Samson Mow CSO of Blockstream rejoins me on the show to breakdown Bitcoin Bonds. We chat:

• Structure of Bitcoin bonds
• Why not HODL bitcoin? 
• Who is the target market for these?
• Operationally how it would work
• Liquid AMP
• Benefits, opportunities and risks 
• Reaction by bitcoiners to the announcement
• What Bitcoin City could become

Links:

• Twitter: @Excellion
• Site: Blockstream.com

Sponsors: 

• Swan Bitcoin
• Hodl Hodl Lend
• Compass Mining
• Braiins.com
• Unchained Capital (code LIVERA)
• CoinKite.com (code LIVERA)

Stephan Livera links:

• Show notes and website
• Follow me on Twitter @stephanlivera
• Subscribe to the podcast
• Patreon @stephanlivera 

Podcast Transcript:

Stephan Livera:

Samson, welcome back to the show, man.

Samson Mow:

Thanks Stephan. How are you doing?

Stephan Livera:

Doing well. I’m back down in Sri Lanka now for a little while and then probably next year will be out traveling again. But it was great to catch up with you back in El Salvador while the big announcement and everything was going down for laBITconf, for Adopting Bitcoin, and of course, Feel the Bit, which was basically President Bukele’s party announcing the Bitcoin bond and Bitcoin City. So I’d love to hear a little bit from you, how all of that got started.

Samson Mow:

Sure. It was definitely exciting and very fun. I guess the start was the Bitcoin as legal tender law—the Bitcoin law that Jack Mallers kicked off. Before the law was announced, we had actually been introduced and were talking with the government there. And they wanted to get some indication of support from companies in this space. So what we actually did was write a letter of support saying, If you’re doing this, we will fully support you from the standpoint of our technology. Anything we can do—expertise and software development resources, too. So we were advising them on a number of topics like Bitcoin cold storage, security, and whatnot. And then during that discussion period, we were pitching them the idea of Bitcoin bonds—bonds that are issued on the Liquid network as a security token, and raising capital to build out their infrastructure in El Salvador. And of course that was very interesting for them, and I think I spoke to Bloomberg at that time and they made a big deal of it, but it was still very early stages at that point. They got busy with the Bitcoin law rollout, they got busy with the Chivo launch and subsequent hiccups. And then somewhere like a month and a half ago, we resumed these discussions on the bonds and we managed to get pretty far with it. We had a few proposals, and we ended up choosing one proposal to flesh out, which is the proposal that everyone sees in the current state. And then when I was down there in El Salvador, we decided to announce it at the Feel the Bit event. So that’s it in a nutshell.

Stephan Livera:

Yeah. Right. And so I think there’s so many different pieces that go into this, right? Because you can look at what is their current rate of funding on the fiat bond side—because that’s actually quite a bit higher. I think last I saw it was like 13% is how much they would be paying just at a fiat bond rate. And so this is actually a different rate. This is 6.5%. So that’s probably one thing just off the drawer that is different about this one. And I suppose some of the criticism I’ve seen is like this idea of, Oh, see, it’s not really a Bitcoin bond. You’re actually just doing fiat still. It’s still US dollar. But I guess the counter, as I understand it, would be essentially that there’s a Bitcoin lockup and that there’s a Bitcoin dividend component? Or how do you see that?

Samson Mow:

Well actually before we get into that, I wanted to ask you: What was your take on the event because you were there?

Stephan Livera:

Yeah, sure.

Samson Mow:

And you talked to a lot of Bitcoiners at the conference, like probably immediately afterwards, but I didn’t get that chance to talk to a lot of people after. And before the announcement, I couldn’t talk about it and I was swamped. So I would like to hear your on-the-ground take of what it was like to hear everything and the reactions.

Stephan Livera:

Yeah, sure. So I think obviously the people who are at the event, their take is going to be much more bullish, because you’re there, you’re feeling it, you’re seeing it—it feels a lot more real. And it was super exciting for the people at the time. Now, I think there are obviously different people in the community who are commenting on it or talking about it. And so, I mean, for me, I’m cautiously optimistic. I would like to see this idea work. I would like to see this whole idea of Bitcoin City and funded with Bitcoin bond and the element of giving residency for the investors, I think it could be quite an interesting pitch and play. I see it as El Salvador took away the test and vaccine mandate to get into the country as well, so I thought that was an interesting thing that might appeal to Bitcoin people, right? And so I thought that was an interesting aspect of it. And now probably the downsides or the criticisms, if you will, from other Bitcoin people who were—at the time—I think some of them might have been thinking, Oh, what if this is just like a way to get money from all the gringos or take money from the Bitcoin people? And what if the project doesn’t pan out in a successful way? So I think that’s probably the, in a nutshell, kind the good and the bad of what people were saying. Personally, I’m a little bit more on the cautiously optimistic side. I would like to see it happen and I’d like to see it work. So I think one way that you might think about it is that—look, politicians have their own incentive, of course. But you can also look at what is the incentive for the country. And if the country has an incentive to basically provide a better deal for Bitcoin holders and people who are willing to participate in this investment or participate in Bitcoin City and try to make Bitcoin City a success—because the success of the two is sort of intertwined because part of the way the bond is going to get paid back, from my understanding, is that there will be a VAT in Bitcoin city—and so obviously the more people who move to Bitcoin City and spend, obviously that’s revenue to pay back the Bitcoin bond. So there’s a little bit of a—the success of these two is intertwined in that way. So you could say the incentive is that they want to make this work, because [we’re] in a world where there’s not that many other places that are offering this kind of deal and this kind of accessibility. That’s how I would summarize it. But what do you think?

