For years, the cryptocurrency industry has been trying to creep closer and closer to the world of public finance.
Quincy, Massachusetts, used
Now, a state conduit issuer in New Hampshire believes it's broken the seal.
The $100 million of bitcoin-backed bonds the New Hampshire Business Finance Authority plans to issue early next year are just the first of many ways the cryptocurrency industry can benefit from the muni market, according to the team behind the deal. The BFA sees an upside, too — its transaction fees will be paid in bitcoin.
The transaction was conceived by Wave Digital Assets and Rosemawr Management. Orrick is advising the BFA on the structure of the transaction.
The structure is a securitization deal, which should be familiar to many investors, said BFA Executive Director James Key-Wallace. Here's how it works:
A bitcoin mining company that works with Wave will supply an amount of bitcoin — Key-Wallace estimates around $150 million — to be put into a New Hampshire Statutory Trust. BitGo Trust Company will oversee the trust.
Then, the BFA will issue $100 million of bonds, using the trust as collateral. Debt service payments will come out of the trust.
If the value of bitcoin — a
But if the value of bitcoin increases, bondholders will "get a percentage of the upside" along with their coupon, Key-Wallace said.
"So it's sort of shrinking the risk, shrinking the reward, putting it in a box that is a little more palatable," Key-Wallace said, "to the traditional institutions that do still want to do something with cryptocurrencies, but have to live within their bounds."
As with any transaction, the BFA will get a fee. In this case, the fee will be paid in bitcoin, and will be deposited into a new Bitcoin Economic Development Fund, which the BFA will use to invest in other business and economic development in New Hampshire. Bond interest will be taxable.
The authority is New Hampshire's state economic development authority, active as a conduit issuer for private activity bonds and for nonprofit issuers.
Les Borsai, the co-founder of Wave, hopes to price the deal sometime in January. He's expecting the bonds to have a five-year maturity, subject to investor interest.
The underwriter for the bonds has not yet been announced, This is for compliance reasons on their end, Borsai said in an email.
"Obviously, when they are in the market, you will know who they are," he said in an email.
He also cannot at this point announce the bitcoin mining company providing the collateral, he said.
Borsai said he has been in the process of obtaining a rating for the bonds for seven months.
"The rating agencies have been very, very open to it, which was great, because they recognize it for the asset that it is," Borsai said.
Once the deal has a rating — hopefully within a few weeks — the BFA will bring the transaction before the governor and the New Hampshire Executive Council, an advisory body for the governor's office for approval.
The odds seem good that Gov. Kelly Ayotte will approve the transaction.
"I'm proud that New Hampshire is once again first in the nation to embrace new technologies with this historic Bitcoin-backed bond," she said in a statement included in the
The point of this transaction isn't the $100 million of bonds. That's supposed to be a building block toward a much bigger goal.
"It advances the crypto ecosystem," Key-Wallace said. "It is an advancement for the ecosystem to say, 'Our assets, with the correct structures, should be available as collateral, just like anybody else's assets.'"
Any company that holds significant amounts of bitcoin could replicate this transaction. Since the BFA board announced its approval of the deal last month, it's received plenty of interest from other bitcoin companies.
"We hope to do this a bunch of times with a bunch of companies," Key-Wallace said. "Hopefully, billions of dollars of transactions should flow from this structure, and that's my goal."
The process holds lots of advantages for cryptocurrency companies. For one thing, the rates on the bonds will likely be much cheaper than other loans bitcoin mining companies receive, Borsai said.
For another, the structure allows a company with a lot of cryptocurrency to turn its reserves into active assets, Key-Wallace said.
"People with [crypto] assets, they want to keep them, because they hope that they go up in value. But when they're just sort of sitting there, you can't do anything with it. It's not like cash, where you can put it in a treasury and earn a return," Key-Wallace said. "So the idea of sort of being able to pledge it, access cash against it, makes this asset useful to you while you hold it."
Borsai expects the transaction structure to spread to other states. One such proposal is already in the works, he said, and he hopes to announce it before the year is out.
But it's not just private companies that could benefit from this type of transaction. Borsai hopes states will issue their own bitcoin-collateralized bonds.
There are three obvious candidates: New Hampshire, Arizona and Texas have passed legislation to create strategic
But many other states technically hold crypto, Borsai said, even if they don't know it.
Several states allow residents to
"When I thought about New Hampshire, it was really to create a use case," Borsai said, "so that when the states started to figure out what assets they had, they'd have a vehicle that they could use."
Key-Wallace said the BFA may one day use this vehicle to borrow against the bitcoin fees it accumulates from pricing bitcoin transactions.
Wave has filed patents for the structure in this transaction, Borsai said, but he doesn't know whether they'll be granted.
Hilltop Securities urged public entities last year to adopt "
"Even with a new regulatory framework forming, the speculative nature of these digital assets warrants caution," Tom Kozlik wrote for Hilltop. Investing in cryptocurrencies like Bitcoin involves significant risk. This level of risk is typically not appropriate for public entities."
The Government Finance Officers Association has
"We just haven't seen enough pickup, enough of a take rate to understand what is the best practice around crypto," Brock said.
Brock noted that cryptocurrencies are not designated as currencies by the SEC, nor are they securities with an underlying value. Plus, the different rules in each state and the lack of unifying policies or procedures are preventing GFOA from weighing in on policy recommendations.
"At this point, I am unprepared to guess or dream with you," Brock said. "I think there are so many talented people who are in the world of crypto, and I would say we're closer than we've ever been on knowing it and understanding it, but it's still going to take a lot, I think, for you know, local governments and governments generally to understand it, to utilize it universally."
Borsai sees many other use cases for integrating bitcoin into public finance.
"There's actually a bigger road map of products that you can structure in the debt markets, versus just an ETF or a stablecoin," he said.
Many universities hold large cryptocurrency reserves, Borsai said. As universities'
"This is about taking all of the traditional kinds of bonds that have ever been issued and applying it to the needs of the digital asset, digital currency industry," Borsai said.
Whether the market has an appetite for a wide array of cryptocurrency-related bonds remains to be seen. But for the $100 million deal in New Hampshire, Key-Wallace said, he's seen a lot of interest.
