Guest Post by Nick Giambruno
El Salvador made history in September 2021 when it became the first country to recognize Bitcoin as a legal currency.
Now, El Salvador is taking it to the next level.
Its next project has the potential to reinvent the entire securities market—starting with the $100 trillion bond market.
Last year, President Nayib Bukele made a stunning announcement.
He made a compelling case for how El Salvador could become “the financial center of the world” and “the Singapore of Latin America” by revolutionizing the bond market.
Here’s how he plans to do it…
El Salvador plans to issue $1 billion in 10-year bonds with a 6.5% coupon via the Liquid Network, a 2nd layer network built on Bitcoin that allows for the issuance of tokenized securities like bonds.
It signifies a paradigm shift in the global securities market if El Salvador can pull it off.
Let me break it all down to understand the vast implications better.
Typically, a country like El Salvador would have three unattractive choices to borrow money.
Option #1: Go to Wall Street investment banks to issue debt—and watch them take a hefty cut.
Option #2: Borrow money from the IMF or World Bank and bow to whatever conditions they impose.
Option #3: Borrow money from China at unfavorable terms, usually involving pledging critical infrastructure as collateral.
By issuing the bonds on the Liquid Network, El Salvador cuts out the expensive middlemen, keeps 100% of the proceeds, and doesn’t lose its sovereignty to the IMF or China. It’s a game-changer.
Bitcoin pioneer and former securities dealer Max Keiser originally inspired the idea. He suggested on Twitter that El Salvador ditch the IMF and instead harness its volcanic geothermal energy via Bitcoin mining to back a debt offering.
Bukele took notice of the tweet and started engaging with Keiser to turn the idea into a reality.
On a related note, Keiser, and his wife, Stacy Herbert, have been in El Salvador for many months to help the government with the offering and other Bitcoin initiatives.
Bukele set up the National Bitcoin Office of El Salvador and appointed Stacy. It’s an excellent sign.
Max and Stacy have been spot-on regarding Bitcoin since it was $1. They have probably created more Bitcoin millionaires than anyone else. As a result, they have built up a large following with a platform that reaches millions worldwide.
In short, Max and Stacy’s involvement gives El Salvador access to their creative expertise in securities markets, Bitcoin best practices, and their broad reach. It’s a huge plus.
Further, Max and Stacy have been around Bitcoin since the earliest days. They know how to spot the bad actors in the space. I have no doubt they’ll help El Salvador develop a robust immune system to keep crypto scammers far away.
Anyways, back to the bond offering.
El Salvador will do two things with the $1 billion it intends to raise.
1. Buy $500 Million Worth of Bitcoin
El Salvador will immediately buy $500 million worth of Bitcoin and lock it up for five years.
After five years (in 2028), El Salvador will sell enough Bitcoin to recoup the $500 million initial purchase.
The upside of any remaining Bitcoin will be shared equally with the bondholders until maturity, which would be another five years. But, of course, that presumes the Bitcoin price will be higher five years from now, which is a reasonable bet.
After the initial five-year period, there will be 20 quarters remaining until the bond’s maturity (in 2033).
Each quarter, El Salvador will take 1/20th of the bondholders’ remaining Bitcoin—leftover after recouping their $500 million initial purchase—and sell it. Those proceeds will accumulate for a year. Then in January of each year, El Salvador will distribute these shared profits to the bondholders, along with the annual coupon payments.
For example, suppose El Salvador buys 30,000 Bitcoin with the initial $500 million investment. Then five years later, the 30,000 Bitcoin is worth $1 billion. At that point, El Salvador would sell 15,000 Bitcoin to recoup the initial investment. El Salvador would share the remaining 15,000 Bitcoin equally with the bondholders, which means the bondholders have a claim to 7,500 Bitcoin.
At this point, 20 quarters remain until the bond’s maturity. El Salvador will take the 7,500 leftover Bitcoins allocated to the bondholders and sell an equal amount each quarter—375 BTC—until maturity. The other 7,500 Bitcoins assigned to El Salvador are for whatever the government decides to do with them. For example, they could sell or add them to the country’s growing Bitcoin treasury.