Samson Mow:

Would you say that most people are cautiously optimistic? Or are most people a little bit pessimistic about it?

Stephan Livera:

I would say in some communities, some people are sort of like, Oh yeah, nah, I don’t trust him because look at the history of politics in South America and Central America where some person comes out and says something and then it changes. And in their mind they could also be thinking, Well, if President Bukele’s term is—I don’t know exactly, but let’s say it’s another two years—what happens with the next? Does that mean we need multiple presidents to be aligned with the vision and the plan? Because what happens if let’s say some new guy comes in in the next term and he doesn’t like Bitcoin City and Bitcoin bonds, and he tries to step away from the program, doesn’t put in as many resources. You could understand that concern also. But I think certainly you see others who are very positive, like fully positive, right? The likes of Max Kaiser and Stacy, right? So they’re fully like, Yep, we’re doing it. We’re moving to El Zonte next year and they’re gonna buy it. They’re gonna do it. So I think you see the full gamut in the Bitcoin community there. I suppose you’ve seen that as well, right?

Samson Mow:

Yeah, I understand like the hesitance to trust in politicians. I’ve seen some blowback from some vocal people in the Bitcoin community saying, You guys are working with governments. But I think it’s a little bit different in this case where you need to factor in the people of the country too. And a government should represent the interests of its people. And I think in this case, it is actually true because they’re trying to lift the nation out of poverty, they’re trying to create a better future for everybody. And to do that, they’re adopting Bitcoin on a number of levels. If you were not looking out for the best interests of the nation and the people, you definitely would not do that. If you wanted to clamp down and rule with an iron fist, you wouldn’t give people Fuck you money. You’re giving them money that you cannot seize. And you’re trying to teach them something new and show them a path to the future. So I would give the benefit of the doubt here and say President Bukele is trying to forge a path forward. And it’s a difficult path to forge. And a lot of that has to do with everything that’s happened in the past, and the difficult situation they’re in right now. So they’re saddled with a lot of debt. And the debt that they’re saddled with really is keeping them effectively like a subservient state of Western nations. That debt that you were saying that they’re paying 13% on—I think the coupon on that is 9% or something, but because it’s trading at a discount, it is effectively like 13-15%. So how do you get out of that hole? You need the IMF to refinance you to give you more financing to service the debt. And that’s just a downward spiral. You’re borrowing more money to service old debts. That’s not really a way to get out of the situation. The only way to get out of the situation is to break the simulation—to ignore the imaginary paper money that they’re lending you to service other imaginary money that you’ve borrowed in the past—and to go with sound, hard money. So it’s a difficult situation: either you can say, We’re going to work with a government, or you can say, Just let the old system exist. And regardless of your opinions, I think to leave it as status quo is worse than helping a government. And yes, maybe he will not be in charge in a few years. Maybe the new person will be anti-Bitcoin—who knows—but that is somewhere in the future, and I think we have to deal with the cards that we have on the table today and try to steer things in the right direction. So, if the country becomes prosperous through Bitcoin adoption, through the Bitcoin bond program, I think it would be difficult for a successor to nullify all of that and just throw it off the table and say, Okay, no more Bitcoin City, no more zero cap gains, and no more property taxes—like, reverse all of those things. That would be very difficult—if it’s successful, right? If things are working and you want to turn it off, I think that’s far harder than if it’s not working and you want turn it off.

Stephan Livera:

Yeah. So then the question I think is—and Samson, I’m sure you know this, you’ve been in the game a long time, as I have—sometimes Bitcoin moves in like a two steps forward, one step back. And so there are times where we really want this to be a big two steps forward, but what if in order to go forward, we’ve gotta go back. Let’s say there’s a big pump and a dump, and then a lot of Salvadorians basically get wrecked in that because they start to hold some Bitcoin, because everyone has to sort of—it’s almost like rite of passage in Bitcoin. You have to kind of go through a big drop. And so what does that reflect for the 6 million or 7 million Salvadorians? So I’m obviously hoping it works, and that’s why I said I’m cautiously optimistic about it. And honestly, I would consider an investment myself. I would honestly consider it for the residence aspect of it, because I’m looking at these things myself in terms of the idea of stacking flags and things like that. And maybe there are listeners who are out there thinking similar things, because I think there’s an element to that. But the point I’m getting to is: Bitcoin adoption might not be instant. It might be it takes time for education and people have to get wrecked sometimes before they learn.

Samson Mow:

Yeah, so let’s go into this from the thing you mentioned before, which is people are criticizing the bond saying it’s not a Bitcoin bond because it’s fiat-denominated. There’s a reason why it is denominated in fiat. So, people say inflation is a good thing, and I think in some cases, inflation is a good thing—inflation’s good for Bitcoiners. So if you’re denominating the bond in fiat and Bitcoin is going up and the US dollar is devaluing, it makes it easier to pay back the bond. So that’s definitely a good thing. But the reason why it is dollar-denominated is to prevent that possibility that the people of El Salvador will get wrecked. You don’t want that to happen. They’re going to take $500 million to buy Bitcoin. So this is the super-structure of the bond: half of the bond proceeds will go towards buying Bitcoin, or if people invested Bitcoin, they’ll HODL that and top it up to get an equivalent to $500 million. The other $500 million will go into energy production infrastructure like geothermal mines, and also Bitcoin mining. So even if the Bitcoin part is stable, like I think the worst-case scenario is: in 10 years, Bitcoin is flat—it’s still at $50K or something right now. I don’t know what the price is—

Stephan Livera:

58K gang.

