El Salvador pushes ahead with cryptoplan

Nayib Bukele did it again. When the news of the newly emerging omicron coronavirus variant was spreading around the world in early December, sending riskier financial assets like stocks, junk bonds, and not least of all cryptocurrencies in a tailspin, the Salvadoran president bought the dips.

Though missing the bottom of the sell-off in Bitcoin by 7 minutes, as he wrote in a tweet later on, the smart purchase got El Salvador another 150 bitcoins for a "knockdown price."

It isn't the first time the 41-year-old president praised himself for successfully hunting the world's largest cryptocurrency for the good of the tiny Central American country that has just about $3.4 billion (€3 billion) in foreign currency reserves. While other developing countries are using their hard-earned dollars and euros to shore up their struggling currencies, the youthful president buys Bitcoin.

His policy has won him accolades from crypto aficionados, as well as criticism from mainstream economists. One of them, Peter Schiff, was quick to reply to Bukele's tweet. "There's a lot more dips coming. How much taxpayer money do you intend to waste?," he wrote.

The US stock broker and renowned financial commentator touched on a weak spot in Bukele's buy-the-dips strategy: It works only as long as cryptocurrencies continue their meteoric rise that saw, Bitcoin soar 90% in 2021 alone.

From rags to riches

Before the introduction of Bitcoin as legal tender in September 2021, the US dollar reigned supreme as the currency most widely used by the country's about 6.8 million citizens.

Under new laws adopted in June, companies and businesses must also accept Bitcoin for payment now. In October, thousands of people took to the streets in brief protests against the controversial policy, and at least one of the estimated 200 Bitcoin ATMs scattered across the country reportedly went up in flames.

Since then, the protests have largely died down, giving the Salvadoran president the opportunity to push ahead with even bolder plans.

At a Bitcoin conference in mid-November, Bukele unveiled his vision of a so-called Bitcoin City he wants to build close to the country's border with Honduras and Nicaragua. It would be situated near the Conchagua volcano, he said, and would boast residential and commercial areas as well as an airport.

"He made the announcement at a huge party on the beach," said Aaron Koenig, a crypto enthusiast and digital entrepreneur, who was at the event and shared his impressions with DW.

Funding for the mammoth undertaking to start in 2022 is to be raised through the sale of a sovereign Bitcoin bond to the tune of $1 billion  — "the hottest investment in the cryptosphere at present," Koenig believes. "At the moment, there are many 'Bitcoiners' having both the resources and the willingness to invest."

Volcano bond

El Salvador plans to sell the debt in US-dollar-denominated 10-year bonds with a coupon of 6.5%. Half of the income from the sale will be used to buy Bitcoin to hold for five years and the rest would fund construction projects in energy and crypto-mining infrastructure. The tokenized bond will be issued in partnership with Blockstream, a digital assets infrastructure company based in Canada.

Blockstream Chief Strategy Officer Samson Mow told financial news service Bloomberg that investors can expect much more than interest payments. "For the first five years, there'll be a 6.5% coupon, but then it accelerates to what I call a Bitcoin dividend. This is a special dividend from basically the Bitcoin being sold off. The Salvadoran government will share that with the bondholder."

Those dividends will either be paid in dollars or the cryptocurrency Tether, a so-called stablecoin meant to be a dollar proxy, Mow said, adding that he was convinced the issuance would be many times oversubscribed due to high demand.

But the $1billion debt sale may only be a first step, because President Bukele himself has said that $17 billion will be needed to build his Bitcoin City — the equivalent of 300,000 bitcoins. The sums circulating in the debate are unheard of in a country where the average annual income of people is about $3,400.  

Default looming?

For German economist Christian Ambrosius, Bukele's plans are "highly dangerous." In an interview for DW, he said he assumed the president was seeking a smart way out of a looming default on El Salvador's older debts. It was striking, he noted, that the $1 billion sum was exactly the same amount money the government had previously hoped to borrow from the International Monetary Fund (IMF) as fresh loans. 

And indeed, the plan to sell new, tokenized bonds could offer Bukele some breathing room after the IMF announced June it would reassess granting fresh loans to the country after the introduction of Bitcoin as legal tender. In November, the global lender of last resort published an analysis that concluded Bitcoin volatility would pose "a significant risk to financial stability" in El Salvador.

Blockstream's Samson Mow argued, though, such analyses were meaningless for crypto investors, because the crypto community had a different vision of the future of money, he told Bloomberg. "A lot of these organizations, like the IMF or the World Bank, won't be relevant in a world based on Bitcoin. They are only relevant because they create money out of thin air. You can't do that on a Bitcoin standard. It really takes us back to what money should be, which is just money, and not a surveillance mechanism or a tool to enforce your economic policies on another nation." 

But Christian Ambrosius is concerned about what he sees as an emerging alliance between the cryptocurrency crowd and "increasingly authoritarian regimes." Even though Bukele was democratically elected, he'd made several attempts at weakening governance and the rule of law in El Salvador, he said.

Crypto entrepreneur Aaron Koenig also views Bukele with some skepticism, but nevertheless believes in the president's attempt to spread the popularity and usage of cryptocurrencies in his country and beyond. Bitcoin has been on a tear for most of this year, reaping El Salvador millions in additional state revenue. But in the crypto world, money won can quickly turn into money lost.  

This article has been adapted from the original German.