During the last event of “Bitcoin Week'', "Feel the Bit" in El Salvador, last November 20th, President Nayib Bukele announced a project for the first El Salvador Bitcoin Bond issue, nicknamed ESBB1.
The project is quite convoluted, having financial, technological, and practical implications. We will cover all of these, but I will try to focus more on the economical and technical aspects of this, leaving the discussion of the details of the Bitcoin City part of the citizenship project to other threads.
1. The MasterPlan. El Salvador, the only country in which bitcoin is a legal tender, announced a debt issuance to raise capital in order to "accelerate hyperbitcoinization and bring about a new financial system on top of Bitcoin," according to a blog post by Blockstream. Half of the Proceeds of the bonds will be used to build a new city, nicknamed “Bitcoin City”,in the Gulf of Fonseca, in the immediate vicinity of an active Volcano, whose geothermal energy will be used not only to power the city itself but also to mine bitcoins. The city would have no income, property, capital gain or labour taxes, but would be financed only by a 10% sales tax.
As only half of the capital will be used to build this “bitcoin infrastructure”, the other half of the bond sale proceeds will be used to pay a special “bitcoin dividend” to the bondholders, which would significantly raise the final bond yield. The plan is to use such capital to buy bitcoins on the market, hodl them for 5 years, and then subsequently return part of the appreciation of those to the investor across the last five years of the bonds in the form of an annual coupon payment financed by the sell of a corresponding amount of those bitcoins.
Thirdly, the investor who buys more than 100,000 USD of the bond, would have the possibility to apply for El Salvador citizenship.
The bond is meant to be fully tokenized on a fully digital form developed together with Blockstream. This would allow the decentralized exchange of the bond using the liquid sidechain. The purchase of the bond will be possible in USD, BTC, and USBt, and, given the special digital feature of this, the minimum amount of the purchase would be 100 USD only. This feature is going to help to “democratize access to the bond”.
If you want to discuss the masterplan of El Salvador and the construction of the bitcoin city, I suggest you this thread:
First Bitcoin City
2. The Bond details Few details have emerged so far. The only details are those revealed at such a conference and a few later interviews with Samson Mow, as Nayib Bukele edidn’t attend a press conference that was meant to give out more details.
The term sheet of the bond was published on a presentation slide and reads as follow:
According to the Termsheet
- The bond will be issued in January 2022. I will be US dollar-denominated (USD is legal tender in El Salvador) and with a potential size of 1 billion.
- The bond will mature in 10 years, or January 2032 and will pay an annual coupon of 6.5%.
- After the first 5 years, the bond will start selling each quarter an equal amount of bitcoin. The sale has been spread over multiple quarters to minimize market impact.
- After the initial bitcoin purchase has been covered, the bond will start paying an additional “bitcoin dividend”. The bond will pay an additional coupon determined as he 50% of the potential Bitcoin gain from the sell of the 20% of the bitcoin held by the bond. If the proceeds of such sale produce a profit, this will be shared in equal parts to the investor.
- Remember that the bond will use only 50% of the funds to buy bitcoin. So the “bitcoin dividend” will pay to the investor 50% of the gain on that 50% investment.
In the following example you can see all the cash flow of the bond, according to the Bitcoin price in the second row:
Spreadsheet Blockstream, a Canadian blockchain solutions company, helped El Salvador to structure the bond, working in close connection over the last few months. In addition, the government is going to issue a few special laws in order Bitfinex to actually sell the bond:
El Salvador also aims to create a government securities law and grant a license to Bitfinex Securities to process the bond issuance. This could pave the way for other Liquid security tokens like the Blockstream Mining Note (BMN) or Exordium (EXO) token to be listed on a regulated El Salvadorian securities exchange.
This is probably going to take some time. Providing not only the issuer but also the arrangements of the operation a legal framework within which to operate is an incredibly demanding task. Above all, because this one is the first experiment with so many aspects to consider.
This bond will be the first fully-fledged digital bond in the world, to my knowledge. The bond will be traded on Blockstream AMP, a platform used to issue, trade, and manage digital assets issued on the Liquid Network. The trading activity would be fully digital, 24/7 (weekends and bank holidays included then) over a blockchain (albeit a permissioned one) on a fully digital form: not only the bond part of the trade will be digital, but also the “purchase “ part will be fully digital, through either FIAT, BTC or stablecoins. This would drive costs down for both the issuer and the investors.
The actual trading would be done with the interface of Bitfinex, which will provide onboarding, matching engine, and order processing the orders and trades.
In this
spreadsheet you can find a copy of the termsheet
3. El Salvador as an Issuer in Traditional Finance El Salvador Has a poor financial situation. The Country has a CCC+ rating, essentially their financial stability is rated as “junk”.
This condition precluded the country from accessing traditional financial markets, as many money managers cannot buy Junk Bonds, and those who can require high premiums to do so.
El Salvador has a few bonds outstanding:
As you can see there are only 12 bonds, maturing from 2023 up to 2052. Bear in mind that the US has more than a few hundred of available bonds to construct the same bond curve.
The yield curve is as follows:
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| El Salvador Yield Curve: it's inverted: shorter maturities require higher yield.
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