Samson Mow:

Yeah. Let’s say it’s flat—they’ll still have energy infrastructure out of this. They will be able to produce electricity and sell electricity to their neighbors—and export electricity. They’ll be mining some Bitcoin on the other side of the bond. The other $500 million. So they’ll accumulate some Bitcoin, which—if Bitcoin is flat—will still have value. The other portion—the one that was used to buy Bitcoin—if they still have it in 10 years and Bitcoin is still flat, they still have half a billion dollars. So it adds some credibility and reliability to the bond, and the faith that you have in them to repay the bond. At least they have something there. And I think the reason why I call it a Bitcoin bond is just because it is backed with Bitcoin. It’s not denominated in Bitcoin. You could probably do a bond denominated in Bitcoin, but it would work a lot differently, and there would be some risks to that. But given that it is a 10-year bond, it will encapsulate two halvings. I find it highly unlikely that with two halvings in this 10-year bond, Bitcoin is not going to make a move—at all.

Stephan Livera:

Of course. Yeah.

Samson Mow:

So I just find a very low probability that the people will get wrecked. There might be some point in the next 10-year cycle that Bitcoin does crash, but maybe it’s from $500,000 to $200,000, yeah? And we’ll cry our tears of sorrow that we’re crashing to $200K.

Stephan Livera:

That’s right. And it’s really funny because people who are new—like that really does happen. They’ll say, Oh, look, it’s crashed. Even though it has just like come up massively if you really zoom out, of course. So getting back to the structure then, I think it is important to point out how this is actually a lot more appealing for people who are currently in negative-yielding bonds right now, because there’s no—like, if you are just a fiat bond investor right now, you’re just losing money basically, but you’re just maybe losing less money than someone else who’s not getting any return. And part of the idea is that you might be thinking, Oh, I can get assets on the cheap when my USD bonds mature. Whereas with the Bitcoin bond, it’s more of a—you’re taking a fundamentally bullish view on Bitcoin as part of the worldview when you’re investing in the Bitcoin bond. But I’d love to hear from you: Who do you see the target market being? And why would they choose the Bitcoin bond rather than obviously simply HODLing Bitcoin?

Samson Mow:

Yeah. So if you’re new to Bitcoin, I would suggest: HODL Bitcoin. But there are a lot of Bitcoin whales that do diversify their Bitcoin holdings just to ease off on the volatility somewhat. I’ll give you one example: so we have the Blockstream Mining Note at Blockstream. It is buying hashrate. Why would people sell their Bitcoin or use their Bitcoin to buy the Blockstream Mining Note? And that is just to diversify, and also to stabilize—they’re going to be earning back their Bitcoin with some additional Bitcoin interest on that, because it’s likely they will mine more Bitcoin by the end of the three-year BMN term than if they just held their Bitcoin. When we launched BMN, it was at 200,000 Euros per BMN, and now there’s like one-point-something Bitcoin within each BMN because it’s mining Bitcoin. So you’re getting Bitcoin returns on top of your Bitcoin. But for something like the volcano bonds, if you have like tens of thousands of coins, it doesn’t hurt you to diversify somewhat and lock in a fiat dollar price, just for locking in the value. And there could be a bear market in two years—who knows—but you’ll at least have locked in the fiat dollar value and you still have some Bitcoin upside, with half of the Bitcoin proceeds being sold after the first five-year period. So after the first five years, El Salvador will recoup their initial $500 million investment, and then they will start sharing that Bitcoin with the bond holders. So half of it they will keep, half of it will be paid out as the special dividend—or the Bitcoin dividend. So you’ll still get back the Bitcoin upside—just 25% of it. But as you receive the coupons—the 6.5% coupons every year—you can also buy back Bitcoin, too. And you can also buy back at the end of the 10-year cycle when you get back your original investment. So I think there is a market for that, but the bigger market is really people that want Bitcoin exposure. I think there’s like $85 billion of money on the market right now that just are institutions and they want Bitcoin exposure. They’re buying ETFs. They’re buying ETFs in Canada and they’re buying ETFs in the US—ProShares had a blowout launch and they sold out. And people are still buying MicroStrategy debt so that Michael Saylor can buy Bitcoin. So these people would just buy this Bitcoin bond. It’s the same thing but from a nation-state, effectively. So you still get that Bitcoin exposure, and it should fit into their mandates or charters that prevent them from buying real Bitcoin. So if you look at it, most of the Bitcoiners on Twitter, they have an advantage: they’re retail investors—they can actually buy Bitcoin, but a lot of these entities and institutions—they cannot buy Bitcoin. And this is their access to Bitcoin. It’s their way to get exposure to Bitcoin.

Stephan Livera:

Yeah. I think that’s a really important point because obviously those of us in the Bitcoin Twitter and Bitcoin community, we tend to be like retail or HODLers ourselves. So we think of it like, Oh, I just hold Bitcoin. But there are a lot of people out there who aren’t at that level yet, and maybe the vehicle that they are in doesn’t allow them to directly purchase Bitcoin. And so this is a way to get exposure for them. And we can see that in the number of people who are buying the likes of GBTC, or buying MicroStrategy, or the listed Bitcoin mining stocks. Of course, those of us who are HODLers who can access directly holding sats—we want to directly hold sats. But I think that it’s true that there’s probably a lot of people who might have, let’s say, some kind of mandate, or they can only purchase bonds. So that might be a bit more difficult for them. So I think it’s actually a good thing in that it opens up the access for people, and this might be the first of more to come, right?

