Dec 18, 2023

Frank Muci, policy fellow at the London School of Economics and Political Science (LSE) joins CoinDesk TV to discuss El Salvador’s long-planned bitcoin (BTC) bonds inching closer to reality after apparently receiving regulatory approval for an early 2024 issuance.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. El Salvador's long planned Bitcoin bonds are inching closer to reality after apparently receiving regulatory approval for an early 2024 issuance joining us to discuss now is Frank Mousy, a policy fellow at the London School of Economics and Political Science. Welcome to the show, Frank. Thank you. All right, we got to get your reaction to this news. I know you've previously written about El Salvador's so-called volcano bonds that was back when it was announced in 2021. What do you make of this update? Well, to be completely honest, it's mostly a nothing burger. Uh President Nayib Bukele commands a very large majority in El Salvador's Congress. So getting regulation approved, passing a law in Congress is no major achievement. Uh when one has so much support domestically politically, it it it isn't a big thing to get regular approved. I think that actually this is a little bit of a smokescreen. So far, all of this discussion about the Bitcoin Bond, the volcano bond has been very unserious. It has mostly been a marketing tactic rather than an actual proposal to raise debt financing. So to be completely honest, this, this doesn't mean much, at least to me, I mean, you mentioned it's a marketing tactic, a marketing tactic for what maybe unpack that for us a little bit more. What's the significance, what's the driver uh behind, you know, making this big show around this product that as you say is maybe just nothing burger. So in uh September 2021 and in, in toward the end of 2021 El Salvador adopted Bitcoin as legal tender again that came in with a lot of fanfare. There was a lot of media coverage but that also sort of amounted to a nothing burger. Uh Bitcoin is not used for payments in El Salvador. It has improved the efficiency of the payment system. It has not made remittances cheaper, it's used for less than 2% of remittances. And so the President Nayib Bukele s crypto announcements have all been in that spirit big announcements, lots of retweets, lots of media coverage, but then you look at the details and they don't make too much sense. So it was the same thing with this Bitcoin Bond in 2021. There was a press conference uh at in a stage, there was a light show, there was fireworks, there was music uh and they said that they were going to raise a billion dollars by token, the first bond ever on a Blockchain. Uh but it didn't really make sense if you glossed. I I if you looked into the details and here are some reasons why so far it has made little sense. Number one, the use of funds El Salvador said it was going to use the money to build a Bitcoin city and also to develop mining infrastructure with revel with renewable energy from a nearby volcano. This all seems very half baked. Uh Building a brand new city does not cost a billion dollars. It costs many, many, many billions of dollars. No plans have ever been developed, nothing has been communicated. So there's been no documentation other than just saying something in a press conference. So, so there's not even a website and the other half of the billion dollars was supposed to be to purchase Bitcoin. Um This again doesn't make much sense at all. El Salvador is a country that was on the verge of debt default then and is sort of still teetering close to the edge now. So investing in cryptocurrencies is not a good thing to do given the severe fiscal constraints that are placed on the country. And I mean, so that's just one thing, the use of funds, but there are many other things that also didn't make sense. So El Salvador's bonds are all issued and governed by New York Law. So its existing sovereign bonds are New York Law, debt contracts. This volcano bond is not going to be a New York law debt contract, it's going to be a domestic law debt contract. So if there's ever a dispute between the bondholders and the government, they need to adjudicate that in Salvadorian courts. And as we know, Salvadorian courts were packed in May of 2021 when Nayib Bukele changed the Supreme Court justices and essentially made them more politically favorable for himself. So the legal structuring of this product doesn't make sense either. And then as a as an instrument of finance, it doesn't have a natural audience or public, uh it is a fixed income instrument coupled with essentially a call option on Bitcoin. So this is a very conservative instrument on the one hand, coupled with a very aggressive uh uh kind of speculative instrument. On the other hand, uh a derivative and so just the, the combination, the package doesn't really have a natural audience and forgive me for rambling. But it's just, there's just so much that doesn't make sense here. Lastly, uh this instrument is supposed to be issued on the Liquid side chain of the Bitcoin