Complex Made Simple

Bitcoin City is a bitcoiner’s dream that could crash Salavadorans’ hopes

El Salvador is planning the construction of a Bitcoin City to help people mine cryptocurrencies. Investments to build this city will come from bitcoin bonds. Will investors buy into this?

For electricity, no less than a volcano will power a geothermal plant in Bitcoin City El Salvador will issue $1 billion worth of bonds by early 202,2 available at prices as low as $100 The Bitcoin City announcement came as El Salvador was in negotiations with the IMF for a loan of $1.3 bn

El Salvador is planning the construction of a Bitcoin City to help people mine cryptocurrencies. Investments to build this city will come from bitcoin bonds that the government plans to issue in less than 60 days.

El Salvador recognized bitcoin as legal tender, earlier this year.

Last November, President Nayib Bukele declared that the country was building schools from bitcoin profits.  

Shaped like a coin, the city will have in place typical infrastructures such as commercial and residential areas, airports, train stations, restaurants, entertainment centers, and more, an official press release said.

As for electricity, a lot of which will be needed to mine bitcoins, no less than a volcano will power a geothermal plant near the Gulf of Fonseca.

In the press release, President Nayib Bukele said that the proposed city would have no income taxes, property taxes, zero municipal taxes, and zero CO2 emissions. The only tax applicable would be a 13% value-added tax (VAT) that would be split in half. One half would be used to pay for urban purposes in the city, while the other would be used to finance the bonds that will be used to raise money for building the city itself. 

According to the plans unveiled by the government, El Salvador will issue $1 billion worth of bonds by early 202,2 available at prices as low as $100. Half of the amount will be used to construct the city and infrastructure while the other half will be used to buy more bitcoins.

After a lock-in period of about five years, El-Salvador will begin to divest its bitcoin holdings, at prevalent market rates, which are estimated to be higher than what they are now, helping the government make windfall profits, Reuters reported. The country plans to issue several more bonds over the next few years.   

Naysayers

Can a plan materialize in the coming years?

El Salvador is one of the poorest countries in the region, and some may argue that the money could be invested in needed services like health and education.

Money laundering

Another worry is that the government lacks institutional controls to detect and sanction money laundering activities related to bitcoins. And in El Salvador, dealing with cryptos, bitcoins, or other altcoins, is not familiar to most of the country’s residents. Dollars are legal tenders everywhere ($1 =8.75 Salvadoran Colones).

Fiat or bitcoin?

Over 2 months since bitcoins began circulating as legal currency in El Salvador, a recent survey revealed that when Salvadorans can choose which currency to pay with, 91.4% wwill use the dollar, while only 5% favored bitcoins.

A different poll by the Center for Citizen Studies at Francisco Gavidia University found 35% were ready to adopt bitcoin, while 40% were opposed.

Immature bonds

Another issue arose with what is now known as “The Volcano bonds”, which would run for 10 years at 6.5% interest at the end of which El Salvador would have to pay about $1.65 bn to investors.

The announcement came as Bukele’s government was in negotiations with the IMF for a loan of $1.3 bn to improve state finances because the country was at risk of defaulting on sovereign bonds maturing in 2023, according to media reports.

The IMF warned that the country’s public debt could grow to 95% of its GDP by 2026. It also said the use of bitcoin as a legal currency entails serious risks because of the volatility of cryptocurrencies.

Not enough vs dirty energy

El Salvador does not produce enough energy to meet its existing needs. The country imports 25% of its electricity from fossil fuel power plants located elsewhere in the region.

Bukele claims Bitcoin City will be carbon neutral, but the carbon footprint of the bitcoin network could be staggering because of it.  

According to Samson Mow, CSO of Blockstream, a leading provider of blockchain technologies, for the city’s proposed funding mechanism to work out, the market price of bitcoin would need to rise to $1 million after 5 years. But even at $0.5 mn, bitcoin’s global emissions could be belching out 617 million tons of carbon a year.

Setting bad examples

The Caribbean island of Puerto Rico has become a hub for crypto developers, attracted by tax incentives and light-touch regulation. In the aftermath of Hurricanes Irma and Maria in 2017, bitcoiners started snapping up urban beachfront properties on the cheap, building exclusive libertarian enclaves, pricing out the locals and offering little in return.

Senegal’s Akon City, a $6 bn smart city with its own purpose-built cryptocurrency Akoin, remains grassland despite much fanfare, leaving locals wondering about their future.

Recent research suggests bitcoiners are drawn to poorer and vulnerable communities to take advantage of economic instabilities, weak regulations, and access to cheap energy and other resources.