El Salvador Builds World's First Bitcoin City

The Bicoin City built by El Salvador will become the world's digital financial center. (photo: twitter)

JAKARTA - El Salvador plans to build the world's first "Bitcoin City", initially funded by bitcoin-backed bonds. This development plan was revealed by President Nayib Bukele on Saturday, November 20, who again risked using cryptocurrencies to encourage investment in the Central American country.

Speaking at the closing ceremony of a week-long bitcoin promotion in El Salvador, Bukele said the planned city in the eastern region of La Union would derive geothermal power from a volcano and levy nothing but value-added tax (VAT).

"Invest here and make all the money you want," said Bukele in English, dressed all in white and wearing an upside-down baseball cap, at the beach resort of Mizata. "It's a completely ecological city that works and is energized by volcanoes."

Along the Gulf of Fonseca, near a volcano, will live #BitcoinCity: a place with no income, property, payroll or municipal taxes, Salvadoran President @nayibbukele announced at #BitcoinWeek last night. 👇https://t.co/yJcHknpdJB pic.twitter.com/bS1mOEGX4b

— CoinDesk (@CoinDesk) November 21, 2021

Half of the VAT collected will be used to fund bonds issued to build cities, and the other half will pay for services such as garbage collection, Bukele said. He also estimates the public infrastructure will cost around 300,000 bitcoins.

El Salvador in September became the first country in the world to adopt bitcoin as a legal tender.

Although Bukele is a popular president, polls show Salvadorans are skeptical about his love of bitcoin, and his bumpy introduction has sparked protests against the government.

Resembling his plans for cities founded by Alexander the Great, Bukele said Bitcoin City would be circular, with airports, residential and commercial areas, and feature a central square designed to look like a bitcoin symbol from the air.

“If you want bitcoin to spread around the world, we have to build some Alexandria,” said Bukele, a 40-year-old tech expert who in September declared himself the “dictator” of El Salvador on Twitter in a joke.

El Salvador plans to issue bonds early in 2022, Bukele said, stating it would be within 60 days.

Samson Mow, chief strategy officer of blockchain technology provider Blockstream, said at the meeting that the first 10-year issue, known as the "volcano bond", will be worth $1 billion, backed by bitcoin, and carry a 6.5% coupon. Half of that amount will be used to buy bitcoins on the market, he said. Other bonds will follow.

After a five-year lockdown, El Salvador will start selling some of the bitcoins used to fund bonds to give investors "additional coupons", said Mow, noting that the cryptocurrency's value will continue to rise strongly. "This will make El Salvador the world's financial center," he said.

The bonds will be issued on the "liquid network", the bitcoin sidechain network. To facilitate the process, the government of El Salvador is drafting a securities law, and the first license to operate the exchange will be granted to Bitfinex, Mow said.

Crypto Investment Bitfinex was listed as a book-runner for bonds at the presentation behind Mow.

Once 10 such bonds are issued, $5 billion of bitcoin will be taken off the market over several years, Mow said. "If you get 10 more countries to commit these bonds, then that's half the market cap of bitcoin there."

Mow argued that the "game theory" on bonds gave El Salvador's first issuers an advantage. "If bitcoin at the five-year mark hits $1 million, which I think it will, they'll sell bitcoin in two quarters and close it at $500 million," Mow said.