El Salvador's Bitcoin journey

Back in 2021, citizens of El Salvador heard the news that Bitcoin would become legal tender in their country. President Bukele announced this in a pre-recorded video reproduced at the 2021 Miami Bitcoin Conference. It presented a moment of confusion for citizens because there were no details published on how such an initiative would be implemented in El Salvador’s economy. 
It seemed like a risky move at the time – people still remembered the 2001 economic hardship when El Salvador became a country with a double circulation of currency – the native currency known as colón and the U.S. dollar. The reality was that people stopped using their native currency and all operations were carried out in U.S. dollars. 
When the Bitcoin new policy was suddenly announced, the country’s citizens feared that history was going to repeat itself. In an attempt to popularise the use of cryptocurrency, the government provided financial incentives to citizens for downloading a special application.
Half of the country’s households downloaded the app when the Bitcoin law went into effect, but it turned out that only a small group of consumers was active. 
To understand what exactly happened in 2021, we suggest reading this article: ‘Is El Salvador the first domino in global Bitcoin adoption?’. 
The so-called Volcano Bonds were announced in 2021 by President Nayib Bukele shortly after he passed the law recognising Bitcoin as a legal tender in El Salvador. Bukele's target objective was to raise $1 billion through Bitcoin-backed bonds, seeding a Bitcoin mining industry reliant on renewable energy, including the one generated by the country's active volcanoes.

 A harsh start

A 2023 research study involving 1800 households in El Salvador brought to the table interesting results. The authors examined whether Bitcoin and Chivo Wallet were adopted after the so-called ‘Big Push’ by the government and which factors deterred the widespread adoption of cryptocurrencies.  
The study found that Bitcoin was not widely used as a regular medium of exchange and that the use of the Chivo Wallet was low. While most downloads took place as the app was launched, the adoption of the wallet was decreasing over time.  
The Ministry of Education of El Salvador partnered with the non-profit organisation Mi Primer Bitcoin to add Bitcoin education to public school curriculum in 2024.
According to this study, transparency and privacy concerns presented key barriers to wide adoption, along with a large adoption cost. Additionally, the study found that those who were already wealthy and banked used crypto actively, which stands in contrast to other hypotheses claiming that the use of cryptocurrencies helps the poor and unbanked. 
Decentralised finance (DeFi) is a valuable tool for obtaining financial freedom. To learn more, why not read this article: 'Can I achieve financial freedom with DeFi?'.

The big crypto move - the Volcano bond

At the beginning of 2023, El Salvador passed another piece of legislation providing the legal framework for the Bitcoin-backed bond. The issuance was at first planned for March 2022, but it was postponed a few times. The digital assets bill was introduced in the Legislative Assembly at the end of 2022. 
As mentioned above, President Nayib Bukele announced the issuance of the Bitcoin Bond, also known as Volcano Bonds in 2021 to raise funds. The main goal was to seed a Bitcoin mining industry that is dependable on renewable energy. Specifically, the name comes from the proposed use of the Conchagua volcano to power Bitcoin mining rigs.
The introduction of Volcano bonds signals the creation of Bitcoin-based capital markets in El Salvador, with the bonds set out to last 10 years while paying 6.5% in annual return to holders.  
Following a regulatory approval, the country's National Bitcoin Office announced the news online, stating that it expects the bond to be issued during the first quarter of 2024, and highlighted its importance for the launch of new capital markets in the country.
The Volcano Bond aims to address the country’s sovereign debt obligations and fund the construction of another project – the Bitcoin City. The bonds will be issued on the Bitfinex Securities Platform, a regulated division of the crypto exchange Bitfinex and a registered trading site for blockchain-based equities and bonds registered in El Salvador.
Many crypto companies, such as Tether, are investing in the Volcano Energy project that aims to generate electricity from renewable sources to power future Bitcoin mining operations across the country. Through the use of the country's volcanic resources for power production, the Volcano Bonds project illustrates El Salvador's commitment to use natural resources to advance economic growth and technological progress.
Volcano Bonds are a financial instrument, but they distinguish themselves by their use of financing geothermal Bitcoin mining operations. This feature ensures that investments align with the significant environmental, social and governance (ESG) principles which became a crucial part of many legislative initiatives around the globe. 

