{"id":22235,"date":"2022-03-23T22:33:52","date_gmt":"2022-03-23T22:33:52","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=22235"},"modified":"2022-04-01T11:52:49","modified_gmt":"2022-04-01T11:52:49","slug":"dont-take-me-down-to-bitcoin-city-el-salvador-volcano-bonds-delayed","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2022\/03\/23\/dont-take-me-down-to-bitcoin-city-el-salvador-volcano-bonds-delayed\/","title":{"rendered":"Don\u2019t take me down to Bitcoin City: El Salvador Volcano Bonds delayed"},"content":{"rendered":"

El Salvador was supposed to issue $1 billion of Bitcoin Volcano Bonds this week \u2014 or maybe $1.5 billion … and yesterday, Finance Minister Alejandro Zelaya announced that the bond issue had been postponed. [Elsalvador.com<\/i><\/a>, in Spanish; <\/i>Reuters<\/i><\/a>]<\/p>\n

The official reason for the delay is the war in Ukraine. Also, the government has discovered that the price of Bitcoin is very volatile!<\/p>\n

 <\/p>\n

\"\"<\/a><\/p>\n

 <\/p>\n

Any moment now<\/h3>\n

Zelaya raised the possibility of the war in Ukraine delaying the bond issue a couple of weeks ago. [Reuters<\/i><\/a>]<\/p>\n

Zelaya was interviewed on local television last night, Tuesday 22 March, confirming the delay was because of Ukraine … and because Bitcoin is volatile. Apparently, nobody in the government had noticed this in the past several months.<\/p>\n

Zelaya wants to issue the bonds before June 2022, and definitely before September. \u201cIn May or June the market conditions are a little different. At latest, in September. After September, if you go out to the international market, it\u2019s difficult.\u201d<\/p>\n

Zelaya repeated his February claim that the Bitcoin Bond was already oversubscribed<\/a> \u2014 \u201cI think we\u2019re going to have a fairly substantial oversubscription that we could channel to the country\u2019s other financing needs.\u201d<\/p>\n

Why delay the bond, then? Did all those buyers disappear? Surely the buyers you had lined up weren\u2019t all<\/i> freshly-sanctioned entities.<\/p>\n

Institutional investors and financial analysts think the Bitcoin Bonds are trash \u2014 even with Zelaya pitching the bonds to analysts personally. [FT<\/i><\/a>, paywalled<\/i>]<\/p>\n

In fact, Fitch Ratings downgraded El Salvador\u2019s sovereign credit rating from B- to CCC. Fitch specifically cited Bitcoin\u2019s status as legal tender having blocked a loan from the IMF.<\/a> [Fitch<\/i><\/a>]<\/p>\n

There\u2019s still no bond prospectus \u2014 just some slides from last November,<\/a> and whatever Zelaya says on TV.<\/p>\n

The laws to enable the bond issue have not yet been put to the Legislative Assembly \u2014 even though President Nayib Bukele said some would be put forward by mid-March: \u201c52 reforms in the oven \u2026 First 10 coming out next week.\u201d [Twitter<\/i><\/a>]<\/p>\n

Samson Mow, who seems to have been the main designer of the Bitcoin Bonds, quit Blockstream on 1 March. Mow is looking to branch out into \u201cnation-state Bitcoin adoption!\u201d There\u2019s no information on whether Mow will still be having anything to do with El Salvador and its Bitcoin Bonds. [Twitter<\/i><\/a>]<\/p>\n

By pure coincidence, a billion new tethers were just printed this morning. [Twitter<\/i><\/a>]<\/p>\n

Sovereign power plant debt<\/h3>\n

The Bitcoin Bonds were marketed as a new form of sovereign debt. This turns out not to be the case \u2014 the bonds are being issued by LaGeo, the national geothermal power company.<\/p>\n

This detail was revealed in a Financial Times article on the bonds: \u201cThe crypto bond will be issued by state thermal energy company La Geo, according to investors and bankers.\u201d [FT<\/i><\/a>, paywalled<\/i>]<\/p>\n

Does LaGeo have the cash flow to pay back billions of dollars in bonds? Of course it doesn\u2019t. Frank Muci runs some numbers. [Substack<\/i><\/a>]<\/p>\n

LaGeo\u2019s 2021 revenue was $136 million, for a profit of $36 million. LaGeo has $773 million in assets, but they\u2019re not at all liquid \u2014 about half the assets are long-term loans to local electricity distributors, and a lot of the rest is the power plants themselves. [statement<\/i><\/a>, in Spanish<\/i>]<\/p>\n

The company owes $200 million in long-term debt, from when it securitised part of its future cash flow. The company had to defer payments on this in 2021 because of the COVID pandemic. [Zumma Ratings<\/i><\/a>, PDF, in Spanish<\/i>]<\/p>\n

LaGeo is too small to be able to afford to pay $65 million annually in interest payments on a Bitcoin Bond without the money coming from somewhere else \u2014 the payments would be half the company\u2019s annual revenue, and twice its current profits.<\/p>\n

