What is the unprecedented and controversial cryptocurrency law approved in El Salvador that redoubles Bukele’s commitment to bitcoin looking for?

Business in El Salvador that accepts bitcoins.

Business in El Salvador that accepts bitcoins.

When the value of bitcoin is on the ground and cryptocurrencies in general are in question as a result of multiple international financial scandals, the president of El Salvador, Nayib Bukele, has redoubled his commitment to the digital currency.

After bitcoin became a legal tender in the country in September 2021 -on a par with the dollar-, the president has continued to buy the cryptocurrency with public funds despite warnings of the high risk to which the nation’s resources are exposed due to the instability of the price of a digital asset that lost more than 60% of its value in 2022.

In one of the latest moves to advance his plan to turn El Salvador into the world capital of bitcoin, Bukele got his country’s Legislative Assembly, with an official majority, to approve an unprecedented and controversial Law on the Issuance of Digital Assets.

The law tries to give foreign investors guarantees to do business in the small Central American country of barely 6.3 million inhabitants, where one in four people lives in poverty and half the population has been exposed to food insecurity. .

According to the Salvadoran government, among the objectives of the law are “protect the rights of buyers and issuers of digital assets in El Salvador”as well as “deter scammers from operating here.”

“El Salvador is the epicenter of bitcoin adoption and, therefore, of economic freedom, financial sovereignty, resistance to censorship, and unconfiscatable wealth,” Bukele said.

In the context of convincing large investors to believe in its project to “bitcoinize” El Salvador and dare to make high-risk loans, the government explained on Twitter that the new law “paves the way for the volcano bonds that we will soon begin to issue.”

It is not easy right now for El Salvador to borrow money in international markets at a convenient interest rate because it is considered a high-risk country.

“The country has almost closed the two ways to obtain financing, which are multilateral organizations, such as the IMF (International Monetary Fund), or traditional bonds,” Carlos Castaneda, an economist at the Central American Institute for Fiscal Studies (ICEFI), told BBC Mundo. ).

With traditional bonds, governments issue debt, which in effect means that private investors lend money to the country in the expectation of earning a return over a certain period of time.

Recreation of a volcano at the Bitcoin Conference 2022, Miami.

Recreation of a volcano at the Bitcoin Conference 2022, Miami.

In economic jargon it is said that a country “issues a bond” that ensures it has the necessary public funds to finance its projects.

In the case of El Salvador, since the country has a low credit rating and a high level of debt, equivalent to 80% of the Gross Domestic Product(GDP), faces serious difficulties in obtaining loans.

From there comes the idea of ​​the Salvadoran government to issue the so-called volcano bonds instead of traditional bonds, for which the new law provides support.

What are volcano bonds?

The so-called volcano bonds, specialists explain, would work as follows: a private investor lends El Salvador money in dollars in exchange for a certain interest rate, and El Salvador pays him in bitcoin when the debt matures.

Najib Bukele

El Salvador’s President Nayib Bukele has invested taxpayer funds in bitcoin.

If it comes to fruition, it would be the first time in history that a country issues a bitcoin bond.

“It is a high risk for investors,” explains Fernando Alvarez, an academic and researcher at the Department of Economics at the University of Chicago, to BBC Mundo.

If the country were to eventually default, the investor who bought the bonds would lose their money. And if, on the other hand, that doesn’t happen, there is no guarantee that the price of bitcoin will go up when you are paid your funds in the digital currency.

In that sense, it is a bet that can result in big wins or big losses.

The nickname “volcano” comes from a project that the government announced in 2021 and that has been widely publicized in the United States to attract investors interested in joining the initiative.

Bukele has said that he will build a city called “Bitcoin City” in the eastern department of La Unión, which would be fed by geothermal energy from a volcano in the area.

Bukele with a screen that says Bitcoin City

Bukele with a screen that says Bitcoin City

And with that same energy from the volcano, the country could generate new bitcoin, he says.

In theory, part of these new bitcoins would be used to pay investors who buy the country’s volcano bonds, that is, the creditors of the public debt.

The government’s plan to turn the country into the bitcoin capital of the world is part of “the president’s idea of ​​modernizing the country,” Alvarez said. “My impression is that there is too much optimism.”

Tax haven for digital assets?

According to economist Carlos Castaneda, the law will also allow the government itself, companies and individuals to finance themselves with digital assets.

For example, acquiring cryptocurrencies directly or its equivalent in dollars.

“If you borrow dollars, your backing is your digital assets,” he explains. In that sense, the new rule would create “a kind of digital asset stock exchange” so to speak.

Demonstration against bitcoin

Demonstration against bitcoin

On the other hand, the norm creates an entire institutionality to regulate the trade of cryptocurrencies through some public entities where “power will be concentrated in the president”argues the economist.

What the law also seeks, he adds, is to pave the way for digital asset companies (such as exchanges where cryptocurrencies are bought and sold) “so that they can operate without major difficulties.”

Castaneda warns that the new regulations also allow private debt to be generated in digital assets, something that, in his opinion, can be highly risky for a person who, for example, wants to buy a house and obtain a mortgage with these instruments.

Person trading bitcoin on phone

Person trading bitcoin on phone

And from another perspective, the economist argues that “This law practically turns El Salvador into a tax haven for digital assets” because transactions of this type do not pay taxes.

“This type of incentive is not aimed at improving the living conditions of the Salvadoran population; it is aimed at protecting groups linked to digital assets and the government itself, which is trying to find a bag of oxygen,” he criticizes.

The government, on the other hand, assures that the future of El Salvador is in bitcoin and that its adoption will allow the entire population to prosper.

Salvadoran with her son

Salvadoran with her son

When the law was approved, pro-government representative William Soriano declared in the local press that the law seeks to “protect not only investors, but also those who decide to trade this type of asset, and Salvadorans who are already part of this world.”

The problem is that very few ordinary people make bitcoin transactions through the application promoted by the government, Chivo Wallet, to spread the use of the cryptocurrency.

The study “Bitcoin as legal tender in El Salvador” published in the National Bureau of Economic Research of the United States, NBER, found that the number of people who use Chivo Wallet to transact with bitcoin is minimal.

“Adoption has been very low,” explains Fernando Alvarez, one of the co-authors of the research.



Debt payment

Surrounded by an economic crisis and with aspirations to be re-elected in the presidential elections of February 2024, Bukele is at the crossroads of facing million-dollar debt payments between 2023 and 2025.

Until now, the government’s economic policies have generated doubts among creditors, buyers of Salvadoran bonds, and the markets in general.

Business in El Salvador

Business in El Salvador

Among the doubts that persist among Salvadorans there are very basic things that remain in the shadows, such as the exact amount of bitcoin that the government has bought and at what price.

Estimates by analysts made with the little information available indicate that the government has invested more than US$100 million of the public treasury in bitcoin, a figure that is impossible to verify with certainty.

In the midst of this opacity, the opposition claims that the promises were not fulfilled.

“That (bitcoin) became a legal tender did not bring the development it promised, it did not bring more foreign investment, it did not bring cheaper remittances, it did not bring financial inclusion for the majority,” says opposition legislator Claudia Ortiz.

“It has been a failed economic policy in a poor and indebted country.”

BBC Mundo contacted the Salvadoran government but received no response.


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