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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Is MicroStrategy Considering Lending Their Bitcoin To Generate Yield? WHY?

Say it isn’t so! Apparently, MicroStrategy ‘s Michael Saylor is considering lending the company’s Bitcoin. On a corporate level, that makes all the sense in the world. As a Bitcoiner, it doesn’t. So, if MicroStrategy decides to do it, the world will know where Saylor’s loyalties lie. And, this should surprise no one. Saylor has been dropping hints that he intends to do this for a while now. 

Related Reading | Michael Saylor Says Bitcoin Is The Oxygen Mask That Will Save Investors

This all happened, “Thursday on the company’s investor day call with shareholders,” Bloomberg informs.

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What Did Saylor Say In MicroStrategy ‘s Call?

His exact words were:

“There may be opportunities to either put a mortgage against it and generate long-term debt under favorable circumstances, which we could leverage up against the Bitcoin, or we think that we could lend it to a trustworthy counterparty. That could become a good source of income for us, or we could develop it with some kind of interesting applications.”

So, they’re still thinking about it and there are a few options on the table. And, even if they choose to lend the Bitcoin for yield, there are infinite possibilities there. What does “a trustworthy counterparty” mean? Is it just a company that can guarantee yield, custody, and return of their BTC? Or are they talking about a company that’ll use that Bitcoin in an ethical way and not short their own investment?

That’s one of the main reasons hardcore Bitcoiners are against lending. People who borrow BTC usually use it to short Bitcoin. They bet against Bitcoin and drive the market down. Is that in the best interest of MicroStrategy? Will they partake in the activity for the yield alone? Maybe they won’t. Maybe they’ll find a use case in which the lender doesn’t use their Bitcoin for nefarious purposes. 

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The other reason Bitcoiners are against lending doesn’t affect MicroStrategy. Hardcore Bitcoiners don’t lend their BTC because they don’t want to lose custody. Self-custody is paramount in Bitcoin culture, and the yield isn’t worth the risk of surrendering your BTCs to another entity. 

If the rumors are true, Coinbase is already the custodian of MicroStrategy ’s Bitcoin. Make of that what you will.

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BTC price chart for 12/17/2021 on EXMO | Source: BTC/USD on TradingView.com

MicroStrategy Considers A Bond Option

There’s a second quote in the Bloomberg report that points to yet another option. This one might be more akin to what’s going on in the world, but, what do we know? In response to a question, Saylor reportedly said:

“I think that we’re still a little bit too soon to say whether there’s a good Bitcoin-backed bond market, but I look forward to exploring that in the future,” he said, adding that he would approach this kind of bond offering if it was accretive to shareholders.” 

In other words, MicroStrategy will see how the El Salvador Bitcoin Volcano Bond does, before committing. The eyes of the world are on that investment vehicle, as they’ve been on El Salvador since the country announced the Bitcoin Law. In any case, it should be noted that MicroStrategy is no stranger to bonds. Their “junk bond deal from June (…) currently trades around par, or 100 cents on the dollar, according to Trace bond-pricing data.”

Related Reading | Michael Saylor Brings The Thunder To Venezuelan Bitcoin-Only Podcast

Bonus: Bitcoin As Digital Property

Last but not least, why did we say that Michael Saylor has been dropping hints about the lending of their Bitcoin? Well, in a recent “What Bitcoin Did” episode he talked about Bitcoin being digital property. Perfect. He compared it to a hotel. Ok. In the real world, all hotels have at least 30% empty rooms. That sounds about right. If that hotel could be in the digital world, the owner could rent all of the rooms all the time, because the demand comes from everywhere in the world. Where are you going with this, Saylor? In fact, he said, we could rent those rooms every second of every day. WHAT?! This man is definitely considering lending MicroStrategy ‘s Bitcoin.

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El Salvador Announces World’s First Bitcoin City, Backed By $1B Bitcoin Bonds

El Salvador is currently the only country in which Bitcoin (BTC) is legal tender. This move has witnessed many developments, as well as some pushback. Amid protests, technical glitches, and inevitable market volatility, El Salvador continues to drive BTC adoption.

Related Reading | There Are More People Using Bitcoin Wallets Than Bank Accounts, Says El Salvador President

In its latest Bitcoin adoption move, the Central American country plans to build a city based on the world’s largest cryptocurrency. President Nayib Bukele announced the Bitcoin City initiative at El Salvador’s Bitcoin Week conference on Saturday night. This conference is a celebration of Bitcoin’s mainstream adoption in the country.

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In partnership with crypto firms Blockstream and BitFinex, Bukele plans to issue $1 billion in tokenized USD-denominated 10-year bonds to fund this project.

The Proposed Bitcoin City

Paolo Ardoino, Bitfinex CTO, says the exchange will support the initiative by launching a securities platform to hold the bonds.

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Blockstream Chief Security Officer Samson Mow also clarified the feasibility of sourcing the $1 billion Bitcoin bonds.

“With Bitfinex, they have a lot of whales. I don’t see a problem filling up a $1 billion bond.”

In an announcement by Blockstream, Mow also said that the $1 billion will be split into two parts. $500 million will go towards building energy and Bitcoin mining infrastructure in the region. The other $500 million worth of BTC will be locked up for five years. Mow further stated that after the five-year lock-up period, El Salvador would start selling some of the bitcoin used to fund the bond to give investors an “additional coupon,”

“This is going to make El Salvador the financial center of the world,” he said.

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BTC trading at $58.866K | Source: BTCUSD on TradingView.com

The Salvadoran president additionally said that the bonds will be available in 2022. He plans on locating the proposed Bitcoin City near a volcano. The idea, he said, is to provide energy for both the city and bitcoin mining.

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.

“In #BitcoinCity, we will have digital and technological education. Geothermal energy for the entire city and efficient and sustainable public transport” said Bukele.

El Salvador’s Infrastructure Development Projects

After El Salvador adopted Bitcoin as legal tender, the government started reinvesting unrealized profits into several projects.

Earlier this month, the government announced its plans to use some of the profits from its Bitcoin Trust to build 20 new schools. One of the purposes of these new facilities will be to educate locals about how cryptocurrencies work.

Related Reading | New York Mayor Says Cryptocurrencies Should Be Taught In Schools

In October, President Nayib Bukele had announced plans to use the profits for a new veterinary hospital. However, some criticized this move, arguing that investment in medical facilities for humans was more urgent.

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