El Salvador’s Bitcoin Law 2.0: the Digital Assets Issuance Law

Here’s the latest from El Salvador’s bitcoin adventure:

• Tether’s enabling law for Bitcoin Volcano Bonds — sorry, Volcano Tokens — has been written and passed at long last.
• El Salvador scraped together the $604 million to pay its January 2023 international bond — by starving public services, as sovereign debt markets expect.
• President Bukele’s temporary suspension of the Constitution is in its tenth month.
• Everything about crypto in El Salvador remains extremely stupid.

 

 

Digital Assets Issuance Law — a back door for sovereign debt

The Ley de Emisión de Activos Digitales (Digital Assets Issuance Law) passed the Legislative Assembly of El Salvador on 11 January 2023 by 62 to 16. Bitcoin Volcano Bonds are one step closer! [Twitter; WSJ, paywalled]

The law made it through committee on 14 November 2022, but was only put up to a vote this month. Here’s the official draft as submitted by the Comision de Economia — it’s a PDF of a scan, sorry. [Bitcoin Magazine; Asamblea Legislativa, PDF, in Spanish]

The Digital Assets Issuance Law was written by the guys at iFinex — the owners of the Bitfinex crypto exchange and the Tether stablecoin.

The law is long, rambling and ill-organised — the species of law which is completely half-assed, but they half-assed it in great detail over many months. It does things like define what a URL is, and translates terms from English where there’s already a jargon word in Spanish.

In the Diario Oficial (Official Gazette) of 17 November 2022, an executive decree created the Oficina Nacional del Bitcoin (National Bitcoin Office). [elsalvador.com, in Spanish]

There will be a Comisión Nacional de Activos Digitales (National Digital Assets Commission), to write regulations, enable or suspend crypto offerings and regulate digital asset service providers. This is in effect no earlier than 90 days after the law passing, so 11 April.

The point of the new law seems to be the Agencia Administradora de Fondos Bitcoin (AAB) (Bitcoin Fund Administrator Agency), part of the Ministry of the Economy — which can authorise the Banco Central de Reserva to issue dollar stablecoins backed by bitcoins.

The state will be able to borrow money by issuing bonds backed by digital assets — such as the Bitcoin Volcano Bonds. The money will be managed by the AAB, whose administrator is appointed by the President for five years.

The really fun bit is that the AAB can issue new government debt all by itself, without the approval of the Assembly — as long as it’s in Ponzi coins and not dollars. This is against the Constitution, but Nayib Bukele is in power.

Here’s a more detailed local analysis from Domingo Flores. [Patreon]

 

 

Don’t take me down to Bitcoin City

The Volcano Bonds were all set to be issued in February 2022. The Finance Minister, Alejandro Zelaya, assured Salvadorans that they had a billion dollars of buyers lined up. In fact, they had a billion and a half dollars lined up!

I know of no smoking-gun evidence of a connection — but Russia invaded Ukraine on 24 February, a pile of Russian billionaires were sanctioned, and coincidentally the prospective buyers of Volcano Bonds vanished. Zelaya even said straight up that the invasion of Ukraine was the main reason for the delay.

Mind you, Salvadoran bitcoin experts Mario Gómez and Óscar Salguero think the Volcano Bonds were just undersubscribed, and never had buyers — particularly given the bonds were a provably worse deal than just buying bitcoins and some of El Salvador’s existing distressed sovereign debt separately. [Bennett Tomlin]

Paolo Ardoino of iFinex expects the Volcano Bonds to be issued “this year.” He’s now calling them Volcano Tokens. [Bloomberg]

Just which non-sanctioned entities are going to buy Volcano Bonds or Tokens? “There is a ton of wealth that is outside the banking system and wants to remain outside it,” said “one industry executive who has experience of working with Bitfinex” to the Financial Times in March 2022. I can’t see any translation for that first sentence other than “crooks.” [FT, 2022, paywalled]

There’s also the small problem of the price of bitcoin going down the toilet in the middle of the year, and the influx of actual dollars into crypto drying up.

El Salvador could certainly do with a billion actual US dollars. But bitcoins are legal tender in El Salvador, so you could just dump your slightly-grubby bitcoins in.

As I’ve been saying since the Bitcoin Law passed in 2021, I think the whole point of the bitcoin boondoggle was always that El Salvador’s national currency was the US dollar, and it couldn’t print its own dollars — so Bukele needed somehow to issue unbacked dollars to fund all his great plans.

Bukele created a new form of dollar that’s not actually a dollar, and isn’t verifiably backed by a large pile of dollars. I think this is what the Chivo Wallet was for.

The next hard part is to get Salvadorans to accept that these non-dollars are dollars. So far they don’t trust Chivo, because it’s just never worked very well.

