Bitcoin Is Working Despite Broad Market Downturn, Says El Salvador FM

Despite El Salvador experiencing heavy losses in its Bitcoin bet, finance minister Alejandro Zelaya has defended the country’s strategy to adopt Bitcoin as legal tender. Zelaya made such revelations in an interview on Wednesday.

While it is almost a year into El Salvador’s bet on Bitcoin, critics have urged the nation to drop the experiment as the cryptocurrency industry suffers through a bear market.

Zelaya acknowledged the setbacks but said he sees a future where digital tokens play a bigger role.

In the past, El Salvador bought 2,381 Bitcoins with public funds. However, such Bitcoin investments are currently worth about 50% less than what authorities paid for them because of the ongoing market plunge.

According to a survey conducted by the U.S. National Bureau of Economic Research, most businesses and consumers in El Salvador still prefer using hard currency to send remittances and pay for goods and services.

In January, The International Monetary Fund (IMF) urged the country to remove Bitcoin as legal tender.

In the interview, Zelaya said: “I believe in the traditional, international monetary system just as I believe that new technologies are going to help human beings in the future. So, I think making that transition is vital, and it would be wrong of us to not pursue financial innovation that could benefit El Salvador.”

Though Zelaya admitted that the use of Bitcoin as a means of exchange is still low in the country, he said he remains a believer in digital money.

“For some, it’s something new and something they don’t entirely understand, but it’s a phenomenon that exists and is gaining ground and will continue to be around in the coming years,” Zelaya said in the interview.

The finance minister stated that the largest cryptocurrency has brought financial services to a largely unbanked population and attracted investments and tourism.

Although Bitcoin’s price crash has delayed the government’s plans to issue a $1 billion Bitcoin-backed bond, Zelaya said the administration still plans to push ahead with the sale when the market improves.

The executive said the government is still moving forward with plans to build “Bitcoin City” and will announce additional Bitcoin-related projects in the next few months.

Bitcoin as Investment Opportunity

The current market crash is affecting investors worldwide, including the government of El Salvador. The country poured millions of dollars into Bitcoin and made it legal tender nine months ago, encouraging local consumers to use it for day-to-day transactions.

The decision by President Nayib Bukele to make the crypto legal tender means that all businesses are expected to accept it, alongside El Salvador’s other currency, the US dollar.

The government said it has no plans to force businesses to accept the crypto, but they should under the country’s Bitcoin Law.

The current crypto tumble has prompted more questions about El Salvador’s Bitcoin policy, especially the use of almost $100 million of public funds to buy the cryptocurrency.

Each time when the country purchases the crypto, the president celebrates the move. On several occasions this year, when the Bitcoin price falls, Bukele often declares the buying opportunity on Twitter social media.

El Salvador intends to go further with its Bitcoin plan. President Bukele plans to construct a new city – Bitcoin City – to be built at the foot of a volcano that will provide geothermal energy and power with a giant Bitcoin mine.

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El Salvador Prepares Regulatory Framework To Issue Controversial Bitcoin Bonds

Will the plan work? Soon, the Bitcoin Bonds will get the legal foundation they need. In a recent TV interview Alejandro Zelaya, El Salvador’s Finance Minister, said they will send the necessary bills to Congress. Soon. Reportedly, El Salvador will initially issue $1B worth of bonds, which will have a ten-year maturity and carry a 6.5% coupon. The bitcoin that backs them will be locked for five years.

The project, announced by President Bukele at Labitconf 2021, includes plans to build Bitcoin City. More on that later. In a scheme worthy of MicroStrategy, El Salvador will spend half of the money on the construction of Bitcoin City and will buy Bitcoin with the other half. Will the plan work? Well, they have to sell the bonds first. And for those to exist, a regulatory framework is required.

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What Did El Salvador’s Finance Minister Say About The Bitcoin Bonds?

In an interview in the local TV show “Frente a Frente,” Zelaya announced the plan’s following steps. Reuters reports:

“El Salvador’s government will send to Congress about twenty bills covering financial markets and investment in securities to provide a legal foundation for issuing bitcoin bonds, Finance Minister Alejandro Zelaya said on Tuesday.”

The Finance Minister didn’t specify exactly when they will introduce the bills. But the will is there. According to El Salvador In English, Zelaya said, “This type of legislation is what we are going to send to the Legislative Assembly to be able to give legal scaffolding and legal certainty to all those who buy the Bitcoin bond.”

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Through the Ministry of Finance’s Twitter, they quote Zelaya being even more daring. “El Salvador could become a regional center where other countries can issue debt, we have great advantages such as having a dollarized economy and pioneers regarding crypto.”

Adding fuel to the fire, President Bukele said via Twitter, “It’s to cover and guarantee the Bitcoin Volcano Bonds, but also a full re-engineering of the economy and of the way a nation state does business.” Not satisfied with that bomb, he added, “Everybody searching for freedom: this is the place to come.”

