Salvadoran President Nayib Bukele’s experiment in making Bitcoin an official national currency alongside the U.S. dollar, which has been the currency since 2001, has not gone well. But when a con artist’s grift starts to fall apart, he knows to move onto the next one fast. The same goes for fast-talking presidents.
More than 91 percent of Salvadorans want dollars, not bitcoins. The official Chivo payment system was unreliable at launch in September—the kiss of death for a new system. Users joined for the $30 signup bonus, spent it or cashed it out, then didn’t use Chivo again. The system completely failed to check new users’ photos, relying solely on their national identity card number and date of birth; massive identity fraud to steal signup bonuses ensued. Bitcoin’s ridiculously volatile price was appreciated only by aspiring day traders. Large street protests against compulsory Bitcoin implementation continued through October. The government stopped promoting Chivo on radio, TV, and social media. Chivo buses and vans were seen with plastic taped over the company’s logo.
Bukele’s financial problems remain. El Salvador can’t print its own dollars, so Bukele urgently needs to fund his heavy deficit spending. The International Monetary Fund has not lent the country the $1 billion Bukele asked for, and has indicated its strong concerns about the Bitcoin scheme.
So Bukele, known for a populism that is half aspiring dictator, half Elon Musk, once more announced national policy from the stage: At the Latin American Bitcoin and Blockchain Conference on Nov. 20, Bukele came onstage to an animation of beaming down from a flying saucer and outlined his plans for Bitcoin City: a new charter city to be built from scratch, centered on bitcoin mining—and powered by a volcano.
Bitcoin City would be paid for with the issuance of $1 billion in “volcano bonds,” starting in mid-2022. The 10-year volcano bonds would pay 6.5 percent annual interest. $500 million of the bond revenue would be used to buy bitcoins. The bitcoins would be locked up for five years, then sold to recover the $500 million purchase price; any profit on the sale would be paid out as an additional dividend. Holding $100,000 in volcano bonds for five years would qualify investors for Salvadoran citizenship.
U.S. Bitcoin services company Blockstream first proposed the volcano bonds to Bukele in July. The bonds will be issued as tokenized securities on Blockstream’s proprietary Liquid blockchain. Samson Mow of Blockstream assured Bloomberg that all the numbers would work out, under Mow’s rosy assumption that the price of one Bitcoin would hit $1 million within five years.
Holders of El Salvador’s existing sovereign debt were unimpressed. The volcano bonds would be a strictly worse investment than buying the country’s existing bonds and hedging them with bitcoins. The existing bonds dropped from 75 cents on the dollar to a record low of 63.4 cents after the volcano bond announcement.
The bonds are set to be issued via Bitfinex Securities, a new unit of iFinex, which runs the Bitfinex cryptocurrency exchange and the Tether stablecoin. iFinex is the company that was fined $18.5 million by the state of New York in February, and $41 million by the U.S. Commodities and Futures Trading Commission in October, for repeated false statements and maladministration over several years concerning the reserves that supposedly backed Tether’s stablecoin. El Salvador and iFinex would draft new securities laws to license Bitfinex Securities to administer the volcano bonds.
The other $500 million raised from bond sales will theoretically be used to start construction on Bitcoin City, a charter city in a special economic zone. Bitcoin City would have no income, property, contract, or city tax. The only tax would be value-added tax, or VAT, half of the proceeds from which would be used to fund the city, and half to pay back the bonds.
(The original Blockstream volcano bonds proposal suggests spending the second $500 million on bitcoin mining equipment, rather than a city, and it calculates a price of $50,000 per bitcoin.)