Samson Mow:

I think so. But it just can appeal to a number of market segments. So as we were talking about before, if you wanted to get permanent residence in El Salvador, how would you do that? I guess you can invest in a company there, you could buy an apartment or a house—but that is more involved. So one of the things that we wanted to do was to tie the bond purchase to that permanent residence. So you just show, I bought the bond—here’s the transaction—and then you’re in that program. We want to link the two things together so it’s super easy. Because otherwise, it’s great that there’s a program, but if the program is complex, then it adds a barrier to entry. But also—buying the bond—you can think of it as a 25% discount off of PR. Otherwise, if you had Bitcoin, you would sell your Bitcoin to qualify. And maybe you have a house now. Maybe the house value will go up, but who knows. But at least this way, you didn’t actually sell all of your Bitcoin—you have 25% upside still on the Bitcoin part. And it is a liquid asset, so I guess that they’d probably tie the holding of the bond for a certain duration to qualify. Maybe it’s five years, I don’t know. But after that period you could sell it and everything would be good. And it’d be easier to sell that than, say, a house. But there’s also people that will invest based on ideology. I think that’s a big one that people don’t put enough weight into, because a lot of people so far have reached out and said, We’ll take some of the bond just to help El Salvador. Or, I think Stephen Cole said, I’ll do it just to say F.U. To the IMF, right? There’s a lot of people that will just invest for the sake of investing. If Bitcoin is F.U. money, now’s the time to say F.U.

Stephan Livera:

Yeah. Right. And look, it could also give an option for those kinds of people. Like let’s say they’re sitting on a stack of coins and they’re thinking, Hey, I want residence. I want to go and live there and work there.

Samson Mow:

Yeah, exactly.

Stephan Livera:

And so as I recall from the event, I think on the bottom of that slide, I think it said investments greater than a hundred thousand dollars of the bond will qualify—so I think you would start off with residence and then you qualify for citizenship by investment after five years. So that could also be something interesting for people. And if you’re bullish on this idea of setting up a Bitcoin City and a financial hub in El Salvador in Bitcoin City, you might be thinking of it like, Hey, I want to skate where the puck is going. Like we think this is where the zero tax financial hub is going to be, and maybe if there’s going to be a lot of other Bitcoin companies and Bitcoin jobs and capital all concentrating into of this area—you want to be in the thick of it. So that’s possibly the bullish case for that aspect of it, right?

Samson Mow:

Yeah. I think it’s like three Bitcoins, because at the time that was a 100K, then somehow the 100K number stuck. I’m not sure yet, I need to check, but I’m not sure if it’s three Bitcoins or 100K or 150K, but I think these things need to be clarified. But Alistair Milne had some good feedback on the residence permit to get citizenship, which was, If you invest this much in the bond, your whole family can get the residentce and fast-track to citizenship. And if you invest—I forgot his number it’s like 500K in the bond—then you get to get preferential fast-tracked access to buying land in Bitcoin City. And I think there are ways to incentivize the pot, but going back to the original point, there’s a lot of different people that can potentially look at this bond and say, This is for me. But if you think it’s not for you, then don’t invest in it because obviously it’s not for you. You know best.

Stephan Livera:

Sure. And so in terms of the timing then, are we looking at early- or mid-next year? And then it’s a 10-year period from then? So essentially the person who’s thinking about it—because we’re doing the breakdown—this person might be thinking, Okay, I’m going to put this money in, let’s say 100K, just to hit the minimum bar for residency. Let’s say they put in 100K and then they’re thinking in 10 years time—so during every year they’re going to get some coupon—and then after five years, they’re going to be receiving some Bitcoin dividend. And then at the end of the 10 years, they get the 100K back. But you also keep the residence, and potentially you have citizenship of El Salvador—potentially, at that point. Is that a fair summary?

Samson Mow:

Yep. I think that’s the right summary. So the Bitcoin coupon—the Bitcoin dividend in the final five years—that’s on top of the 6.5% base coupon. So we did some projections and one of the scenarios was the 30% year-over-year growth. And that would put Bitcoin at like $1 million dollars. And in that case, the yield in the 10th year—just the 10th year, the earlier years will be less—is 90%. And then there’s another scenario where it could be 140%. So in the last stages of the bond, I think it could be a very attractive thing for people to hold. And I guess that’s another market too. It could just be traders that want to sit in—like normally they would sit in a stablecoin—now they could sit in a bond because it is a token. It is a crypto token, and it could also potentially be used as collateral for trading too. So HODL the bond, use it to 1X margin-long Bitcoin again, right? There’s a number of ways to play this game. Or it’s: borrow dollars against your Bitcoin to buy the bond.

Stephan Livera:

Yeah, because maybe you might be thinking, Look, I don’t wanna give up sats. And if I have income that allows me to get a loan against some Bitcoin, maybe that’s an idea as well. People might use the whole collateralized loan for that 100K, get some fiat to buy the bond with fiat, and so that might be another angle. And so then instead of paying sats for the bond, they’re paying USD for the bond—obviously they’re still paying interest, but—.

Samson Mow:

Or not.

Stephan Livera:

—that might work out for them.

Samson Mow:

If your interest rates are less than 6.5%, then it’s free, right?

Stephan Livera:

True, true. So yeah, you’ve got to think about that also. And so I think then in terms of operationally, is it going to be essentially trading like do you have to go become a customer at Bitfinex to get the bond? Or how would you actually buy it?

