El Salvador

El Salvador’s government has taken another step towards transforming the country into an extravagant crypto-libertarian utopia. President Naib Bukele has pledged to build Bitcoin City on the Pacific coast, which will be fully powered by the volcano. Residents of this city will receive full tax exemption with the exception of VAT. Funding for the construction of a new settlement is planned to be provided through special “volcanic” bonds. The Salvadorans intend to bail out the equivalent of $ 1 billion in the first issue alone. Details – in the material “Izvestia”.

Bold decisions

El Salvador is one of the smallest and poorest Latin American countries (only Venezuela, Bolivia, Honduras, Nicaragua and Guatemala are lower in GDP per capita), which most people associate with only a high level of crime, mass emigration to the United States and the Mara Salvatrucha criminal group “. Otherwise, El Salvador was perceived as a remote province of Latin America. In a completely new light, this country was presented by President Naib Bukele, who this year decided to make it the main world center of the cryptocurrency industry.

Bukele is an extremely interesting politician: if he were a bigger head of state, he probably would not have left the front pages of the world’s largest publications. The 40-year-old president comes from a family of Middle Eastern Christian Arabs, of whom there are many millions in Latin America. True, his father converted to Islam at a mature age, founding the country’s first mosque. Naib himself, making curtsies towards all Abrahamic denominations, made a dizzying political career – from the mayor of the tiny town of Nuevo Cascatlan (2012) through the chair of the head of the capital of San Salvador (2015) to the presidency (2019). Having earned a reputation as a “strong hand” that conquered crime in the controlled territories, in the presidential elections he defeated competitors, who were put forward by the two dominant systemic parties in the Salvadoran political field. After the victory, his rating went off scale. In none of the approval polls since June 2019, he scored less than 80% – a result not every dictator can handle. It did not interfere with universal approval (and maybe even helped) entry of troops to parliament in Napoleon style to pass the US loan law necessary for the president.

El Sonte, El Salvador

Фото: REUTERS/Jose Cabezas

In 2019, in the small town of El Sonte, a haven for surfers, an experiment was launched to create a community where cryptocurrencies would be used for payments. The Bitcoin Beach program turned out to be quite successful, despite the fact that the vast majority of the inhabitants of the village did not initially trust the crypt. Nevertheless, by 2020, virtual currencies were actively used to help families affected by the pandemic, and even as a reward for schoolchildren who successfully complete their homework. The example inspired Bukele, and he decided to do something similar at the national level.

Official crypt

On June 5, 2021, the president announced that he intends to soon make bitcoin the official means of payment in the country. They moved from words to deeds very quickly: on June 8, the bill was adopted by the parliament, which at that time was already quite loyal to the head of state. Less than three months later, on September 7, the real introduction of bitcoin into the financial system of El Salvador started – for the first time in the world.

The plan was as follows: the state with budget funds bought 400 bitcoins for a total of about $ 20 million. By the way, this greatly influenced the rate of the most popular cryptocurrency, allowing it to rise above the $ 50 thousand mark for the first time since May. download any Salvadoran and get the equivalent of $ 30 on a crypto wallet. The entire operation was carried out by the Salvadorans independently with the support of IT enthusiasts. The World Bank refused to help with this operation.

The main idea was that the citizens of the country could get access to electronic payments, bypassing traditional intermediaries – banks and payment systems. Bukele argued that settlements through bitcoin would allow the country’s residents to save about $ 400 million a year on transactions. According to him, this is how the country had to break “with the traditions of the past” and take a step “into the first world.” However, at first I had to hobble rather. First, about half of the country’s population does not have reliable access to the Internet, therefore, and could not enjoy the benefits of distributed financial systems. Secondly, many of those who had such an opportunity were faced with the fact that the application turned out to be impossible to download from Apple, Google and Huawei platforms. It turned out that the developers did not take into account the simultaneous interest in the program at all and the traffic surpassed the capabilities of the servers. Nevertheless, when the situation settled down, the government decided that the experiment was generally successful and bought another 150 bitcoins, taking advantage of the temporary price drop on crypto exchanges.

