Bitcoin City: El Salvador continues to lead the way in innovation and adoption

Bitcoin city El Salvador Nayib Bukele
El Salvador’s President Nayib Bukele has announced plans to develop a 'Bitcoin City' that would be funded by the cryptocurrency and powered by a volcano.

El Salvador officially took the step in June this year of becoming the first country in the world to accept Bitcoin as legal tender and now plans to construct a “Bitcoin City” in the country’s southeast.

The June policy shift obliged all local businesses from hair salons to coffee shops to accept Bitcoin as payment and meant the country would accept both US dollars and Bitcoin for all transactions.

Since the introduction of Bitcoin as a currency, more citizens of El Salvador have a Bitcoin wallet than they do a traditional bank account.

It is estimated that around 2 billion people in the world right are currently unbanked, by simply having a mobile phone or access to a computer, these people are able to tap into the Bitcoin network.

Bitcoin city

As a superlative follow-up to its audacious plans (or, in some people’s eyes, a rescue attempt) El Salvador is now hatching plans for a Bitcoin City, unveiled on 21 November at Bitcoin Week by El Salvadoran president Nayib Bukele – a notable millennial in the country’s political history of typically senior presidents.

According to Mr Bukele, access to Bitcoin will allow millions of El Salvadorans living in the US to send money back home with the notable benefit being a complete lack of commissions and transfer waiting times.

Not stopping there, El Salvador will launch a US$1 billion “Bitcoin bond” to help fund the construction of its new Bitcoin city along the volcanically active Gulf of Fonseca – a 260km stretch of coastline in Central America.

The government plans on building a power plant adjacent to the Conchagua volcano in the southeast of the country to provide energy for both the city and Bitcoin mining, the president said.

Construction is expected to commence next year and is already being touted as the future jewel of a crypto “municipality” offering a variety of living and investment opportunities.

Bitcoin metropolis in a crypto municipality

In his presentation last week, Bukele explained Bitcoin City will be a fully functioning metropolis containing both residential and commercial areas, as well as restaurants and an airport.

Current plans see the city being laid out in a circle with a central plaza to be occupied by an extravagant Bitcoin symbol.

Importantly, the city will have no income, property, capital gains or payroll taxes which raises the prospect of a new era for crypto investors – a place crypto earnings are fully ringfenced away from government taxes.

Bitcoin city El Salvador Nayib Bukele income capital gains property payroll tax
The only tax in Bitcoin City will be a 10% value-added tax to fund city construction and services.

Bitcoin City could hail a shift in how money is perceived, whereby traditional currencies created by central banks are gradually phased out in favour of decentralised cryptocurrencies.

The inevitable result could be all central banks launching cryptocurrencies of their own with the UK’s Bank of England already discussing a “Britcoin”, while Ethiopia is actively going ahead with its “watershed moment” partnership with Cardano.

Other central banks, including the US Federal Reserve and the PBOC, have also expressed interest in developing a national cryptocurrency in recent months.

Bond maturity

Maturing in 2032, president Bukele’s Bitcoin bond will issue annual coupon payments of 6.5% which amounts to around 50% of the amount paid on standard 10-year El Salvador bonds.

Relatively lower returns combined with perceivably more risk is particularly irksome but it has not dismayed crypto investors. For issuance, El Salvador is partnering with Blockstream who has agreed to develop a tokenised financial instrument on the Liquid Network.

From the $1 billion capital raise, US$500 million is expected to be used to construct energy and Bitcoin mining infrastructure while the other US$500 million will be used to acquire more Bitcoin.

At the cryptocurrency’s recent trading price of about US$60,000, that would take the country’s treasury holding to around 9,000 Bitcoins.

According to Blockstream, El Salvador intends to institute a securities law and intends to grant an operator’s licence to Bitfinex Securities to process the issuance. Blockstream’s chief strategy officer Samson Mow confirmed that following a five-year “lockup period”, El Salvador will sell its cryptocurrency holdings and pay an added dividend to bondholders.

“By the time 10 years have elapsed the annual percentage yield will be 146%, based on Blockstream models predicting the price of Bitcoin will have hit US$1 million within the next five years,” said Mr Mow.

Crypto wonderland

At first, cryptocurrencies attracted the attention of individuals, keen to empower their financial wellbeing and to improve payment flexibility.

Then came the corporations, seeking to utilise the power of digitisation and decentralisation to offer a variety of coins with a wide range of features and unique abilities.

Now, it seems governments are playing catch-up and getting in on the act of utilising blockchain, distributed ledger technology, decentralised finance and cryptocurrencies to help improve their economies.

Despite the apparent efficiencies and widescale empowerment facilitated by Bitcoin and cryptocurrencies in general, potential risks remain.

An early criticism of El Salvador’s plans is that the country will set a precedent for so-called “crypto municipalities” that serve as de-facto tax havens for wealthy crypto investors.

The entire crypto landscape remains largely unregulated, and therefore, supported only by private interest and speculative demand.

However, in a world where governments are seeking to increasingly control every aspect citizens lives, this may be a solution for those who prefer freedom.

Also, far from stable, Bitcoin prices remain highly volatile.

Prices rose to highs of around US$62,000 in April this year, only to cascade back down to US$30,000 by July.

At the time of writing, Bitcoin was trading back up at around US$59,500 having made a record high of US$68,990 earlier this month – demonstrating how volatile cryptocurrency gyrations can be, even for its leading bellwether.

The hope is that El Salvador’s big bitcoin ambitions do not suffer the same gyratory fate and can advance as adoption of the asset class continues to gather pace.

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