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EXPLAINED: An Alexandria, A Singapore? What El Salvador's 'Bitcoin City' Will Look Like, How It'll Come Up

El Salvador President Nayib Bukele at the Latin Bitcoin conference at Mizata Beach in El Salvador where he announced the plan to create Bitcoin City (AFP)

El Salvador President Nayib Bukele at the Latin Bitcoin conference at Mizata Beach in El Salvador where he announced the plan to create Bitcoin City (AFP)

It is the first country in the world to make Bitcoin legal tender. Now, under its President Nayib Bukele, El Salvador is set to create a 'Bitcoin City'

Bitcoin is already legal tender in the tiny Central American country of about 70 lakh people. Now, Nayib Bukele, its 40-year-old Bitcoin enthusiast president, has announced that the country will create a ‘Bitcoin City‘ that will stand the test of time. More significantly, the proposed city will virtually have no taxes and will be partially funded by Bitcoin, the first and the largest cryptocurrency by market value, even as most countries around the world view it, and others of its ilk, with suspicion.

Where Is Bitcoin City Going To Come Up?

Bukele said that the Bitcoin City will be located in the region of La Union in the south-eastern part of El Salvador. It will lie along the Gulf of Fonseca at the base of the Conchagua volcano.

Construction of the city is expected to begin in 2022 with Bukele saying that the project will be taken up “in the 60 days after the financing”, some of which is going to come from a special bond to be issued by his government.

Announcing the plans at a Bitcoin and blockchain conference, Bukele said the new city would “include everything”. “Residential areas, commercial areas, services, museums, entertainment, bars, restaurants, airport, port, rail — everything devoted to Bitcoin,” he said.

The contours of the city will be circular to convey the shape of a large coin and it will contain a central plaza that looks like the Bitcoin symbol from the air. Bukele invoked the city of Alexandria in Egypt, founded by the Greek conqueror Alexander the Great, as he laid out his plan. “If you want Bitcoin to spread over the world, we should build some Alexandrias,” he said.

How Will The Bitcoin City Be Funded?

Bukele announced that there will be no taxes levied on the residents of the city, with only a value added tax (VAT) to be collected that would go towards meeting the infrastructure spend and keeping its streets “neat and clean”.

He further said that his government will provide the land and public infrastructure and also take steps to attract investors to the city, where “access will be equal to everything”.

“We will have no income tax, forever. No income tax, zero property tax, no procurement tax, zero city tax, and zero CO2 emissions. The only taxes that they will have in ‘Bitcoin City’ is VAT, half will be used to pay the municipality’s bonds and the rest for the public infrastructure and maintenance of the city,” said a statement from the El Salvadorean president‘s office.

Reports said Bukele anticipates that the cost of building the public infrastructure for the city would be covered by around 300,000 Bitcoins. One Bitcoin is currently trading at close to USD 60,000. Which means that the proposed city would take his government about USD 18 billion to set up.

Interestingly, the energy for running the city and supporting Bitcoin mining — an energy-inensive process for creating new Bitcoins through the solving of cryptographic codes — will be drawn by way of geothermal energy from the Conchagua volcano. “This is a fully ecological city that works and is energised by a volcano,” Bukele said.

What Is The Bitcoin Bond That El Salvador Is Floating?

El Salvador will also be issuing a ‘Bitcoin bond” to raise USD 1 billion, half of which will be used to fund the creation of energy and Bitcoin mining infrastructure for the ‘Bitcoin City’ while the other half would be used to buy even more Bitcoin. For this, the Bukele government has tied up with Blockstream, a Bitcoin services company.

El Salvador will also be bringing in a securities law to enable the floating of the Bitcoin bond with the first licence for facilitating the bond issue to go to Bitfinex Securities.

The USD-denominated bonds will have a 10-year term with a five-year lock-in period. The Bitcoin-backed bond will initially pay a dividend of 6.5 per cent, but Samson Mow, the chief strategy officer of Blockstream who was present on stage when Bukele made the Bitcoin City announcement, said that El Salvador would start selling some of the Bitcoin bought with the capital after the five year lock-in to offer extra dividend to investors.

Mow said that his forecast is based on an assessment by Blockstream of a continued rise in the value of Bitcoin, which has actually witnessed wild fluctuation in value ever since its launch in 2009. Reports said that 10 years after the bonds are issued in 2022, the annual jump in Bitcoin value would be close to 150 per cent, predicting that the price of a single Bitcoin will touch USD 1 million in the next five years.

Mow added that by using its USD 500 million corpus to buy Bitcoins — it will give the El Salvador treasury about 9,500 Bitcoins at current prices — the country will help push up Bitcoin’s value by taking so much of the cryptocurrency out of circulation. In a blog post, Mow said the “bond has the potential to accelerate hyperbitcoinisation and bring about a new financial system built on top of Bitcoin”. That would make “El Salvador the financial centre of the world” he had said, adding that the country will become “the Singapore of Latin America”.

What Do Salvadoreans Think Of Bukele’s Bitcoin Push?

Reports say that Bukele has championed Bitcoin adoption as a means of bringing much-needed investment to his country, one of the poorest in Latin America. After he made Bitcoin legal tender in September, the wildly popular Bukele — he is the leader of the populist New Ideas party, which he had founded in 2017 — had seen protests breaking out against the move.

The El Salvador government had also launched a e-wallet for Bitcoin transactions called Chivo — local slang for ‘cool’ — paying USD 30 in Bitcoin as an incentive for downloading the app. His government now says that “millions of Salvadorans make purchases and sales of products and services with this cryptocurrency” while those living abroad “send remittances without paying commissions”.

Promoting the legal status to Bitcoin — El Salvador does not have its own currency and uses the US dollar as its main legal tender — Bukele had said it would spur economic growth and lead to job creation. Announcing the ‘Bitcoin City’ plan, he invited people to “invest here and make all the money you want”.

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first published:November 23, 2021, 14:41 IST