El Salvador made history in September 2021 when it became the first country to recognize Bitcoin as legal tender.
Now El Salvador is taking it to the next level.
His 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 startling announcement.
He convincingly demonstrated 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 go about it…
El Salvador plans to issue $1 billion in 10-year bonds with a coupon of 6.5% through Liquid Network, a 2nd layer network built on Bitcoin that enables the issuance of tokenized securities like bonds.
It means a paradigm shift in the global securities market if El Salvador can achieve it.
Let me break it all down to better understand the broad implications.
Typically, a country like El Salvador would have three unattractive choices for borrowing money.
Option 1: Go to Wall Street investment banks to issue debt and watch them take a big cut.
Option 2: Borrow money from the IMF or the World Bank and comply with the conditions they impose.
Option 3: Borrowing money from China on unfavorable terms, usually involving pledging critical infrastructure as collateral.
By issuing the bonds on the cash network, El Salvador eliminates costly intermediaries, retains 100% of the proceeds, and does not lose its sovereignty to the IMF or China. It’s a game changer.
Bitcoin pioneer and former stockbroker Max Keizer originally inspired the idea. He suggested on Twitter that El Salvador abandon the IMF and instead harness its volcanic geothermal energy via Bitcoin mining to back a debt offering.
Bukele took notice of the tweet and began engaging with Keizer to turn the idea into reality.
On a related note, Keizer and his wife, Stacy Herbert, have been in El Salvador for many months helping the government with the supply and other bitcoin initiatives.
Bukele established the National Bitcoin Office of El Salvador and appointed Stacy. It’s a great sign.
Max and Stacy have been on the spot regarding Bitcoin since it was $1. They have probably created more Bitcoin millionaires than anyone. As a result, they have built a large following with a platform that reaches millions around the world.
In short, Max and Stacy’s involvement gives El Salvador access to their creative expertise in the securities markets, Bitcoin best practices, and broad reach. That’s a huge plus.
Also, Max and Stacy have been around Bitcoin since the early days. They know how to spot bad actors in space. I have no doubt that they will help El Salvador develop a robust immune system to ward off crypto scammers.
Anyway, back to bond issuance.
El Salvador will do two things with the billion dollars it intends to raise.
1. Buy $500 million worth of Bitcoin
El Salvador will immediately buy $500 million worth of Bitcoin and freeze it for five years.
After five years (in 2028), El Salvador will sell enough Bitcoin to recoup the initial purchase of $500 million.
The benefit of any remaining bitcoin will be shared equally with bondholders until maturity, which would take another five years. But, of course, that assumes the price of Bitcoin will be higher in five years, which is a reasonable bet.
After the initial five-year period, there will be 20 quarters remaining until the bond matures (in 2033).
Every quarter, El Salvador will take 1/20th of the bondholders’ remaining bitcoin — the leftovers after they recoup their initial purchase of $500 million — and sell it. These benefits will accumulate for one year. Then, in January of each year, El Salvador will distribute these shared profits to bondholders, along with the annual coupon payments.
For example, suppose El Salvador buys 30,000 Bitcoins with the initial investment of $500 million. Then five years later, the 30,000 bitcoins are worth $1 billion. At this point, El Salvador would sell 15,000 Bitcoins to recover the initial investment. El Salvador would share the remaining 15,000 bitcoins equally with bondholders, meaning bondholders are entitled to 7,500 bitcoins.
At this point, there are 20 quarters left until the bond matures. El Salvador will take the remaining 7,500 Bitcoins allocated to bondholders and sell an equal amount each quarter – 375 BTC – until maturity. The other 7,500 bitcoins allocated to El Salvador are for whatever the government decides to do with them. For example, they could sell them or add them to the country’s growing bitcoin treasury.
This is just a conservative example. Bitcoin could easily grow 10x (or more) by 2028. It has done it many times before and could do it again. This would mean significant shared upside potential for El Salvador and bondholders. But, of course, past performance does not indicate future results for any investment, including Bitcoin.
Suppose Bitcoin increases 10 times in five years. This would mean that the original $500 million value of BTC would have increased to $5 billion. After recovering the $500 million, there would be 27,000 Bitcoins left to split between bondholders and El Salvador over the past five years. And in these remaining five years, there is a chance that Bitcoin will increase again by 10 times.
I don’t think any other bond currently in the market can match this kind of upside potential, which is why Volcano Bonds could shake up the entire bond market.
2. Bitcoin mining infrastructure
The remaining $500 million from the bond issuance will help build Bitcoin mining and other infrastructure. In particular, this money will fund facilities to use the country’s abundant geothermal energy from volcanoes to mine Bitcoin. This is how bonds earned the nickname “Volcano Bonds”.
Bukele says a project will “provide approximately 95 MW of 100% clean, emission-free geothermal energy from our volcanoes.”
Bitcoin mining infrastructure will monetize El Salvador’s endowment of natural energy assets and provide the country with a Bitcoin revenue stream. All from assets, namely volcanoes, which were previously unprofitable to use.
Investing in productive assets that will provide cash flow to the country further reduces bond risk.
Other benefits for bondholders
In addition to Bitcoin’s shared rise after the fifth year, Volcano Bonds will pay an annual coupon of 6.5%, which bondholders will receive each January for the full 10-year term of the bond.
The notional amount of Volcano Bonds – and the minimum investment – is just $100. This is only possible because El Salvador issues the bonds through Liquid Network. This brings unprecedented access to ordinary people around the world.
Most bond offerings are made 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 are eligible for permanent residency in El Salvador and citizenship after five years.
Since El Salvador issues the Volcanic Bonds on the Liquid Network, the bonds will trade 24/7/365 and clear immediately. So if you want to trade at 11:30 p.m. on a Saturday during a holiday weekend, you can do that.
Bitcoin City
It’s no secret that securities laws in the West are complex, outdated, cumbersome and onerous. They fill the financial system with unnecessary bureaucracy and stifle innovation. Yet it is practically impossible to change them because of inertia.
This is where El Salvador has another golden opportunity. It will skip constipated Western countries to craft a modern digital asset regulatory framework with the clear intention of making it as simple and user-friendly as possible.
The new digital securities law will allow El Salvador to do just that. It has already been submitted to Congress and should be passed before Christmas. After its adoption, El Salvador could issue the volcanic bonds during the first quarter of 2023.
El Salvador is adopting the Dubai model by offering attractive conditions to businesses and qualified expatriates. And since bitcoin exchanges and other businesses are location-agnostic, many could flock there, just as financial institutions have flocked 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 in the Gulf of Fonseca.
Bukele promised that Bitcoin City would have no income tax, no corporate tax, no property tax, no payroll tax and no other taxes of any kind except a VAT of 10% 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 fund the construction of Bitcoin City with other Volcano Bond issues, assuming the first one succeeds.
Here is the bottom line.
Volcano Bonds could be a huge catalyst for Bitcoin adoption.
That’s why I just published an urgent PDF report.
It details how this could all unfold soon…and what you can do about it. Click here to download the PDF now.