Samson Mow:

Right. So Bitfinex is going to be the initial exchange that is releasing the bond. So they will be getting the first license and that would allow them to issue this security. So I think anyone that wants the first bond would go through Bitfinex to buy it, but once you have it—so let’s take one step back—these bonds are issued as a token on the Liquid network, and they do have a permissioned part, and that’s done with Blockstream AMP, our asset management platform. So it’s effectively a two-of-two multisig. So you would go to Bitfinex, do your KYC, you would be added to the AMP whitelist, and then if you and I are both on the AMP whitelist, then we can withdraw it to any wallet that supports Liquid in AMP assets. And we can OTC trade it back and forth with one another, just like the Blockchain Mining Note. So there’s a Telegram channel and people are already trading the BMN OTC every day. But there is no marketplace. There’s no secondary exchange marketplace, but they’re freely able to trade that. And that would be the same case for any bond holder. So you’d be able to trade it and buy and sell it with any other bond holder.

Stephan Livera:

Yeah. Right. And so as an example, you might go to Bitfinex, sign up, buy this bond, and then you could hold it on your Blockstream Jade, right?

Samson Mow:

Yeah.

Stephan Livera:

Like you could withdraw the token of this bond to your Blockstream Jade and have it on that. And so actually I’m curious then as well, like how would it work if, as an example, let’s say you lost the seed words for your Blockstream Jade—how would that aspect of it work? Is there a central registrar of it? Is that what AMP is providing here?

Samson Mow:

Yes, effectively. So AMP would allow the service to blacklist those tokens because they’re lost now. And because it is—like, this is not decentralized, right? We should not pretend like these bonds are decentralized. They’re not. They are a security, and that’s why you have to KYC and you have to be added to a whitelist to be able to trade them and withdraw from exchange, of course. So what would happen is the service would blacklist those old tokens and then issue new ones for you. So the net circulating supply would not change because some of the tokens are now out of circulation, but there is a way to get it back. And we’ve had that with EXO for Infinite Fleet. Someone lost their keys, actually. So they’re going to actually get new tokens from STOCKR. So there is recourse if you lose your key—it is not Bitcoin. It’s a bond tokenized with Bitcoin in it.

Stephan Livera:

I see. Yeah. And then in terms of people who are trading it around afterwards—so let’s say they purchasethe bond, they’re holding it, they’re self-custodying it, and they’re trading it around as you said in the Telegram chat rooms or whatever. That part is just peer-to-peer but within a closed loop of KYC individuals, is it?

Samson Mow:

Yes.

Stephan Livera:

So from those individuals to individuals, they can literally send the token to someone else’s wallet, and AMP would recognize, Oh, it’s gone from this person A to person B, we’re going to update our registry to match what the current holdings are.

Samson Mow:

So yeah, it’s using Bitcoin multisig similar to Blockstream Green. If you set up a multisig shield wallet, the Green service will sign off if you send them your two-factor authentication. So basically you tell Blockstream, You can sign now—here’s my two-factor—and then Blockstream will sign. So it’s the same thing in this case: if you’re both on the list, then it’ll sign and say, Yes, you can send it to this guy.

Stephan Livera:

Right. So as an example, you might have bought like $500,000 worth of it. And then maybe in a few years’ time, you’re like, Okay, I want to lower my investment a bit. I’m going to sell $200,000 of it. And I sell $200,000 of it to you because you want to increase your investment in it or whatever. That’s an example—the kind of thing that could happen there. So the structure of this overall thing is that the money is going into Bitcoin mining that will fund part of this whole venture. And of course the VAT in the Bitcoin City will help fund this venture, so there’s a little bit of a tie in there. And so I guess people would be thinking, Okay, how long is it going to be for things to get started, being built out—what do you see? I don’t know if you know what’s the timeline looking like for people who might be looking to actually go live in Bitcoin City? Do you know? Would that be in like two years’ time? Three years’ time? You have no idea?

Samson Mow:

The city’s a big project, so I don’t expect it’s going to be all built out. I would expect it would be in stages. So the first bond is called the volcano bond because that money is earmarked to start building energy and mining infrastructure. I think some of it could be at some facilities near San Salvador, but then they could tap and open up some geothermal plants near the Conchagua volcano—the volcano that is near the city—and start mining there. But I think there will be more bonds. So this is just bond one. That’s why they’re named EBB1. So they can increment to infinity if you wanted to. But the subsequent bonds would be earmarked for the city, I think. So you would know, like this bond is going to build the city. But all the bonds will be allocated to a specific project or purpose. So people will know. But things happen very quickly in El Salvador. I think it’s very different there and they’re very motivated to build and do it quickly. So I would say it’s possible they break ground on the new city next year. It’s a big goal for their nation to build this thing.

Stephan Livera:

Yeah, for sure. And I think that was part of President Bukele’s presentation as well. I think he was trying to say, Oh, look, we did this pet thing—the pet hospital thing.

Samson Mow:

Chief of Pets.

Stephan Livera:

Right. And so I think he was trying to say, Look, we did this announcement and we built it really quickly, et cetera. So I think he was trying to say, Okay, this is an example that we can get it done quickly. So I guess that’s the bullish case. So then potentially, if people who are the real frontier people are starting in Bitcoin City next year, maybe the infrastructure is not fully there yet. Maybe you don’t have like the fully running water and high-speed internet yet, but people are going to start getting set up there and trying to build that up. Yeah I think I’m just really curious to see how that goes. I wonder, do you have any speculations or what you think will happen with Bitcoin City? Do you see it becoming like a hub for Bitcoiners?

