Yesterday, El Salvador’s Economy Minister María Luisa Hayem Brevé sent a request to Parliament for the creation of a Bitcoin fund administration agency.
This was reported by local newspaper ElSalvador.com, saying that the new entity would be regulated by a new law called the “Law on the Issuance of Digital Assets.”
The text of that law, which is still in the process of being approved, states that a “Bitcoin Funds Administration Agency,” or AAB, will be created, which is a public law institution with its own legal personality and assets, of a technical nature, and with economic, financial and administrative autonomy.
The agency will be connected to the government through the Ministry of Economy, will be headquartered in San Salvador, and will also be authorized to establish offices abroad.
Among the things it will be able to do is to invest the funds received through public offerings of digital assets made by the State of El Salvador.
El Salvador’s Bitcoin Volcano Bonds
One such offering is expected to be the so-called Volcano Bonds, which are bonds collateralized in Bitcoin.
The idea of Volcano Bonds was developed last year, and in theory they were supposed to land on the market in March of this year.
Instead, they have suffered many postponements, no doubt due in part to the bear market, but recently the government seems to have revived the project.
The economy minister’s initiative is along those lines, and at this point, it certainly looks like they are getting ready to launch.
The Volcano Bonds obviously have as their primary goal to raise financing in the marketplace, but they have been named so because a portion of that financing is supposed to be used for the creation of a Bitcoin mining farm powered by the energy of a volcano.
This would thus be clean energy that would be available for a long time in large quantities, and it would give the small Central American state a way to generate some sort of annuity, should revenues exceed expenses.
Volcano Bonds are nonetheless bonds, so they would add to the country’s already greatly increased debt in 2020.
Bitcoin in El Salvador
El Salvador was the first country in the world to adopt Bitcoin as legal tender.
However, as ElSalvador.com reports, according to a recent poll by the José Simeón Cañas Central American University (UCA) about 77% of Salvadorans believe that this decision turned out to be a “failure.”
Then again, not only did it come at a time when the price of BTC was particularly high due to the speculative bubble that was going on last year, but it was followed by several government investments in BTC that are currently at a heavy loss.
It is possible that the Salvadoran government last year deluded many of its citizens by exploiting the very hype generated by the speculative bubble, while now that enthusiasm is wearing off.
Furthermore, according to ElSalvador.com, Bitcoin has not had great acceptance among the local population, due in particular to its volatility. It also reports that civil society and some cryptocurrency experts are criticizing the government’s lack of transparency regarding government funds used to purchase BTC.
In fact, it is not known exactly how much was invested, although some estimates put the total amount at around $100 million. Now, however, the BTC purchased by El Salvador would be worth less than $50 million, and this obviously generates discontent.
However, it is worth specifying that the country’s public debt totals more than $21,000 million, so the accumulated losses from the BTC investment can be called marginal.
Generating further discontent, however, is President Bukele’s decision to return to investing in BTC, although perhaps the current investments make more sense than those made so far.
Despite this, it appears that the country is experiencing continued growth in several sectors after making Bitcoin legal tender in September 2021. This was reported by El Salvador’s Ambassador to the US, Milena Mayorga.
In addition, the new law proposed by María Luisa Hayem Brevé also calls for the creation of a National Digital Assets Commission, charged with authorizing or suspending digital asset service providers in the country.
In other words, popular discontent is not holding back the government in its attempt to press on with the expansion of crypto operations in the country.
The collaboration with Bitfinex
The issuance of the Volcano Bonds is being done in collaboration with the crypto exchange Bitfinex, so much so that its CTO, Paolo Ardoino, commented on the recent news saying that the new digital asset law will allow El Salvador to be the financial center of Central and South America.
Digital securities law will enable El Salvador to be the financial center of central and south America.
— Paolo Ardoino 🍐 (@paoloardoino) November 23, 2022
It is possible that President Bukele’s goal is precisely that. So it should come as no surprise at all that he is continuing to insist on this path.
Through Bitfinex, about $1 billion worth of bonds will be issued on Liquid Network, or a sidechain of Bitcoin, with $500 million allocated directly to BTC, and $500 million to be invested in the mining farm and other infrastructure.
These Volcano Bonds will pay a yield of 6.5%, and also provide for the government to share with investors half of any additional gains when the Bitcoin purchased with this funding are sold.
The fact that the issuance of these bonds, and the purchase of $500 million worth of BTC, takes place during the bear market could also ultimately prove to be a winning move for the small Central American country.