The regulatory approval of Bitcoin bonds

The regulatory journey took off in November 2022 with the adoption of the Digital Asset Issuance law. The landmark legislation provided the extension of the country’s crypto market beyond Bitcoin to encompass securities and altcoins; it marked a broad stride forward. 
This regulatory initiative established the country’s Bitcoin Fund Management Agency with the task of overseeing and administering public offerings of digital assets issued by the country and its institutions. 
The essential part of El Salvador’s crypto progress presents the 33-page digital securities bill. The law in question lays the basis for the Bitcoin Volcano Bonds which have received regulatory approval by the country's Digital Assets Commission at the end of 2023.

The main purpose of this law is to set out a legal framework that provides legal certainty to transfer operations to any sort of digital assets utilised in public issuance offers.
The novel legal framework doesn’t include non-fungible tokens (NFTs) though; they are already regulated by the country’s other legislation. 

The link between Volcano bonds and Bitcoin city

El Salvador’s Bitcoin City refers to an ambitious Bitcoin mining facility run specifically on renewable energy, involving the energy produced by the country’s active volcanoes. As mentioned above, the Volcano bond is used to address sovereign debt and finance the construction of the country’s proposed Bitcoin City.

The first phase of the construction process is about building a 241-megawatt (MW) mining facility that will generate approximately 169 MW of photovoltaic solar energy and 71 MW of wind power. Additionally, the mining farm is being constructed in the Metapan region, which is close to the Conchagua volcano that powers Bitcoin mining operations. 
The Bitcoin City project aims to enhance businesses and start-ups with tax benefits, crypto-friendly regulations, and other incentives to foster a sustainable Bitcoin mining zone.

Potential impacts of Volcano bonds on El Salvador's economic growth

The outcome of the Volcano bonds shall play a vital role in El Salvador’s financial landscape and economic development. First of all, it prompts a broader debate on the impact of such regulatory initiatives on Bitcoin mainstream adoption in Latin America. 
While there have been reports in the last two years that El Salvador’s Bitcoin gamble wasn’t paying off, the country is witnessing an increase in foreign direct investment led by the use of Bitcoin and sustainable energy projects.  
In April 2023, the National Assembly passed the Law for the Promotion of Innovation and Manufacture of Technology which grants a 15-year-long exemption from income and capital gains taxes, municipal taxes on net assets, and taxes on imports needed for technology-related investments. Qualifying business activities include for example, distributed ledger technology, cloud development services, software programming, big data analytics, and artificial intelligence. 
Additionally, the country has continued to embrace Bitcoin with the launch of a 'freedom visa' program providing foreigners a passport and residency if they invest $1 million in Bitcoin or Tether.
Strategic partnerships with Tether and Luxor Technology represent an important milestone for the country. The integration of its partners’ expertise in Bitcoin mining operations could position El Salvador as a hub for innovation within the crypto space. 
The country’s economic growth relies on the success of the Volcano Bonds project. For example, the commitment to contribute 23% of Volcano Energy’s net income from mining operations to the country’s government presents a dedication to economic development as well as the reinvestment of mining profits in energy transmission and infrastructure.

The domino effect of Bitcoin adoption

When the Congress in El Salvador approved President Bukele’s proposal to embrace Bitcoin in 2021 and make it the first country in the world to recognise Bitcoin formally as a legal tender, everyone expected a quick domino effect.  
One of the poorest regions in the world was the first to embrace cryptocurrencies: following El Salvador’s announcement, many politicians from Latin America and other parts of the world expressed their support and intentions to adopt crypto-friendly policies.  
Most of these countries have weak currencies dependent on remittances or are on the hunt to attract capital to enhance their local economies. The economic link between Latin American countries may make El Salvador a good example for neighbouring countries. 
As soon as another country embraces Bitcoin and starts transacting with El Salvador, a true domino effect would be more likely to happen. However, while El Salvador is trying the economic game theory for Bitcoin adoption, Latin America and other parts of the world are watching closely.