Samson Mow:

It definitely has that potential. So they have the benefit of geographical proximity to, you know, the US and Canada, as well as all of South America right smack-dab in the middle of everything. And that is really good. Like Bitcoin City will have an international airport—that’s part of the design. So I could see it being a major economic hub, just like Singapore or Hong Kong. It could be this Mecca for the new age of finance, like: digital securities, cryptocurrencies, and everything like that, where people are setting up their HQs there and you have massive development companies move in to build software out of El Salvador, too. But I think that’s the foundation of a major hub. You have that population, and you have access to a specific region. I think there’s nothing like that in the Americas. So it would be the first one to take a stab at doing that.

Stephan Livera:

Yeah. And it could even be that the way that some people now—they might use the likes of other well-known low–tax or zero-tax tax-havens now, whether it’s Dubai or whether it’s Cayman Islands or somewhere where they base themselves there. Bitcoin City potentially could be like that for Bitcoin people. They might say, Hey, look, I’m gonna set up my base here. And that’s gonna be my base. I’m not necessarily living there all the year, but it’s my base, and I’ll travel around and go to different places, but come back and drop by and chat with other Bitcoin people. So I guess we’re all going to have to learn Spanish, aren’t we?

Samson Mow:

Yeah. That’s what I noticed. I need to learn Spanish, too.

Stephan Livera:

Yeah. So I’m curious as well, what’s been your impression on the ground in El Salvador, spending, Lightning—what was your impression of that?

Samson Mow:

I’m not sure I’m the best person to ask. I didn’t get that much time to explore. I was just zipping around from location to location. So I still haven’t had pupusas yet. I need to go back again and try that. But from what I saw, it’s a lot different than people make it out to be in the media. If you read reports about El Salvador on the news, it sounds dangerous, but it’s really not. I felt very safe in San Salvador and at the beach areas. I didn’t get to go to El Zonte, but I went to Mizata, the one next to it—and it’s very safe. And the people there are very warm and welcoming, too. So I think media often portrays things in a certain way, and you just have to go there and see for yourself before you can actually understand what the reality is.

Stephan Livera:

Yeah, for sure. And I’m curious as well how you think about the personal security aspects there for Bitcoiners? Like let’s say they are well-known Bitcoiners, or maybe they are known to have a lot of coin. Do you see that as like a security risk for them going to El Salvador? Because I can imagine there might be some listeners out there who have that question.

Samson Mow:

Well, I think it’s a risk anywhere you go. Like let’s break it down a bit. So when you’re talking about the general environment there and what it’s like, I think for normal people it’s quite safe. But if you are a well-known Bitcoiner with Bitcoin, obviously you have a target on your back no matter where you go. So I would still say, take some prudent measures. It’s really up to you to decide what your risk tolerance is. I think having security for any Bitcoin in any big city would probably be warranted. But it’s really down to the individual level of what your comfort is. Like, going to New York I think might be worth having security too. And I definitely felt El Salvador was safer than New York.

Stephan Livera:

Right. Yeah. And it’s probably fair to say that there are definitely times where you might think a poorer country is not as safe, but then if you think back to some big cities in well-known countries, they’re not super safe either. Places like Chicago can have a lot of shootings and things like that as well. So there’s this illusion of safety in some of the big Western world big cities. I’m curious as well, so in terms of downside risks, let’s say we’re assessing this bond for investment and we’re trying to think about what other downside risks [there are]. Could one be that the Bitcoin City idea goes belly-up, or there’s not as much revenue coming in on that. Maybe that would be potentially one of the downsides. Or maybe another idea might be the electricity rate garnered by using geothermal—maybe it’s not a very competitive rate for Bitcoin mining. Do you have any thought on that or any insight on that?

Samson Mow:

Yeah so for the city there’s always a risk that—like any mega-development—there is some risk to it. And does it get to take off and get off the ground? I’d be crazy to say there’s zero risk, right? There’s obviously some risk, and it really depends on the execution of the government. But from what I saw they’re all very much pulling in the same direction, and they’re very motivated to make something happen. My feeling is they see this as is a once-in-a-lifetime opportunity to fix their nation. And this doesn’t come along all the time. So the vibe I got from working with all the different departments there is really—everyone is gunning for the prize. They’re working evenings and weekends. And you just wouldn’t see that in, say, Canada, right? Like politicians are going to take the evening off and the weekends off. They’re hustling there. They’re trying to make it happen. And I don’t blame them. Like this is really a once-in-a-lifetime shot to fix the country.

Stephan Livera:

And actually I’ll add something there as well. I think it was interesting when I went, I saw definitely that the treatment that was given for Bitcoin people, was like a very privileged access in that way, that they would fast-track people through the line in terms of landing at the airport, and they I think were genuinely trying to make it a good experience for the people who were attending at least for that week of Adopting Bitcoin and laBITconf and that week. So that’s certainly an interesting indicator, if it means anything. And also, I think during that week, it was that week that they dropped this whole requirement around tests before entry into El Salvador, which obviously appeals to a lot of the freedom-loving Bitcoiners out there.

Samson Mow:

Yeah. I don’t think El Salvador is really a tourist destination, but they could be. The weather down there is beautiful. It’s sunny days almost every day I was there. And the climate is really nice. The beaches are great. It could be a major tourist destination, I think, especially with the added freedom of Bitcoin is legal tender. So I think to make sure that happens, you have to make sure the country is safe. So a lot of the incentives are all in the right direction to make this a paradise really on every level.

