El Salvador’s billion-dollar bitcoin-backed bond could tap deep capital wells among cryptocurrency enthusiasts for financial backing after many big international investors shunned the project.
Demand from bitcoin “whales” — investors holding large amounts of the world’s largest cryptocurrency — is likely to be crucial in raising money for the bond, according to those involved in the effort.
Paolo Ardoino, chief technology officer at Bitfinex – which is set to provide the technology platform for the deal – said the crypto exchange had received “half a billion dollars” in interest from of its users. Important details of the bond will need to be ironed out, requiring the passage of new securities laws in El Salvador, before potential buyers confirm their interest, he added.
“Some of our users have proactively contacted us to express their interest. They are certainly interested in participating in this, but they are waiting for the details to be released,” Ardoino said. He added that the exchange would not be involved in marketing the bond.
The issuance of El Salvador’s debt proceeds comes just over a year after the country became the first to adopt bitcoin as legal tender, with the enthusiastic support of President Nayib Bukele.
The so-called volcanic bonds – half of the proceeds of which will be invested in bitcoin while the rest will go towards building a “bitcoin city” at the foot of the Conchagua volcano – could offer a financial lifeline to the Bukele government, as doubts grow over the sustainability of his finances.
The crypto community’s optimism for the offering, which is the first of its kind from a sovereign borrower, stands in stark contrast to most mainstream mainstream investors, who said they were highly skeptical of the deal.
Buyers of the bitcoin bond – which offers a 6.5% annual interest rate as well as a share of any benefit from the proceeds invested in bitcoin – would offer financing on favorable terms to El Salvador, whose Existing 10-year dollar bonds are currently yielding above 20 percent.
These yields rose sharply as most investors took a dim view of Bukele’s experiments with cryptocurrency, warning that the bitcoin bond could lead El Salvador away from access to traditional debt markets and harm its relationship with the IMF.
“Bitcoin’s impact in El Salvador so far, in our view, has been to increase potential macroeconomic risks rather than introduce material change in the way economic transactions are conducted,” analysts from Barclays last week.
Potential buyers of the Salvadoran bond also lack basic information about the legal framework of the tokens or the entity that will issue them.
People close to the project are betting that big players in the crypto community will see bonds as an attractive investment despite the relatively low yields and uncertainties surrounding them.
El Salvador has suggested it could also open up bond issuance to retail investors, but the scope of marketing is among many details still unresolved.
“There is a ton of wealth that is outside the banking system and wants to stay out of it,” according to an industry executive who has experience working with Bitfinex. For these investors, accessing government debt in a crypto-friendly way is attractive, “even if you earn less in terms of returns.”
Potential investors were drawn to the bitcoin bond’s status as a “world’s first,” those involved in the project said. “There is a desire to be part of something so revolutionary,” said one.
Still, fundraising for bitcoin bonds is facing steep hurdles, after the government announced a delay that casts doubt on the issuance’s timing and future – with important details still unclear. The sale was originally scheduled for March, but was delayed.
Bukele blamed the delay on the need to push ahead with pension reforms, while his finance minister, Alejandro Zelaya, claimed last week that market conditions were to blame and the issue remained ready to go live. Zelaya also confirmed that the government plans to issue the bond through La Geo, a state-backed thermal energy company.
“There appears to be little chance of a deal anytime soon,” Barclays analysts said.
According to Ardoino, further details on the terms of the bond will have to wait until the government has passed its securities legislation.
“The time frame for this could be anywhere from a week to a few months. This is the main obstacle preventing us from moving forward,” he said.
Even though many mainstream investors are betting that Bukele’s bitcoin surge is pushing El Salvador away from the IMF and closer to the brink of insolvency, some are hoping that crypto traders will offer the country a lifeline.
“The bitcoin community is doing weird things,” said Bradley Wickens, founder of Broad Reach, an emerging-markets hedge fund that holds El Salvador conventional bonds. “If they end up providing a funding route without the IMF, it could totally change El Salvador’s fortunes over the next few years.”
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El Salvador Courts Crypto ‘Whales’ As Traditional Investors Avoid Bitcoin Bonds
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