That is just a conservative example. Bitcoin could easily go up 10x (or more) by 2028. It has done so several times before and could do so again. That would mean significant shared upside potential for both El Salvador and the bondholders. But, of course, past performance does not indicate future results for any investment, including Bitcoin.
Suppose Bitcoin does go up 10x in five years. That would mean the initial $500 million worth of BTC would have grown to $5 billion. After recouping the $500 million, 27,000 Bitcoin would remain to be split between the bondholders and El Salvador for the last five years. And in those remaining five years, it’s possible Bitcoin could go up 10x again.
I don’t think any other bond currently on the market will be able to compete with that kind of upside potential, which is why Volcano Bonds could turn the entire bond market on its head.
2. Bitcoin Mining Infrastructure
The other $500 million in proceeds from the bond issuance will build Bitcoin mining and other infrastructure. In particular, this money will finance facilities to use the country’s abundant geothermal energy from volcanoes to mine Bitcoin. This is how the bonds earned the nickname “Volcano Bonds.”
Bukele says one project “will provide approximately 95MW of 100% clean, 0 emissions geothermal energy from our volcanoes.”
The Bitcoin mining infrastructure will monetize El Salvador’s endowment of natural energy assets and provide the country with a stream of Bitcoin income. All from assets—namely volcanoes—that were previously uneconomic to utilize.
Investing in productive assets that will provide cash flow to the country helps to further de-risk the bonds.
Other Perks for Bondholders
In addition to the shared Bitcoin upside after year five, the Volcano Bonds will pay an annual coupon of 6.5%, which bondholders will receive each January for the entire 10-year term of the bond.
The notional amount of the Volcano Bonds—and the minimum investment—is just $100. That is only possible because El Salvador is issuing the bonds through the Liquid Network. This brings unprecedented access to ordinary people worldwide.
Most bond offerings are done through large financial institutions with much higher minimums and are more complicated for average investors to participate in.
Investors can fund their bond purchases with Bitcoin, US dollars, or Tether (USDT)—a US dollar stablecoin.
Those who invest at least $100,000 can qualify for permanent residency in El Salvador and citizenship after five years.
Since El Salvador is issuing the Volcano Bonds on the Liquid Network, the bonds will trade 24/7/365 and clear immediately. So if you want to trade at 11:30 PM on a Saturday during a holiday weekend, you will be able to.
Bitcoin City
It’s no secret that securities laws in the West are complex, outdated, burdensome, and onerous. They fill the financial system with unnecessary bureaucracy and suffocate innovation. Yet, it is all but impossible to change them because of inertia.
That’s where El Salvador has another golden opportunity. It is going leapfrog constipated Western countries to craft a modern framework for regulating digital assets with the clear intention to make it as easy and as business-friendly as possible.
The new digital securities law will enable El Salvador to do just that. It has already been submitted to Congress and is expected to pass before Christmas. After it has passed, El Salvador could issue the Volcano Bonds sometime in Q1 2023.
El Salvador is going for the Dubai model by offering attractive terms for businesses and skilled expatriates. And since Bitcoin exchanges and other firms are location independent, many could flock there, just as financial institutions went to Singapore, Hong Kong, and Dubai in the past for similar reasons.
This plan involves Bitcoin City, a new opportunity zone and administrative region in El Salvador. It will be located on the Pacific coast on the Gulf of Fonseca.
Bukele promised that Bitcoin City would have no income taxes, no corporate taxes, no property taxes, no payroll taxes, and no other taxes of any kind except for a 10% VAT tax to pay for municipal services like water and garbage collection.
Bitcoin City will have residential and commercial areas, services, entertainment, restaurants, and a new international airport.
Bukele plans to finance the construction of Bitcoin City with further Volcano Bond issues, presuming the initial one is successful.
Here’s the bottom line.
Volcano Bonds could be an enormous catalyst for Bitcoin adoption.
That’s why I just released an urgent PDF report.
It details how it could all unfold soon… and what you can do about it. Click here to download the PDF now.
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Does this make El Salvador the GTFOOD (Get The F*ck Out Of Dodge) destination?
I’ll stick with Florida real estate out by the swamp, thank you.
Great place for dumping bodies.
So they want to expand the scam of selling nothing for something.
Nothing but blue sky and sunshine. How could this go wrong? Here, take all my money for this sure fire plan.
OMG…..