Stephan Livera:

Yeah. And then on the question of executing as a mining venture, because doing geothermal and executing in a cost-effective way—obviously you have a lot of exposure to the mining world as well, coming from that world, arguably. So do you have any thoughts on the feasibility, the practicality of doing Bitcoin mining in El Salvador?

Samson Mow:

Yeah, I think it is very practical. The point at which you would argue if it was practical or not is more if you’re trying to operate the geothermal mining as a hosting business. So at Blockstream, we’re one of the biggest in znorth America, we do a lot of hosting and we need to get our rates down because we’re charging people for hosting. So there is the base electrical cost, energy cost, plus our hosting costs and our capex costs that we have to cover. So if the electrical cost was 10 cents plus—which I think it can be for geothermal—it would make it difficult for us to run this business. But it’s a different ballgame when you’re a sovereign nation mining. Like it doesn’t cost them anything other than the money they need to invest into the infrastructure. Once that’s done, from the standpoint of a nation state, there is no P&L. It’s your own energy and it’s your own mining farm, your own equipment, your own ASICs. So if you want to mine Bitcoin, you just mine Bitcoin. There is no—you don’t have to really worry about what it costs you. If you’re in it for the long run and you believe Bitcoin is going to become more valuable, then you just treat it as a sunk cost. Like, Yeah, we mine Bitcoin and, Yes, the cost to produce 1 Bitcoin is this much money. And that’s fine, because you’re a sovereign nation and you have that energy at your disposal, and the Bitcoin is also yours. So you’re just converting your own power into Bitcoin at your own rate at which you value it at.

Stephan Livera:

Interesting. And so I mean they still face opportunity-costs like with their capital. They would still have to—but I understand the point you’re making though, but I’m just thinking it out. Because they still face opportunity costs. Like if they spend more than the current price of Bitcoin right now to earn a Bitcoin that’s less than that, then it’s like an unprofitable investment. But as you said, rightly—to your point—is if you are fundamentally long-term bullish on Bitcoin, which is what’s implied by doing a Bitcoin City and a Bitcoin law and a Bitcoin bond, even if you mined it unprofitably now, in 5 years’ time, 10 years’ time, that coin has already risen so much dramatically that you are solidly in the green, in the profit, on that.

Samson Mow:

Well the thing is, most nation-states do a lot of things that are unprofitable, right?

Stephan Livera:

Very much so.

Samson Mow:

At least this one makes sense. Let’s just put ourselves in their shoes for a minute. They could say, Okay, geothermal power is 10-12 cents. Okay, that’s expensive. Let’s go and mine in the US for 2 cents. But there is a cost to that too, which is: the US could seize your equipment, or someone else could seize it. It’s not your own. So when you’re a sovereign nation, you want to have your own assets. Like the mining farms are assets, the ASICs are assets. You want to keep them within your own borders, right? Close to your own people. So there’s so many different ways to look at it. Like, that is sending it somewhere else to get cheaper power. Yeah, you get a little upside on the cost of producing a Bitcoin, but you lose on risk. Basically it’s like keeping your Bitcoin with a foreign custodian at that point.

Stephan Livera:

Yeah. It’s the difference between what’s financially optimal versus what might be sovereignty-optimal, something like that. And I think it’s a good point and it takes a certain level of vision and foresight, and perhaps it’s also a certain level of having less to lose. So let’s say if you were already an established nation, the USA, Canada, et cetera, you might be less inclined to go this hard on Bitcoin because you might be thinking, Well, I’ve already got a pretty good—I’m already on a pretty good wicket, or I’m already in a pretty good circumstance. I don’t need to go and take this big career risk of like betting all-in on Bitcoin, having a Bitcoin City and a Bitcoin bond and everything. So maybe that’s one way to think about it. And also, actually, this is something you mentioned in the Feel the Bit event around what happens when other nations play copycat. So I’m interested to hear your thoughts on that as well?

Samson Mow:

Yes. So El Salvador is already taking the lead on Bitcoin as legal tender. And we haven’t really seen anyone else copy yet. And I think the root cause is most people are followers and nation states are the same, right? Most politicians don’t want to take a lot of risk. They take enough risk to get reelected. They don’t necessarily take the difficult decisions that may be short-term unpopular, but long term are the right decision. So that’s why I have a high level of respect for President Bukele because he’s taken a very difficult step. Like he’s going against the major established organizations. You could say he’s going against the US, too. The US is definitely not happy with a lot of the things that are developing right now, right? The IMF is not happy. And to take that stance, it takes some guts to do. So I think the other nation states are going to wait and see how this plays out. And it will be the same with the bond, too. I think once the first few bonds are filled and they’ve raised several billions of dollars through this new structure, through Bitcoin bonds, other nations will jump on board. It’s just inevitable. It’s the same thing with Michael Saylor and putting Bitcoin on the balance sheet. People thought he was crazy at first, but once they started seeing it was working, then he’s able to raise debt like nothing. And other companies are also buying Bitcoin and sticking it on their balance sheet. So let’s kick off that same game theory and competition to acquire Bitcoin at the national level. But it’s going to take some success first before they’re going to take that chance.

Stephan Livera:

Yeah. And one other thing I find interesting about all of this is that it’s pulling in a lot of people to have an incentive to make Bitcoin go well. Like all these companies now have an incentive for Bitcoin to go well. We are starting to have El Salvador with a strong incentive to make sure this goes well. So they are going to be listening for feedback and trying to fix things that go wrong, whether that is Okay, something with Chivo wallet is not working well—okay, let’s fix that. Let’s make it work because we need this to work. And so I think it’s an interesting element, interesting dynamic to see, and it happens whether you’re an individual, you’re a company, whether you’re a country, or you’re a business or a fund, you just have more of an interest in that. And that might lead you to now think about, Okay, sponsoring Bitcoin development or review or some other Bitcoin project, or translation of Bitcoin material and education into local languages and things like that. I think it’s an interesting element where you’re bringing people into this fold because now they want to make it work.

