El Salvador’s President Nayib Bukele took the stage last weekend at the end of “Bitcoin Week” to the cheers of the fans, who were delighted that his Central American country was the first to introduce cryptocurrency alongside the US dollar as legal tender.
40-year-old Bukele, wearing his signature baseball cap back, described himself as a “savior” when he unveiled plans to build “Bitcoin City” at the foot of the Conchagua volcano overlooking the Pacific. Bitcoin price in India was Rs. 45.11 lakh as of 5:00 p.m. IST on November 25th.
Funded by Bitcoin-backed bonds and powered by geothermal energy, the city would offer a tax-free haven. “Invest here and make as much money as you want,” he told the euphoric crowd.
Supporters have welcomed Bukele’s plans – including the introduction of Bitcoin as legal tender in September – and said they would bring jobs, financial inclusion and foreign investment to one of the poorest countries in the western hemisphere.
“Feel the Bit” read the giant screen before Bukele – who describes himself on Twitter as “CEO of El Salvador” – came on stage.
But some in El Salvador and beyond have expressed outrage at the glittering event in a nation plagued by inequality, violence and poor public services.
“This video makes me sick, angry and sad all at the same time,” said Marce, Twitter user @_lamismadayer.
The government says that issuing “volcanic bonds” in partnership with Blockstream – a digital asset infrastructure company – would provide $ 1 billion in development funds. According to the rating agency Fitch, El Salvador is currently facing a budget gap of 500 million US dollars (approx. 3,725 billion rupees) for the next year.
But the Bitcoin bond isn’t designed to fill that void.
Half of the bond money would flow into the infrastructure, including for the construction of Bitcoin City, the rest for the purchase of Bitcoin and locked for five years. After the lockdown, the bitcoin can be sold, generating a return on investment that will be split 50-50 between the government and investors only after the initial $ 500 million (roughly Rs 3,725 billion) is recouped as planned.
The 10-year Bitcoin bond offers a 6.5 percent coupon payable annually, but another Salvadoran bond that matures in 2032 is currently yielding nearly 13.9 percent.
The financial markets reacted cautiously. The spread between Salvadoran yields and safe-haven US Treasuries has widened significantly since the end of April. This week it added an additional 79 basis points and is above 1,200 bps, its highest level ever.
Investors sold El Salvador’s bonds in May after Bukele-controlled Congress sacked the attorney general and five Supreme Court justices who were replaced with loyalists, critics say.
According to refinitive data, the 2025 bond will yield more than 18 percent. With such high costs, the country is effectively excluded from borrowing from the market.
Graham Stock, senior sovereign analyst at Blue Bat Asset Management, said government funding through Bitcoin could deter El Salvador from pursuing sustainable spending policies, adding that the country would likely continue to need support from the International Monetary Fund.
“Building the economy around mining cryptocurrencies and attracting crypto businesses is an untested strategy, to say the least,” he said, adding that Bukele does not appear to have any plans to increase growth and tax revenue.
Talks with the IMF over a $ 1 billion loan have stalled amid concerns about a lack of transparency and price volatility of the cryptocurrency, as well as fears of a democratic relapse in the wake of the consolidation of Bukele devices. But many in the cryptocurrency community are optimistic, saying the bond will take advantage of strong retail demand.
“Bitcoin bonds are a turning point in bond markets,” said Moritz Wietersheim, founder of Specter Solutions, a bitcoin security and product company.
Although Bitcoin has fallen about 16 percent this month from its record high of $ 68,990.90 (about Rs 51 lakh), it remains up over 90 percent this year.
Bitcoin Week marked the first time that the digital currency experiment was stress tested by international crypto evangelists.
When sellers were selling “Jesus Loves Bitcoin” shirts, panel discussions on cryptocurrency leaders and Salvadoran ministers were grouped together. There was widespread excitement about having a “petri dish,” as many participants called the El Salvador experiment.
Several participants expressed concern about the government’s Chivo wallet, which Salvadorans can use to send and receive Bitcoin – and highlighted tensions over a government instrument for a currency created as an alternative to government financial systems.
Chivo comes preinstalled with US $ 30 (approx. 2,230 rupees) for users and has a fund of 150 million US dollars (approx. 1,120 crore rupees). Chivo allows users to transact with other Chivo users for free, but registration requires entering their ID for Salvadoran numbers and other personal information while transactions are being conducted on a ledger.
Some participants described Chivo as access to independent Bitcoin wallets like Muun or BlueWallet that offer privacy.
“When I make a payment, I write ‘Use Muun, do not use Chivo’ in the notes area,” said Wietersheim using the hashtag #FixChivo on Twitter.
Since its inception, Chivo has been criticized for thousands of fraud cases and money disappearing from wallets.
Several programmers said these technical issues were normal given the speed of implementation – less than four months after Bukele announced it at a conference in June.
Bukele blames the high demand for the problems. A spokesman for the presidential office and Chivo could not be reached for comment.
© Thomson Reuters 2021
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