El Salvador Bitcoin Bond: super promotion for security tokens? – General ledger information

El Salvador’s announcement of its intention to issue a 10-year billion dollar Bitcoin bond has sparked skepticism in the mainstream media. Part of that is because it carries a 6.5% coupon, while El Salvador’s other ten-year bonds are currently yielding 13%. But we think a few key points are missed, such as the overall goal of compressing Bitcoin’s supply.

We will briefly explore the link, but the focus is on three other aspects. This is a brilliant marketing campaign for a new token bond asset class. It also highlights how some first world regulated entities are starting to interact with some controversial entities. And one of the motives for issuing bonds is to reduce the available supply of Bitcoin. Some might see this as an attempt to manipulate the market.

Half of the bond proceeds are intended for building Bitcoin City and Bitcoin mining infrastructure. The other half will be invested in Bitcoin, which will be blocked for five years. Part of the gain on Bitcoin will go to investors as Bitcoin is sold on a quarterly basis starting at five years. These gains have been the argument used to explain why a 6.5% coupon is not comparable to existing bonds.

Brilliant promotion

Bitcoin software and mining company Blockstream are credited with coming up with the idea. The bonds will be issued using its Liquid Network, a Bitcoin side chain that supports tokenized securities. Unlike the main Bitcoin chain, Liquid enables confidential transactions, identity verification, and settlement in two minutes. Blockstream and its executives have used Liquid to issue securities, including with the approval of German regulator BAFIN.

If you take a step back, pretty much all of the major financial media covered this Bitcoin Bond. This is much more visible than when the Commonwealth Bank issued a blockchain bond for the World Bank in 2018. Last week, the Swiss exchange SIX launched its SIX Digital Exchange (SDX) which included a tokenized bond for SIX. Most mainstream outlets didn’t mention it. However, the European Investment Bank’s Ethereum bond fared a bit better, but not on this scale.

The Bitcoin Bond is a potential win-win for all parties involved. The liquid network gets massive exposure. Bitfinex, the controversial crypto company associated with Tether stablecoin and banned in New York City, gets another regulatory license. It is already a regulated Kazakh institution. And Bitfinex writes the rules for cryptocurrencies and digital securities. It’s also good for Blockstream as Bifinex’s parent company, iFinex, is one of its main investors.

El Salvador, with a GDP of just $ 24.6 billion, is receiving a massive influx of money as it grapples with the IMF. And assuming most investor funds come from Bitcoin maximalists, investors can support an attempt to contract Bitcoin’s supply. So even though, God forbid, they end up not getting reimbursed, they may be hoping for a return on future price cuts.

Bitcoin compression

Blockstream’s chief strategy officer Samson Mow spoke on stage at the launch event. He said it would be El Salvador’s first Bitcoin bond issue, with plans for more.

Speaking of the $ 500 million invested in Bitcoin, he said, “There is a five-year lock on the bond, so it’s half a billion dollars taken off the market for five years. If you make nine more bonds, that makes ten bonds. That’s five billion Bitcoin taken off the market for ten years. And if you get ten more countries to do those bonds, that’s half the market cap of Bitcoin there. Mow was on stage, so maybe a little nervous as ten countries would represent $ 50 billion or 5% of Bitcoin’s market cap. Nevertheless, the intention is clear. “This is the start of a FOMO nation state,” he said.

He went on to explain that he thought Bitcoin would be worth a million in five years. We calculated that if half of the price increase was shared with investors as a dividend, it would leave the country with $ 4 billion in earnings that would easily pay investors back. But this is all based on a bet that Bitcoin will be worth a million in five years and that the proceeds will not be used for any other purpose.

If there is a genuine belief in Bitcoin as a currency, then there is an argument that the bond should be denominated in Bitcoin, not dollars. Of course, if there is an expectation of price appreciation exaggerated by an expected price suppression, this might not work for El Salvador as far as reimbursement is concerned. Unless Bitcoin really becomes mainstream in the country, not just legal tender. What if he wasn’t so dependent on inbound dollar remittances.

Let us return to this liquid network.

Regulated entities rub shoulders with prohibited entities

It would be a mistake to view Blockstream and its liquid network as purely niche. The two companies work alongside traditional regulated entities. For example, Daiwa has issued securities on the Liquid Network. The Swiss exchange SIX is a member of the Federation of Liquid, as is Komainu, the crypto custodian joint venture owned by Nomura. Blockstream provides Bitcoin mining services to Fidelity and Galaxy Digital. And Goldman Sachs clients invest in Galaxy Digital funds. Baillie Gifford, one of Britain’s top ten asset managers, led Blockstream’s $ 210 million Series B funding alongside iFinex precisely because of his interest in tokenized securities.

It is the association with Bitfinex that raises the eyebrows. iFinex, the parent company of crypto exchange Bitfinex has an agreement with El Salvador. It will help the country “to create and implement well-balanced cryptocurrency laws, regulations, rules and guidelines, especially in relation to digital financial instruments to promote the growth of the crypto industry. -currencies in El Salvador, ”he said in a statement. .

Take a step back. This is the same organization that was banned by the New York attorney general because of the lending of Tether stablecoin backing assets used to cover Bifinex’s losses, among other issues. There will be a Salvadoran law that has not yet been created and, therefore, it is not possible that Bitfinex has been reviewed as a suitable and compliant institution. But it has already been decided that Bitfinex will get a license. After all, it will help write the rules.

“You know that with Bitfinex they have a lot of whales, so I don’t see a problem with fulfilling a billion dollar obligation,” Mow said onstage at the launch event. In a Bloomberg interview, Mow wore a T-shirt featuring the Tether stablecoin logo. Why not just invest the Tether stablecoin reserves directly into the Bitcoin Bond? Would you be willing to bet against this, if not for this link, then a future?

So, on the one hand, the Bitcoin Bond appears to be a brilliant marketing initiative for the Liquid Network and digital bonds in general.

But its association with a strongly authoritarian government, Bitfinex, not known for its past transparency, combined with the motivation for a Bitcoin squeeze, raises questions. Blockchain has the potential to offer a brighter future. Is the picture of the future painted by this particular event any better than the one we have now?

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