Samson Mow:

Yeah. I think the biggest benefit is probably kicking off competition for, not just people—for companies, too. The regulatory environment I would say overall is not friendly towards Bitcoin. There’s like some places that are friendly, some that are neutral, but I would say on average it’s not that great. But if this succeeds that should kick off a snowball effect where everyone is competing and trying to have the best possible regulatory environment to draw in talent. You can tax unrealized capital gains, you can monitor every single transaction, but that’s not how wealth and prosperity is generated. Wealth and prosperity are generated by smart people and great companies building great things. That’s the only way forward. And if those companies and people start going to El Salvador, then everyone else is forced to compete. And I think that’s a good thing, because the regulatory framework is just archaic in most places. And in some places it’s downright antagonistic towards Bitcoin, like even within the US, Kraken vacated New York because of the Bitlicense. You’re going to see more and more of that playing out. And El Salvador is a counterbalancing force to that. They’re going to roll out the new digital securities and securities laws there that will attract people to go and operate out of El Salvador. And you pair that with the legal tender, you pair that with Bitcoin cities, favorable conditions, and I think you have the perfect mix and the perfect catalyst to revitalize the entire region.

Stephan Livera:

Yeah. And it’s an interesting point around securities laws, because obviously I think of it as Bitcoin, not crypto, but in the crypto world, there’s been very much this trying to get around securities laws. Now, of course, I’m a libertarian, I believe in market regulation and not government regulation, but it always is difficult for people—and even in the Bitcoin world—dealing with things like having to KYC, know your customer, AML laws, et cetera. How do you think about that idea and where we’re all going with this? Like what kind of regulations do you see happening in the future in let’s say Bitcoin-friendly countries that might help give people a better way to deal with these things, as opposed to having this massive regulatory overhang?

Samson Mow:

Yeah. So I think a lot of the cryptocurrency projects out there are just useless. But a security is a security, and we do have security laws around the world. They’re all at various stages of making sense and not making sense, but generally they’re a cumbersome thing to overcome. And I would say that’s probably one factor of why people did ICOs, because they didn’t want to deal with that regulatory burden. But you can do a security token offering without cutting off your arms and legs. Like we did the BMN and EXO through Luxemburg and their securities laws are pretty good and pretty modern, and they’re lightweight. I think if you do have something of a modern framework in El Salvador, that should make it easier for real companies to raise capital through securities. And they don’t need to do some shady ICO. I’m with you that I believe in free market instead of regulation, but I think there needs to be steps to get there. But one of those steps is making it easier for real companies to raise capital. And we’ll deal with the next step down the road, but ust getting there and setting this precedent and having something that people can look at and replicate in other jurisdictions is going to be a starting point, I believe.

Stephan Livera:

Yeah. And actually with the Bitcoin bonds, is there an accredited investor requirement for that?

Samson Mow:

I don’t think so because it is just a bond. Like to buy a bond, you don’t need to be accredited. But typically access to bonds is challenging, because the minimum sizing of bonds is pretty high. Like maybe it’s like a thousand dollars for more retail-focused bonds, but then it goes up to hundreds and millions of dollars for these kind of bigger bonds. And most people can’t buy that. The El Salvador volcano bonds are going to be down to a minimum size of a hundred dollars. So I think that will make it far more accessible so that El Salvador and diaspora around the world, if they want to help out, they don’t need to ship things back to their home country or remit. They could just buy the bond and help from afar and it’s much lower friction.

Stephan Livera:

Yeah. So at the end of the day, it’s another vehicle for people to look into—that they might currently be sitting in negative-yielding bonds and think, Hey, this is a way better deal than what they’re currently getting. So let’s look into that. And although maybe their systems won’t be fully set up in this way because they’ll have to now learn, Okay, what’s this Liquid thing? What’s this AMP thing? What are these aspects? It’s a new whole thing for them to learn. But at the same time, their current vehicles might be more well-geared up to invest in the Bitcoin bond than into HODLing directly. Or maybe they want to play a bit of both. Maybe they’re HODLing some, and they want to do a bit of the Bitcoin bond as well. So maybe that’s one aspect of it. So that’s probably a good spot to wrap up. Do you have any closing thoughts there for the listeners and around the Bitcoin bond and where you see it going and why they should think about it?

Samson Mow:

I don’t know your audience, but if there’s institutional investors there, I think they should start looking into it seriously and figuring out how they can tap into the bond. One question that was asked quite often is, Why would they buy it? And I think the answers are quite obvious that it is a better instrument than any other bond on the market. And can they buy it? I don’t know. And that’s really up to them to figure out, but creating it as a bond, it should allow it to fit into their charter and mandates, that they can buy it. And it’s really up to them to work things out internally and with legal to figure out how they buy it.

Stephan Livera:

Fantastic. All right, Samson. So just for anyone who doesn’t know where to find you, where’s the best place?

Samson Mow:

I’m on Twitter. My handle is @excellion. And then you can look up Blockstream at @Blockstream.

Stephan Livera:

Fantastic. Thanks for joining me, Samson. I enjoyed chatting.

Samson Mow:

Thanks Stephan. Great chatting.