El Salvador Gives Regulatory Approval to Bitcoin-backed ‘Volcano Bonds’

According to a post from the country's Bitcoin Office, El Salvador's proposed Bitcoin Bond (or Volcano Bond as they like to call it) has received regulatory approval from the Digital Assets Commission. The bond is expected to be issued during the first quarter of 2024 and will be traded on Bitfinex Securities, a platform regulated in Kazakhstan and El Salvador. 

President Nayib Bukele, a prominent advocate of Bitcoin, first announced the Volcano Bond in 2021, although the project has seen multiple delays since then, allegedly due to Bitcoin’s low price. This January, El Salvador’s congress finally approved a digital securities law that created a legal framework for the Bitcoin-backed bonds.

The bond hopes to raise $1 billion, and was so named due to the plan to use geothermal energy from volcanos to power Bitcoin mining. The funds collected are earmarked to finance (among other things) the creation of “Bitcoin City,” where renewable energy will be used for mining. The Volcano Energy project, a 241MW renewable energy generation park, is currently being developed in Santa Ana, El Salvador, aiming to power one of the world's largest Bitcoin mining farms. Volcano Energy recently partnered with Luxor Technologies to launch the country’s first Bitcoin mining pool. 

Bukele retweeted the information about the approval of the bond, adding: “Wen volcano bond?” He also reminded his social media followers that, after the token's recent rally, El Salvador's bitcoin investment was in profit by more than $3.6 million, outlining that he has no intention of selling and that price fluctuations wouldn’t affect the country’s long-term strategy. He claimed that it is important that the naysayers and critics take back their statements:

“The responsible thing to do would be for them to issue retractions, offer apologies, or, at the very least, acknowledge that El Salvador is now yielding a profit, just as they repeatedly reported that we were incurring losses.”

It is worth mentioning that one of these “naysayers” is the IMF, which urged El Salvador to discontinue bitcoin’s status as a legal tender and expressed concern over the risks associated with issuing bitcoin-backed bonds. 

However, issuing the bond might help the government to avoid defaulting on its debt. If successful, it could reduce dependency on the U.S. and serve as an alternative for IMF emergency loans, which are usually only given under strict conditions. Furthermore, the new financial product might attract a broader pool of foreign capital to diversify the country’s holdings.

While traditional financial institutions are firmly against El Salvador going its own crypto way - either for economic reasons or due to an unwillingness to lose control over the country - commercial companies are rather interested. This September, Google Cloud announced a multi-year strategic partnership with the government of El Salvador aiming to bring digital infrastructure and Google Distributed Cloud service to the country. Tether, the world's largest stablecoin issuer, is also ready to bet on El Salvador, being one of the main investors of the above-mentioned Volcano Energy project.

While other countries might be loudly discussing plans to become crypto-friendly jurisdictions, El Salvador has shown a more practical approach. Whether it fails, or becomes a template for the new monetary system, we will continue to Observe.