El Salvador’s Bitcoin bonds not going as planned for crypto-mad millennial president

March 30, 2022, 2:25 PM UTC

Just last November, El Salvador’s crypto-mad president Nayib Bukele was rocking out at a Bitcoin conference to AC/DC’s megahit “You Shook Me All Night Long,” as he announced a new “volcano bond”—the world’s first cryptocurrency sovereign-debt product, and one more step in his plan to create an entire crypto-heavy nation.

Now the tempo seems less upbeat.

Bukele is at loggerheads with international lenders and ratings agencies, who have warned for months that his crypto strategy could pose economic risks and raise the country’s borrowing costs. He also faces deep skepticism among financial institutions.

Those doubts have not appeared to ease as Bukele tries to roll out the volcano bond—so named for a plan to spend half the bond’s proceeds on a new “bitcoin city” at the foot of El Salvador’s Conchagua volcano; the other half would be invested in bitcoin.

The 10-year, $1-billion bond would pay 6.5% annual interest, with profits returning to investors after a five-year lock-in period.

But institutional investors are skeptical.

“When the idea first came out, we thought it was pretty far-fetched,” Kevin Daly, portfolio manager at Aberdeen Standard Investments in London, told Fortune on Wednesday. “It is not something institutional investors would even consider touching.”

Concerns increased after Salvadoran officials appeared fuzzy on the details of the bond.

“Surprising, to say the least”

In a meeting in Paris earlier this month, El Salvador’s Finance Minister Alejandro Zelaya told institutional investors, including Abrdn, that the bond had attracted “demand was $1.5 billion,” Daly says, adding: “It was surprising, to say the least.”

But the true figure could be far lower. In an interview with the Financial Times on Wednesday, Paolo Ardoino, chief technology officer at Bitfinex, which is slated to be the tech platform for the volcano bond, said it had received “half a billion dollars” in interest from its users—about a third of Zelaya’s estimate, though Ardoino’s estimate was only from Bitfinex customers.

The bigger concern among investors is the country’s apparent rift with international leaders. The IMF has pushed Bukele for months to scrap its use of bitcoin as legal tender, saying in a report in January that it “entails large risks for financial and market integrity, financial stability and consumer protection.”

Daly says there is unease among the country’s creditors; El Salvador’s $800-million Eurobond matures next January.

“The market is basically saying, ‘you’re at high risk of default,’” he says. “It is something everybody is talking about.”

Pricey remittances

That was not meant to be. Among Bukele’s main motivations in declaring bitcoin legal tender was to make cross-border money transfers simpler and cheaper. That is crucial for El Salvador, about 24% of whose GDP is made of remittances from relatives working abroad. A World Bank report last year estimated that Salvadorans lose about 7.88% of their remittances from the U.S. simply by using services like Western Union.

Within a month after bitcoin tender began, last September, Bukele tweeted that three million Salvadorans—about half the country—were now using the national crypto wallet Chivo, withdrawing it in cash from special ATMs.

Chivo’s website says it allows people to “save millions of dollars in remittances” by using bitcoin, and that foreign investors buying bitcoin can boost the country’s economy. There are no intermediaries, there are no commissions.”

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