five months the law has been in force, just 2% of remittances collected by Salvadorans had come in the form of bitcoin.
With ratings firms Fitch and Moody’s having downgraded the country’s bonds deep into junk territory Cardenal pointed out that member banks have little exposure to bitcoin’s price volatility, as they immediately sell any BTC collected.
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