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El Salvador passes law for bitcoin-backed ‘volcano bonds’ and eyes expanding to other cryptocurrencies

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Salvadoran President Nayib BukeleSalvadoran President Nayib Bukele.

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  • El Salvador passed legislation that would allow issuance of bitcoin-backed “volcano bonds.”
  • The move follows El Salvador’s previous action that established bitcoin as legal tender. 
  • The bond issuance was originally planned for March 2022, with expectations to raise $1 billion. 

El Salvador’s assembly passed legislation Wednesday that clears the way for bitcoin-backed “volcano bonds” to be issued and for cryptocurrencies other than bitcoin.

After declaring bitcoin legal tender in late 2021, the Central American country had planned to issue the bonds in March of 2022. But that was pushed back because of the crypto sector’s volatility as platforms like Three Arrows and Voyager collapsed in the spring followed by FTX’s bankruptcy in the fall.

The legislation that creates the legal framework for the bonds was ultimately introduced in November, and it cleared the legislature in a 62-16 vote Wednesday. 

The name “volcano bonds” stems from the intended use of the funds raised from the issuance, which would partially be used to support a bitcoin mining industry powered by El Salvador’s active volcanoes. 

El Salvador President Nayib Bukele and his controlling party, Nuevas Ideas, said in 2021 they hoped to raise $1 billion from the issuance of the bonds, which would be denominated in US dollars and pay 6.5% annually for 10 years. 

Of the proceeds, half would go toward building a tax-free “Bitcoin City” on the coast that draws on geothermal energy from a nearby volcano.

The other half would buy additional bitcoin, with any appreciation shared with bondholders. El Salvador has bought 2,381 bitcoin through June, according to a Bloomberg tally based Bukele’s tweets. And in November, he vowed to buy one bitcoin every day.  

The bill also sets up a legal framework for all digital assets, clearing the way for more cryptocurrencies beyond bitcoin. A new regulatory agency was also created.

After diving about 70% from its all-time high, bitcoin has seen a strong rise so far in 2023, with a gain of roughly 13%. 

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