What About Bitcoin City? Is That A Go?

The Bitcoin Bonds will finance the construction of Bitcoin City, but, what’s that exactly? When President Bukele announced El Salvador’s plans, NewsBTC timely reported: 

“According to Bukele, Bitcoin City will be a full-fledged metropolis with residential and commercial areas. It would also have shopping centers, restaurants, a port, an airport, and railway services. There would be no income, property, capital gains, or payroll taxes. Residents would, however, be subject to just value-added tax (VAT). This tax will go towards paying for the municipality’s bonds, public infrastructure, and city maintenance.”

However, more recently, an investigative report by podcaster Anita Posch cast doubt upon the Bitcoin Bonds and the whole enterprise:

“Apparently, the seemingly advanced plan for Bitcoin City was a collage. “At least some of the Bitcoin City presentation slides were downloaded from the internet and there was no detailed plan behind the announcement.” Not only that, the structure behind the Bitcoin bonds that will finance the whole operation was also improvised. “The way the Bitcoin bonds will work was finally decided only a few minutes before Samson Mow took the stage.”

However, the plan is a go, and Blockstream’s Samson Mow is all-in on it. He recently tweeted the trailer for an upcoming documentary on El Salvador and its Bitcoin City plans. In the tweet, he threw an extremely optimistic, “Bitcoin is going to save the world and it starts here in El Salvador.”

Will the plan work? Is Bitcoin City a real project or a hastily put together mess? Do the Bitcoin Bonds offer a high enough return? Or are the Bitcoin Bonds too risky? Wouldn’t it be better for an investor just to buy bitcoin with that bonds money? Or are we missing something? 

To answer all those questions and more, El Salvador needs a regulatory framework to issue the Bitcoin Bonds. And the roughly twenty bills that guarantee that are on their way to Congress.

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El Salvador Prepares Legislation for First Bitcoin Bond

Key Takeaways

  • El Salvador will send roughly 20 laws to Congress in preparation for launching a Bitcoin bond, the Minister of Finance has confirmed to local news.
  • The country is planning to issue $1 billion in Bitcoin bonds to fund its previously announced “Bitcoin City” plans.
  • One proposal is to grant residency to Bitcoin holders who settle in the country.

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El Salvador’s government is hoping to issue $1 billion in Bitcoin bonds. 

El Salvador Moves Toward Issuing Bitcoin Bond

Not content with adopting Bitcoin as an official currency, El Salvador is planning new legislation as part of a move to issue $1 billion in Bitcoin bonds. 

The Central American country’s Minister of Finance, Alejandro Zelaya, told Telecorporación Salvadoreña that the government would be sending around 20 laws to Congress in advance of issuing its Bitcoin bond. Zelaya said that the bond, otherwise known as EBB1, would focus on promoting “innovation and financial freedom” in El Salvador. “Since a Bitcoin bond has never been issued, a series of regulations must be issued,” he said. 

Zelaya further added that the country was proposing a plan to offer benefits to Bitcoin investors who take up residence in El Salvador, including granting them nationality. “There are Bitcoiners and friends of mine who want Salvadoran nationality and ask me how they can obtain it, but the country’s legislation does not have those benefits,” he said, noting that the United States offers similar incentives to individuals who make investments in the country. He also noted that the laws would relate to the country’s plans to become a debt market center in partnership with the Central American Bank for Economic Integration. 

President Nayib Bukele announced the country’s ambitions to issue its first Bitcoin bond in November when he revealed that it would be building a city dedicated to the world’s leading crypto. “Bitcoin City” will have its own residential and commercial areas, restaurants, and a plaza, and will initially be funded by the Bitcoin bond, Bukele said at the time. The President also promised that Bitcoin City residents would be exempt from paying income tax, property tax, capital gains tax, and payroll tax. The country is planning to use half of the bond for energy and mining infrastructure, and the rest will be invested in Bitcoin. Blockstream is developing the bond on the Liquid Network. 

During the Telecorporación Salvadoreña interview, Zelaya said that the country would need to establish “a democratic process” to approve Bitcoin City since the plans have not yet been made into law. One viewer asked Zelaya about El Salvador’s process for investing in Bitcoin, to which he responded that the government is working with the team at Chivo, the firm powering the country’s digital wallet, to accumulate the asset. Bukele has taken to Twitter on several occasions to announce the country has “bought the dip” during market retraces in recent weeks; the country now holds 1,391 BTC worth about $64.9 million at today’s prices. 

El Salvador officially adopted Bitcoin legal tender back in September in what was described as a landmark moment for the cryptocurrency industry, but its path to adoption has been far from smooth. Thousands of Salvadoran residents have protested against Bukele’s government in part because of its Bitcoin adoption policy, while other critics have included Vitalik Buterin, the IMF, and the World Bank. 

Disclosure: At the time of writing, the author of this feature owned ETH and several other cryptocurrencies.

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