The US state of New Hampshire is set to become the first public-sector entity in the world to issue municipal bonds backed by bitcoin. The initiative aims to attract private investors and encourage new forms of financing for local economic development.

The New Hampshire Business Finance Authority (BFA) Board of Directors has approved a pioneering financing structure that would allow the state to issue a municipal bond collateralised by bitcoin, positioning New Hampshire as a global frontrunner in digital finance.

The bond still requires approval from Governor Kelly Ayotte and the state Executive Council before issuance. However, the step is largely seen as procedural, as Ayotte has already publicly endorsed the proposal.

“I’m proud that New Hampshire is once again first in the nation to embrace new technologies with this historic bitcoin-backed bond. This is an innovative way to bring more investment opportunities to our state and position us as a leader in digital finance without risking state funds or taxpayer dollars,” Ayotte said earlier.

How the bitcoin-backed bond will work

Under the proposed structure, borrowers will be required to post 160% of the bond’s value in bitcoin as collateral. Transaction fees generated through the bond will be directed into a Bitcoin Economic Development Fund, which the BFA plans to use to support business growth and financial innovation programs across the state.

If the value of bitcoin falls below 130% of the bond’s value, an automatic liquidation mechanism would trigger the sale of the cryptocurrency to protect bondholders from losses.

The legislation also authorises the state treasurer to invest up to 5% of state funds in digital assets with a market capitalisation exceeding $500 billion. At present, bitcoin is the only digital asset that meets this threshold.

A bold experiment for public finance

Municipal bonds, commonly referred to as munis, represent a $4.3 trillion market in the United States. While they make up only a small share of the nearly $48 trillion US bond market, they are attractive to investors because interest income is typically exempt from federal income tax, and in some cases from state taxes as well.

According to Financial Times analyst Brendan Greeley, the New Hampshire initiative “stretches the definition of what economic development is.” While digital assets are innovative, he notes, “it is not clear how they directly create economic growth.”

Governments at all levels have long sought ways to finance spending through future revenues. Traditionally, private activity bonds are backed by expected income from companies and, indirectly, the state itself. In New Hampshire’s case, however, a private company would post its bitcoin as collateral, held in trust.

By issuing the bond, the state effectively converts private-sector bitcoin holdings into a cash loan. The involvement of cryptocurrency in public debt issuance is unprecedented, making this experiment one that markets and policymakers alike will be watching closely.

Sources:

https://finance.yahoo.com/news/hampshire-approves-worlds-first-bitcoin-164617754.html

https://www.ft.com/content/e641c7f7-d097-4ceb-8d72-bdcadc91d7d0

https://nhbfa.com/news/nh-bfa-approves-worlds-first-bitcoin-backed-municipal-bond/