Last week, El Salvador moved one step closer to issuing its contentious bitcoin-backed ‘Volcano Bonds.’ The country’s Legislative Assembly passed a legal framework for issuing blockchain-based digital securities, including provisions that allow businesses to deal in digital assets other than bitcoin.
62 of its members voted in favor of this new Digital Assets Issuance Law on January 11. However, El Salvadoran president Nayib Bukele initially planned to issue the bonds as early as March 2022.
Bukele’s regime has postponed the bonds’ issuance several times, partly due to last year’s poor digital asset markets, but also because of more pressing issues, such as a nationwide crackdown on gangs — by September, mass arrests had incarcerated a staggering 2% of all adult males residing in the country.
Since the president made bitcoin legal tender in 2021, he’s struggled to prove the move makes any kind of sense for the country — El Salvador has sparred with major international players in the financial industry, like the International Monetary Fund.
Indeed, the country holds 2,300 bitcoin and is significantly underwater on its average purchase price. In November, Bukele was estimated to have lost $65 million on bitcoin purchases — a loss of 61%. That same month, he announced a plan to buy one bitcoin a day for an indeterminate amount of time.
With the passage of the country’s new Digital Assets Issuance Law, El Salvador is one step closer toward finally being ready to sell its Volcano Bonds for some bitcoin and USD — but especially, Tether.
Here’s what you need to know.
Volcano Bonds are coming, whether Salvadorans want them or not
Bukele has a way of getting what he wants. He unilaterally altered the constitution so that he could remain president longer than was previously legal. The military has been deployed by Bukele to force legislators to pass his laws.
El Salvador didn’t have a solid legal framework for issuing debt with digital assets until the legislative branch introduced a bill in November. It passed earlier this week.
The bill adds a National Digital Assets Commission to Bukele’s previously established National Bitcoin Office, in order to manage regulation of private participants in the digital asset industry. It also creates a Bitcoin Fund Management Agency to manage funds raised through El Salvador’s public offerings of digital assets.
Bukele plans to raise up to $1 billion with the Volcano Bond. He says his administration will use the proceeds to pay down sovereign debt, invest in bitcoin mining infrastructure, buy bitcoin, and build ‘Bitcoin City.’
Bitcoin City: Waypoint along China’s Belt and Road
If ever realized, Bitcoin City will reside on the Gulf of Fonseca on the southern coast of El Salvador. The entire project is a recycled version of a Chinese ZEDES project. The city will feature a friendly regulatory and tax regime for digital asset businesses interested in doing business in El Salvador.
Renderings for Bitcoin City were carelessly plagiarized without attribution. They were redrawn over maps of Central City from the manga series Fullmetal Alchemist.
The Bukele administration plans to use the nearby Conchagua volcano to power bitcoin mining with geothermal energy. Proceeds from the volcanic mining will back the new bonds, hence the name, ‘Volcano Bonds.’
That said, geothermal experts have expressed doubt regarding the economic viability of the Conchagua volcano for geothermal power production. Despite years of the volcano’s existence with every opportunity for power infrastructure development, as of December 2019, El Salvador still imported one-fifth of its electricity.
Moreover, industrial electricity in El Salvador is still prohibitively expensive for bitcoin mining, averaging 13-15 cents per kWh. For years, China and Kazakhstan sold industrial electricity contracts for bitcoin mining below 5 cents per kWh.
Bitfinex ensures that Tether will be accepted as a funding source
In Bitfinex’s statement on the Digital Assets Issuance Law, it expected the use of renewable geothermal energy to attract investors interested in Environmental, Social, and Governance (ESG) investing. Environmentalists have frequently criticized Bitcoin’s energy usage despite a report indicating that more than half the energy used for bitcoin mining comes from sustainable sources.
Read more: Opinion: Bitfinex goes full fascist
Controversial digital asset exchange Bitfinex will provide infrastructure services for the Volcano Bond. It refers to the bond as a ‘Volcano Token,’ indicating that it expects the bond to exist as a digital token on a blockchain. Volcano Bonds will accept funding denominations in bitcoin, USD, and — critically — Tether.
It looks as if El Salvador’s Volcano Bonds will be a great way to whitewash Tethers by swapping them for a government-approved debt issuance.