President of El Salvador Naib Bukele

El Salvador President Naib Bukele Unveils Plan for First Bitcoin City

Фото: REUTERS/Jose Cabezas

Practice has shown that, despite criticism (in the first two weeks, foreign media reported the operation to legalize bitcoin as a failure), certain successes were achieved, and the use of cryptocurrency began to grow. Many businesses refused to accept bitcoin as a means of payment – government coercion in this matter was not applied everywhere. At the same time, the program has become very popular among expats who donate their money to families in El Salvador. In total, by mid-October, about 12% of the population admitted that they use cryptocurrency in their monetary transactions, and the number of Chivo wallet owners exceeded 3 million people, or more than half of the country’s population.

Volcano energy

Inspired by the results achieved, the Salvadoran authorities have now put forward a much more ambitious project: the construction of an entire city – Bitcoin City. This is not just a pretty name: something like a libertarian utopia will be created in the city, to which cryptocurrency enthusiasts gravitate. Bitcoin City will not have the usual taxes for El Salvador, including income taxes. The only exception will be for VAT. For the rest, the construction and maintenance of the city will be initially financed through the issuance of special bonds.

The implementation of the project will begin not “in the distant bright future”, but as soon as possible. In early 2022, it is planned to place a bond issue for $ 1 billion, and construction will start 60 days after the placement. Bukele and the company have foreseen a response to criticism of Bitcoin, which has recently been accused of a colossal consumption of electricity (more than countries like Argentina or Norway) and, accordingly, an increase in global warming. Bitcoin City will be powered by geothermal energy from nearby Konchagua volcano, eliminating CO emissions2.

bitcoin

Photo: REUTERS / Edgar Su

From a purely technical point of view, this is by no means science fiction. Geothermal energy is used in several countries around the world, and for example, in Iceland it is the main one. Some power plants – such as Krafla in the northeast of the island – reach 60 MW, which should be enough to power a mid-sized city. The obvious advantage of geothermal plants over other renewable energy sources is that they can operate around the clock and are completely independent of the weather. On the other hand, technologically this is a rather difficult task, and there are not so many companies and people who possess the necessary skills for the construction and operation of such an object in the world – in contrast to the rapidly growing industry of wind and solar power plants.

Spend and earn

Funding for a large-scale project looks like this in general terms: the state will issue “volcanic bonds”. Half of the proceeds from the placement will go to the construction of infrastructure, and the other half will be purchased by bitcoins. The bond rate will be 6.5%, which is more than half the rate for El Salvador’s usual 10-year bonds. By the way, Salvadoran debt securities are very popular with investors, and the excitement demand for them arose immediately after the announcement of the transition to bitcoin in financial settlements. Subsequently, new issues are planned, the volume of which may reach $ 5 billion. The cost of one security will be about $ 100, which, according to the Salvadorans, will “democratize” access to them.

The government expects the price of bitcoin to jump significantly in a few years. Thus, the state will be able not only to easily pay off the resulting debts, but also provide investors with an additional coupon. The acquired bitcoins will be frozen, and their sale will begin no earlier than in five years. Bukele’s associate, blockchain technology developer Samson Moe, predicts that Bitcoin should reach the $ 1 million mark 10 years after the placement, which will bring investors a net return of 146%.

El Salvador

Фото: REUTERS/Jose Cabezas

The prospects on paper are encouraging. Bukele and his associates quite well captured the spirit of the times in their project. First, investors in a low-interest environment want high-yield investments and are ready to invest in risky activities. Secondly, the project itself looks breakthrough and revolutionary, and also received good publicity. Comparisons of Bitcoin City with Alexandria – the fundamentally new cities that Alexander the Great built throughout Asia – may impress many. You can ask Elon Musk or his less famous colleagues from Rivian and Tesla about what happens to enterprises that have provided successful PR. Libertarians from around the world can also take an interest in a tax-free city.

The wrong side of the whole event is that El Salvador remains an extremely problematic country, including in terms of public finances.. In January 2023 as writes Reuters, the state will need to repay bonds for $ 800 million. These securities in the secondary market are now circulating with a 20% discount, which indicates the uncertainty of investors in the return of funds. Bitcoin bonds have an incomprehensible legal status – it is completely unclear how they will be redeemed if El Salvador defaults on traditional securities. The problem of corruption, common for Latin American countries, also raises questions, which can interfere with the bright plans for the construction of the “city of freedom”. However, if El Salvador succeeds in infecting foreign and local investors with its enthusiasm, all these fears will fade into the background – at least for a while. And it will be incredibly interesting to follow the creation of the first cryptocurrency city in the world.

Leave a Reply