El Salvador has greatly increased its media presence in recent months. The reason is the decision to adopt the cryptocurrency bitcoin as legal tender in the country. The Salvadoran Parliament approved the initiative in June 2021.
The decision did not remain on paper, on the contrary, a series of concrete steps for its implementation took place. On September 6, the President of El Salvador, Nayib Bukele, announced the purchase of the first 400 bitcoins. In the meantime, the project to install the first 200 counters at which it is possible to convert U.S. dollars, the other legal tender in the country, into bitcoin, and vice versa, had begun.
The initiative was also accompanied by a promotional campaign. It gave the equivalent of 30 dollars in bitcoin to anyone using the digital wallet provided with the Chivo app.
All this has taken place amidst the curiosity and interest of some countries, and the skepticism and concern of international financial bodies, first and foremost the International Monetary Fund and the World Bank.
Bukele, however, has decided to go further and in recent days has announced a new initiative in crypto that has again brought El Salvador on the front pages of newspapers. He announced in fact the project of creating a “Bitcoin City”.
Bitcoin City
President Nayib Bukele on November 21 unveiled the project that will create the world’s first Bitcoin City.
The city will be circular to represent the shape of a large coin and the plan is to build it in the southeastern region of La Unión.
According to Bukele, the city will have all the services: residential areas, commercial areas, services, museums, entertainment, bars, restaurants, airport, port, railroad – all based on bitcoin. In particular, the city will have renewable energy infrastructure, mainly geothermal, dedicated to bitcoin mining.
Moreover, no income, property, or capital gains taxes will be applied to the activities carried out in Bitcoin City. The only tax on goods and services will be VAT.
In the region that will host Bitcoin City, there are several volcanoes. They will provide power to the power plants that will have to feed the data centers necessary for bitcoin mining.
The plan is to build the city at the foot of the Conchagua volcano.
Bukele did not give dates for the construction or completion of the city, however, he estimated that much of the public infrastructure will cost around 300,000 bitcoins.
Bukele’s intent is to attract crypto companies and investors through low energy costs and low taxation.
The Bond
To build the city, Bukele has launched a $1 billion bond that will be used, in part, to finance geothermal infrastructure dedicated to mining and in part to purchase cryptocurrencies that, beginning in the fifth year after issuance, can be purchased by citizens as a source for dividend payments to all subscribers.
This is a special bond as it will be based on the Bitcoin network. In fact, it will not directly raise dollars or traditional currency. Investors will have to pay in cryptocurrency.
It will be developed on the “Liquid network”, a sidechain of Bitcoin, a kind of blockchain hosted by the main Bitcoin blockchain that allows the development of next-generation instruments.
The bond would initially pay 6.5% interest and within 5 years local mining would allow for additional interest payments. The issuance is going to take place in 2022.
Conclusions
This new announcement by President Bukele has raised further fears about El Salvador’s financial future. In fact, International voices against the initiative have multiplied. According to Bukele’s detractors, the initiatives intend to cover an undemocratic drift in the country. Others believe it’s a gamble. It could, in the most optimistic of predictions, transform El Salvador into the Singapore of Central America.
The success or failure of the bond offering will already say a lot about the actual confidence investors have in Bukele’s crypto turnaround and in part also about the country’s economic prospects.