Bitcoin City, which the Volcano Bonds were supposed to fund, will never be built. But here are some very silly Bitcoin City mockups from May 2022. [elsalvador.com, in Spanish]

El Salvador pays its 2023 sovereign debt bill on time

El Salvador managed to scrape together enough actual dollars to pay its $604 million of sovereign debt that was due on 24 January!

I and many others thought El Salvador would have trouble paying on time. They scraped through by just cutting dead their funding to local municipalities — the sort of thing that sovereign debt holders expect of a poor country — by buying back some of the distressed debt themselves for cheap, and by dipping into the country’s foreign exchange reserves. [El Mundo, in Spanish; elsalvador.com, in Spanish; Twitter]

The $800 million Eurobond — nothing to do with Europe or euros, the “euro” prefix just means it wasn’t denominated in its country’s home currency — was cut down to $604.1 million after El Salvador bought out some of the debt.

El Salvador’s next major bond comes due in 2025. The International Monetary Fund is visiting the country from 30 January. [elsalvador.com, in Spanish; Reuters; Reuters]

Trolling for no fun and no profit

Reuters wrote up Bukele’s Troll Center and how it works: they create pro-Bukele sockpuppet accounts and harass anyone they think is opposed to them — on the government payroll, often working from government buildings. [Reuters]

I had these bozos show up here on this blog, but I feel no obligation to let through more than the odd sample — though they stopped claiming to be from El Salvador when I called them out on doing so from a US IP address.

Mario Gómez spoke to El Diario de Hoy about his own investigations of the Troll Center since 2019. [elsalvador.com, in Spanish]

El Faro journalists who were hacked with the Pegasus spyware are suing the software’s distributor, NSO Group, in the US. El Faro has just now revealed that the Salvadoran police bought three other spyware programs in 2020. [El Faro, in English; New Yorker; El Faro, in English]

For the tenth month in a row, the Assembly has approved extending the State of Exception to the Constitution, where you can be jailed without a charge or a lawyer, and the police have been arresting poor people to meet a quota. Last week, military units started setting up in middle-class neighbourhoods, not just poor ones — supposedly to catch gang leaders living there? But really in case of trouble next election. Let none mistake this for a dictatorship, even as Bukele is following the same script as was used in Venezuela and Nicaragua. [elsalvador.com, in Spanish]

Athena spills the beans on Chivo

I didn’t cover this when it came out — but in February 2022, Athena Bitcoin Global filed an S-1 form with the SEC to become a publicly traded company. Nelson Rauda from El Faro bothered looking it up, and wrote about it in April. [El Faro, in Spanish]

The S-1 contained a lot of the detail about the Chivo Wallet that should already have been available from the Salvadoran government as public knowledge, given they spent hundreds of millions of dollars in public funds — but which Bukele’s government declared was all confidential or secret.

“Chivo is in a position where one would expect a completely transparent public institution, but it has been created as a private company where no one is allowed to look inside in any way,” I’m quoted as saying.

Here’s the Athena Bitcoin Global S-1. “When Salvadorans convert their Bitcoin to dollars, they do not receive dollars in the digital wallet. Instead they become holders of stable-dollar coins, which are only a claim to real dollars.” This seems like a very weird way of describing holding dollars in an account with a liability to the customer. [SEC]

Athena did mention in passing the bit where they lost the Chivo contract — ”The government of El Salvador discontinued use of the platform on or about December 15, 2021, but has not terminated its contract with the Company while the Company assists the government’s secondary provider.” Okay.

The SEC’s EDGAR filings database contains some wild stuff — you just have to go looking. That S-1 had been sitting there for two months, but Rauda was the one who went through EDGAR and found it.

SEC media stardom

Apparently, my piece from April 2022 mentioning a large theft via Chivo caused problems for Athena. I was writing on rumours from trustworthy sources (e.g., Mario Gómez), who put the total stolen at several million dollars. The sources were pretty good, but didn’t tell the tale in its full glory.

In November 2022, Factum wrote up precisely what happened in April. This story is amazing and you should read it, even through a translator. And not just because I spoke to them for the piece. [Factum, in Spanish]

A bug in Chivo meant users could transfer funds to their bank account without having the dollars in their account on Chivo. The Chivo wallet gave an error — but it transferred the dollars anyway. The glitch happened on 8 April, and lasted for about 12 hours.

“On April 8, 2022, at 1:30 a.m., Michelle made a transaction from her Chivo Wallet to her bank account. She moved $100. Four minutes later she transferred $200 to the same account. At the same time the system registered another transfer for $2,000. A minute later she made two more transfers: one for $100 and one for $1,600. Michelle continued to move money for several hours from her Chivo Wallet to two bank accounts in her name. She did this 466 times. Prior to those transactions, she had a balance of $100 in her account, but ended that day with $72,850.”

The original rumour was that millions of dollars had been stolen. The official total was $840,000, but Factum confirmed that over a million dollars was known to have been stolen, dozens of people were involved…