Blockchain. Um iiii I hope I don't offend any Bitcoin maximalist on your show. But the Liquid side chain of Bitcoin is simply not used by many users. If you want to reach the largest global audience with an issuance, you would issue on Ethereum or on a programmable Blockchain that has more traction. Liquid just doesn't and finally, uh uh Bit Fin, it does not have a large market share and is banned in the United States. So issuing on Bit Fin isn't something that makes sense. Either it would make more sense to go with finance or with an exchange that has a larger global footprint and that can access more users. So for all of these reasons, it has seemed to me that the volcano bond has been more a marketing tactic. It has been more uh uh you know, a thing to get headlines to get media attention. But as far as a real public policy proposal, it does not meet that criteria. At least not yet. Well, I want to come back to something you said earlier and that was the um uh an uneventful, I guess use of Bitcoin as legal tender in El Salvador. I think you said like 2% of, of folks are using it there. I think the reason why this narrative got so much fanfare, especially in crypto media is because uh Remittance, Bitcoin for remittances is something that is talked about, not only in El Salvador, but in other parts of the world. Why do you think that Salvadorians um are, are not adopting Bitcoin as much as maybe it's being portrayed in the media? So that's a fantastic question. So El Salvador uh remittances in that country are absolutely massive, something like 20 to 25% of GDP. So that's a monumental share of the economy that's coming in through remittances. And that's because thanks to El Salvador Civil War from 1979 to 1991. If I'm not mistaken, there is a very large Salvadoran diaspora in the United States and they make, uh you know, there are lots of incredibly well paying jobs in the States. Even poorly paying jobs, make a lot of money for a Salvadoran standards. So there's just an ocean of remittances that goes from America to El Salvador every year. Uh Those remittances are very expensive though the average fee on a Remittance according to World Bank data is something like 5 to 7%. So you send $100 it costs 5 to 7. If you send $100 every month, you're spending 50 to $70 or more per year just getting your remittances to the intended recipient. So the remittances space in El Salvador was certainly one that was ripe for disruption and it needs to disrupting still however, Bitcoin as a product is just didn't do it. And there are a number of reasons why and they have to do with the particularities of the Salvadorian context. In El Salvador, people like using us dollars cash. That is the preferred payment method. And for many people that is the preferred savings vehicle, El Salvador, of course, is dollarized. So it uses the US dollar as its currency. And so, um receiving Bitcoin through the government's chivo wallet app and turning it into dollars and then cashing out the dollars into cash. It's a very clunky experience. It's not user friendly. And so basically nobody does it because, you know, switching dollars in America into Bitcoin, sending the Bitcoin, changing that Bitcoin back into dollars and cashing out into cash is just too clunky, too complicated. And that's why essentially Bitcoin never really got traction. It was not a good product for the Remittance need in that country. All right. And lastly as we move into 2024 if that user experience is sorted out, if there's some kind of solution that can be implemented. So folks don't have to uh change currencies so many times. Uh Do you think Bitcoin could solve the Remittance issue in El Salvador? No, I don't, but I think stablecoins might actually because, you know, if you look at us DC or you look at tether or you look at any of the new entrants into the market, those tokens are already denominated in US dollars. And so there, there, there isn't this cognitive friction of switching into a volatile currency to send the volatile currency to switch back into the unit of account the US dollar. So stable coins might actually become the global uh uh uh uh you know, competitive in the global remittances space, especially to the extent that cheaper blockchains come around and transaction fees continue to fall with layer two solutions. So I think that if, if, if we're looking for cross border capital flows and remittances. I think stablecoins are the killer product there. Not Bitcoin and, and, and, and, you know, we'll see if they make a difference in El Salvador and I suspect that they might, or at least they might uh uh uh become, they might make that space more competitive. All right, Frank, we are going to have to leave it there. We will, of course, continue following the stablecoin story into 2024 and Bitcoin developments in El Salvador. Thank you for joining and providing that insight. Thank you, my pleasure. That was Frank Mousy, a policy fellow at the London School of Economics and Political Science.

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