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After many big international investors shunned the project, El Salvador's $1 billion bitcoin-backed bond could tap deep wells of capital among cryptocurrency enthusiasts.
According to people familiar with the effort, demand from bitcoin "whales" — investors who own large amounts of the world's most popular cryptocurrency — is likely to be critical to the bond's fundraising.
Bitfinex's chief technology officer, Paolo Ardoino, said the crypto exchange has received "half a billion dollars" in interest from its users. Bitfinex is set to provide the deal's tech platform. Before potential buyers firmed up their interest, he added, important details of the bond would need to be ironed out, which would necessitate the passage of new securities laws in El Salvador.
"Some of our users have proactively reached out to us to express their interest. They are definitely interested in participating in this but they are waiting for the details to be published ," Ardoino stated. He also said that the exchange would not be involved in the bond's marketing.
El Salvador's debt product is being issued just over a year after the country became the first to adopt bitcoin as legal tender, with President Nayib Bukele's enthusiastic support.
The so-called volcano bonds, which will see half of their proceeds invested in bitcoin and the rest used to build a "bitcoin city" at the foot of the Conchagua volcano, could provide a financial lifeline to Bukele's government as concerns about its financial sustainability grow.
The crypto community's enthusiasm for the offering, which is the first of its kind from a sovereign borrower, contrasts sharply with the skepticism expressed by most large traditional investors.
Buyers of the 10-year bitcoin bond, which offers a 6.5 percent annual interest rate and a share of any upside from proceeds invested in bitcoin, would be providing El Salvador with financing on favorable terms, as its existing 10-year dollar bonds currently yield over 20%.
El Salvador will sell bitcoin after a five-year lock-up period to recoup its initial investment and then share half of any profit with investors.
Most investors were skeptical of Bukele's experiments with cryptocurrency, warning that the bitcoin bond would push El Salvador further away from traditional debt markets and harm the country's relationship with the IMF.
"Bitcoin's impact in El Salvador thus far, in our opinion, has been to increase macroeconomic potential risks rather than to introduce any material change in how economic transactions are conducted," Barclays analysts wrote last week.
The legal framework for the tokens, as well as which entity will issue them, are still unknown to potential buyers of El Salvador's bond.
Despite the relatively low returns and uncertainties surrounding the bonds, people close to the project believe they will be seen as an attractive investment by large entities in the crypto community.
El Salvador has hinted that the bond issues could be opened up to retail investors as well, but the scope of the marketing is one of many details still up in the air.
"There is a ton of wealth that is outside the banking system and wants to remain outside it,," said one industry executive who has worked with Bitfinex. Accessing government debt in a crypto-friendly manner appeals to these investors, "even if you make less in terms of returns."
According to those involved in the project, the bitcoin bond's status as a "world first" attracted potential investors. "There is a desire to be part of something so groundbreaking," one said.
However, the bitcoin bond fundraising effort faces significant challenges after the government announced a postponement, casting doubt on the issuance's timeline and future — with key details still unknown. The sale was supposed to happen in March, but it was postponed.
Bukele attributed the delay to the need to move forward with pension reforms, while his finance minister, Alejandro Zelaya, said last week that market conditions were to blame and that the issuance was still ready to go. The government intends to issue the bond through La Geo, a state-owned thermal energy company, according to Zelaya.
According to the Barclays analysts, "there seems to be little chance of a transaction any time soon."
Fuller details of the bond's terms will have to wait until the government passes its securities legislation, according to Ardoino.
"The timeline for that could be from one week to a couple of months. That’s the main blocker for us to move forward," he explained.
While many traditional investors believe Bukele's bitcoin push will push El Salvador further away from the IMF and closer to insolvency, others believe crypto traders will save the country.
"The bitcoin community does some bizarre things," said Bradley Wickens, the founder of Broad Reach, an emerging markets hedge fund that holds some traditional El Salvador bonds. "If they end up providing an avenue of financing without the IMF, that could totally change El Salvador’s fortunes for the next few years."
By fLEXI tEAM