El Salvador passes historic cryptocurrency law, paving the way for Bitcoin-backed bonds

El Salvador has passed landmark legislation providing the legal framework for a Bitcoin-backed bond — known as a “Volcano Bond” — that will be used to repay sovereign debt and finance the construction of its proposed “Bitcoin City.”

The bill passed on January 11 with 62 votes to 16 and will become law after President Bukele ratifies it.

El Salvador’s National Bitcoin Office announced the passage of the bill in a tweet thread on Jan. 11, noting that they will start issuing the bonds soon.

According to cryptocurrency exchange Bitfinex, which is the provider of bond technology, the Volcano Bond – or Volcano Tokens – would allow El Salvador to raise capital to pay down its sovereign debt, finance the construction of Bitcoin City and create a Bitcoin mining infrastructure.

The volcano descriptor for the bonds comes from the location of the country’s Bitcoin City, which is set to become a renewable crypto hub powered by hydrothermal energy from the nearby Conchagua volcano.

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Bitfinex notes that the city would be a special economic zone similar to those seen in China, which would offer tax benefits, crypto-friendly regulations, and otherwise incentivize Bitcoin activities for its residents.

The bonds were aimed at raising $1 billion for the country, half of which went towards building the special economic zone.

According to the initial proposal, the tokenized bonds would be denominated in US dollars, have a ten-year maturity and an annual interest rate of 6.5%.

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Speaking to Cointelegraph Samson Mow, a Bitcoin advocate who has been involved in the development of the Volcano Token, suggested that passing the bill could help transform the country into a “major” financial center.

“The move to pass the new Digital Securities Law and enabling new instruments such as Bitcoin Bonds will help El Salvador pay off existing debts and will be key in transforming the country into a major financial center of the world.”

The bill also includes a legal framework for all non-Bitcoin digital assets, as well as those issued on Bitcoin, and creates a new regulatory agency that will be charged with enforcing securities law and providing protection from bad actors.