El Salvador's president, Nayib Bukele, announced on November 20th that he wants to establish a city in the east of the country. The financing must initially come from income from so-called “volcano bonds”.

The issuance of these government bonds should provide El Salvador, the first country in the world where Bitcoin is legal tender, with one billion dollars. In his speech, Bukele explained that half of the income will be used to buy Bitcoin (BTC). The other half will be used to build the facilities that will mine Bitcoin based on geothermal energy from a new volcanic hotspot.

The yet-to-be-built Bitcoin city, at the foot of the Conchuaga volcano, will also depend on this energy from Mother Earth. The city, which will get its own airport, was presented by Bukele as an ecological city in the form of a coin, with its own tax rules. For example, there will be no income tax, property tax or capital gains tax.

Less dependent on the IMF

The volcano bonds, scheduled to be issued in 2022, will have a ten-year maturity and pay out 6.25% per year. After five years, the fund will pay a dividend provided the price of Bitcoin will have gone up. The bonds are backed by the expected income from Bitcoin mined by the yet-to-be-built facilities. Based on estimates from last summer, this new mine could generate about 600 Bitcoin per month. Enough to recoup the one billion debt in a few years.

The idea of the volcano bonds came from Max Keiser, an early Bitcoin believer. He pitched the bonds to Bukele last June as a way for El Salvador to become less dependent on the International Monetary Fund (IMF). El Salvador, like so many less prosperous countries, relies on loans from this institution. Bitcoin is a financial tool that would allow countries like El Salvador to pay off their debt and not need new loans.

First mover

El Salvador has recruited two major players in the crypto world, Blockstream and Bitfinex, to oversee and implement the process of issuing the bonds. The parties involved envision a future in which El Salvador becomes the Singapore of Latin America: the local financial centre.

If the price of Bitcoin continues to rise, the volcano bond could become one of the most profitable bonds in history, encouraging the issuance of similar bonds by other parties or countries. This in turn could become a catalyst for hefty price increases in Bitcoin. As a first mover, this would benefit El Salvador.