So why LaGeo? Muci sees the obvious trick:<\/p>\n

    \n
  1. El Salvador can default on their existing sovereign debt without affecting Bitcoin Bond holders;<\/li>\n
  2. If LaGeo goes broke, then Bitcoin Bond holders have very little recourse.<\/li>\n<\/ol>\n

    Zelaya confirmed the bonds would go out via LaGeo in last night\u2019s TV interview: \u201cIf the debt is issued by LaGeo or by the Salvadoran state, in the end it\u2019s always a state debt, because who owns LaGeo? Because all the shares are owned by CEL, even if it\u2019s autonomous. Because if CEL goes bankrupt, it has to be saved by the state.\u201d<\/p>\n

    That may not hold legally. LaGeo is an ordinary corporation that\u2019s owned by another ordinary corporation, CEL, that\u2019s owned by the country. So if LaGeo defaults, bond holders might at best get to be creditors in a bankruptcy.<\/p>\n

    Fainting goats<\/h3>\n

    The Financial Times article also details the lack of Bitcoin adoption in El Salvador:<\/p>\n

    A senior executive at one bank said fewer than 0.01 per cent of debt payments were being made in bitcoin, while another from a rival said they had seen an \u201cirrelevant\u201d number of transactions.<\/p><\/blockquote>\n

    The government says that Bitcoin\u2019s been popular with tourists \u2014 i.e.<\/i>, Bitcoin tourists.<\/p>\n

    Camarasal, the Salvadoran chamber of commerce, runs a regular survey of small businesses. In the March 2022 survey, 91.7% said Bitcoin had made no difference to their business. 14% have made even a single sale in Bitcoin \u2014 86% made no sales at all in Bitcoin. Only 3.6% said Bitcoin had increased their sales. [Camarasal<\/i><\/a>]<\/p>\n

    How about remittances, apparently the number one use case for Bitcoin? BCR, the central bank, was asked by news agency EFE what value in remittances had been sent via Chivo between September 2021 and January 2022. BCR refused to answer, on the grounds of customer confidentiality. [Yahoo! News<\/i><\/a>, in Spanish<\/i>]<\/p>\n

    Rest of World: \u201cInterviews with dozens of Salvadoran citizens, economists, and technology developers reveal cracks in the project.\u201d Chivo doesn\u2019t work well, and its customer service is unhelpful. Businesses around Bitcoin Beach are reverting to accepting only cash. [Rest of World<\/i><\/a>]<\/p>\n

    But Chivo\u2019s getting fixed,<\/a> right? Bitcoin Magazine has an article on AlphaPoint trying to fix the Chivo Wallet system. Even Bitcoin Magazine had to admit that actual Salvadorans hate this nonsense because it’s broken rubbish. Though the magazine took care to explicitly disclaim the article at the bottom. [Bitcoin Magazine<\/i><\/a>]<\/p>\n

    What happens next?<\/h3>\n

    Bukele has too much ego tied up in the Bitcoin project \u2014 he\u2019s unlikely to just kick it into the long grass. At least, not immediately.<\/p>\n

    It\u2019s possible that AlphaPoint can build a Chivo system that works reliably. Then their problem will be getting back the trust of the public.<\/p>\n

    All politics is local, and Bukele\u2019s government has other issues. The government plan to take over the national pension scheme \u2014 *psst*<\/i> they want to steal it \u2014 has been delayed. Fresh news of corrupt government figures and liaisons with the drug gangs keeps coming out. The government nationalised a private bus company, for reasons that make no coherent sense \u2014 *psst*<\/i> they\u2019re stealing it \u2014 and then it hasn\u2019t been able to run the buses properly.<\/p>\n

    It\u2019s always the material, on-the-ground issues that really do in a government. Bitcoin\u2019s local image is as a bad idea that doesn\u2019t work, and is being used to steal everyone\u2019s money, again.<\/p>\n

    President Bukele is speaking at Bitcoin Miami on 9 April. We\u2019ll see what malignant and diseased rabbits he pulls out of the hat by then.<\/p>\n

     <\/p>\n

    \"Become<\/a>

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    Zelaya blames the war in Ukraine. Did all those buyers disappear? Surely they weren\u2019t all<\/i> freshly-sanctioned entities.<\/p>\n","protected":false},"author":1,"featured_media":21114,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[2405,2769,2408,21,2831,2366,2832,2305,2830,2424,2307,1604],"class_list":["post-22235","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorised","tag-alejandro-zelaya","tag-alphapoint","tag-bcr","tag-bitcoin","tag-camarasal","tag-chivo","tag-efe","tag-el-salvador","tag-fitch","tag-lageo-sa","tag-nayib-bukele","tag-samson-mow"],"jetpack_featured_media_url":"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/11\/bukele-bitcoin-city-official.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/22235","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/comments?post=22235"}],"version-history":[{"count":4,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/22235\/revisions"}],"predecessor-version":[{"id":22321,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/22235\/revisions\/22321"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media\/21114"}],"wp:attachment":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media?parent=22235"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/categories?post=22235"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/tags?post=22235"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}