Scholars Evaluate El Salvador's Bitcoin Bonds: IMF Approaching the End, El Salvador Has Little to Lose

El Salvador will issue $1 billion in Bitcoin bonds next year, despite multiple warnings from the International Monetary Fund (IMF) since the country passed the Bitcoin law. However, columnist David Z. Morris from CoinDesk believes this move signifies the end of the IMF era, while macroeconomist Lyn Alden states that heavily indebted El Salvador has little to lose.

A Billion-Dollar Bitcoin Bond

Earlier reports indicated that El Salvador announced it would issue a $1 billion Bitcoin bond on Blockstream's Bitcoin sidechain Liquid Network by the end of November. Half of the bond proceeds will be used to buy Bitcoin, while the other half will be spent on energy infrastructure and Bitcoin mining facilities.

The Bitcoin bond, with a 10-year term and a coupon rate of 6.5%, is set to be issued in 2022. According to Blockstream, when the initial $500 million is converted into cryptocurrency, half of the additional profits will be distributed as Bitcoin dividends and shared with investors.

In addition, iFinex, the parent company of Bitfinex, will be granted the license to handle the bond issuance, allowing the Salvadoran government to issue and launch their Bitcoin bonds on Bitfinex.

International Monetary Fund (IMF)

The IMF, established in 1945 and officially operational in 1947, not only monitors the trade situation and debt of various countries but also provides assistance to countries facing severe economic challenges. It evaluates and provides financial aid to countries with significant fiscal deficits, making it one of the world's two largest financial institutions alongside the World Bank (WB).

However, in a column for CoinDesk, writer David Z. Morris pointed out that despite the IMF's nominal aim to support democracy and free markets, the consequences of IMF assistance often turn out to be disastrous.

For instance, the $57 billion loan agreement with Argentina in 2018 and the $6 billion relief program with Pakistan led by the IMF both resulted in increased taxes for repayment, causing rapid inflation and economic crises.

El Salvador has been in negotiations with the IMF for a $1.3 billion loan, and the IMF has issued warnings to El Salvador multiple times regarding its adoption of Bitcoin. Despite El Salvador's Central Bank Governor Douglas Rodriguez claiming that adopting Bitcoin would not affect IMF loan approval, David Z. Morris believes that whether approved or not, it signifies the IMF's diminishing utility.

The IMF's Dilemma

David Z. Morris highlights the IMF's unease with Bitcoin for this reason. El Salvador, as a developing country in economic distress, has found an international financing method bypassing the IMF and global banks.

The bond can be subscribed in increments of $100 through Bitcoin or USDT and is issued by the largely unregulated platform Bitfinex. This means that El Salvador can not only easily sell this batch of bonds next year but may also issue the next round, potentially replacing the IMF's $1.3 billion loan.

Regarding Blockstream's prediction of a 165% annual return rate on the bond within 10 years, based on Bitcoin reaching $1 million, David Z. Morris believes predicting any asset's price in ten years is not entirely realistic; it may reach that level, but it remains an unknown.

El Salvador Has Nothing to Lose

Macroeconomist Lyn Alden also shared her views on El Salvador's Bitcoin bond in the What Bitcoin Did podcast, referring to it as a national version of Michael Saylor.

She likened this to many real estate financings where property prices rise over time, allowing owners to refinance. However, Bitcoin is a more volatile version with only a 13-year history. If one bets correctly, the potential returns can be significant.

Regarding the $500 million of the billion-dollar bond allocated to energy mining, Lyn Alden is cautious. She believes El Salvador's climate is not conducive to Bitcoin mining and requires experts in mining for assistance.

With a 6.5% bond rate, requiring $65 million annually to repay investors, Lyn Alden is uncertain if El Salvador's operations can generate this cash flow each year. However, given El Salvador's existing economic challenges, it seems they have little to lose in some aspects.

She and host Peter McCormack agree that the success of the bond will depend on Bitcoin's price trend over the next five years.