Nayib Bukele, president of El Salvador, announced in November 2021 an ambitious plan to build the so-called Bitcoin City in the municipality of La Unión in the Conchagua region. A couple of months before, he had announced this cryptocurrency as a legal tender in El Salvador in September 2021. He has been buying the dip and now holds 2,301 BTC. He has also just announced the plans for this crypto city, turning deaf ears to complaints about Chivo Wallet.
What about Bitcoin in El Salvador?
In September 2021, El Salvador was the first country to accept Bitcoin as legal tender. A couple of months later, president Nayib Bukele announced his intention to build a Bitcoin City at the Bitcoin Week. According to Bloomberg, he has been buying Bitcoins since September and now holds 2,301 BTC. His intentions are clear and moving forward while expectations and skepticism grow.
Bitcoin City, an Ecological and Promising Project
The announcement of Bitcoin City took place as a big show with fireworks. Bukele showed up on stage like a rock star, introducing himself as «The President.» He led the event in English, asking the audience if they liked their country, which clarified he was addressing foreigners.
This city plans to use new geothermic plants to take advantage of Conchagua volcano energy. The town will have a circular shape surrounding a Bitcoin monument placed in the middle.
The city will have an airport, train station, and seaport to take advantage of its proximity to the Gulf of Fonseca. It will expand over 7,000 hectares and be a fully functional city with residential, commercial, and entertainment areas. In addition, the Bitcoin mining areas will benefit from the volcano’s activity to supply power.
Are Tax Benefits for all Salvadorians?
The Salvadoran government seeks to attract residents and businesses through various tax benefits. All inhabitants will be exempt from taxes, except the value-added tax (VAT). However, Bukele claims that half of the VAT collected will pay for the municipal bonds issued and the infrastructure and operation of the city.
But what about the rest of the Salvadorans? With this fiscal scheme, the city will function as a parasite since it will continue to receive funds without contributing to the national tax collection. It will only accentuate the problems that have dragged the country down for decades.
In El Salvador, 26.9% of the population lives in poverty. A lot of gang violence pushes thousands and thousands of Salvadorans to leave their country because they fear for their lives. Infrastructure is insufficient to meet the needs of its population. It is not clear how President Nayib Bukele’s project will benefit ordinary Salvadorans.
Bitcoin City and the Environment
Cryptocurrency mining consumes a lot of energy, so it is often called a polluting activity. However, Bukele said the Conchagua region has a volcano that will supply power to Bitcoin City.
The volcano will power the whole city and will also power the mining … It is a totally ecological city that will work and get its energy from a volcano.Nayib Bukele
Geothermal Facilities nearby the Volcano would Provide Potential Energy
During the presentation of the project, Bukele stressed that the city would have zero CO2 emissions since it would supply its electricity needs with geothermal energy.
In the first instance, this can be an excellent measure to mitigate the polluting effects of the new city. However, a more critical gaze suggests the actual adverse environmental impact. Carlos Martínez Cruz, a professor at the University of El Salvador, clarifies using installed capacity. At the same time, the unique geothermal plants would leave thousands of families without electricity.
El Salvador is an importer of energy, and as a consequence, the combustion of petroleum derivatives would compensate for the diverted energy, which is environmentally counterproductive.
First City Financed by Bitcoin
The government will issue tokenized bonds called «Volcano Bond» to finance the city. This project will cost approximately 17 billion dollars. The country plans to launch a 1 billion bond round in 2022 with 6.5% annual interest and a 10-year subscription. Half is to acquire Bitcoin, and the rest is to start the construction of geothermal and mining plants.
Building cities from scratch is possible, but it is also quite ambitious. For example, Brasília was built between 1956 and 1960 to be the new capital of Brazil and become a metropolis. It cost approximately 1.5 billion dollars, which is a very high price considering inflation.
One of the project’s initial objectives was to attract Brazilians from other large cities and create an environment without inequality among inhabitants to benefit the population of Brazil. In this case, the question is how Bitcoin City will impact the average citizen of El Salvador.
Salvadorans Reject the Use of Bitcoin
Indeed, this blind faith that Nayib Bukele shows for Bitcoin has generated skepticism and harsh criticism of the approach of this project. Martínez Cruz adds that the area has a hot and humid environment. Therefore, cooling down the computers that mine Bitcoin requires a lot of energy, which would generate unnecessary energy consumption.
In Soyapango, nobody uses those bitcoins, neither my friends nor my neighbors, nor do they receive them in the store. They do not serve us, because here everything is still pure dollars … That [plan] of the president is for other people.See AlsoDalila Meléndez, habitant of Soyapango.
Within the average Salvadoran public, sentiment towards the construction of the new city is negative. Bitcoin City is aimed at particular people who do not represent the bulk of the Salvadoran population. The presentation was conducted in English, while El Salvador’s illiteracy rate is 11%, and only 45.7% of the population speaks English.
Bitcoin City seeks a foreign and wealthy public that trusts Bitcoins. In this way, Bukele aims to fulfill a chimera. The hometown of El Salvador seems to benefit little or nothing from the project.
Is It a Money Laundry Paradise?
The main attraction of Bitcoin is that it provides anonymous and fast transactions without the intervention of third parties. On the one hand, many consider this a perfect option for illicit activities. They argue that it will not be possible to determine if the Bitcoin received comes from a legitimate investor or someone who obtained it through illegal activities.
The criminals will find fertile ground, since there are no institutional legal frameworks. El Salvador could be considered as a paradise for money laundering.Ricardo Castañeda Archeta, economist at Instituto Centroamericano de Estudios Fiscales.
Others believe that t of the illicit acts already occur with traditional money, so the problem is not the cryptocurrencies themselves.
Great Expectations and Skepticism
El Salvador continues its path as the first country to make Bitcoin legal tender. It involves big plans that blindly place their trust in this cryptocurrency. This significant commitment by Nayib Bukele generates great expectations. The eyes of the world are on El Salvador with high skepticism that the common Salvadoran will benefit from Bitcoin City.
Recent claims show Chivo Wallet has reported several issues concerning misuse of users’ identities and lost funds in several accounts. This problem deserves further analysis to show that Bitcoin adoption in El Salvador is not going as planned. Although cryptocurrencies imply a decentralized economy that may benefit developing countries, Bukele’s strategy is questionable. Still, he just presented an update of Bitcoin City plans on Twitter, moving his project forward amidst uncertainty.
First published in Spanish on December 16, 2021. Translated and edited on May 11, 2022.