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Tuesday, December 07, 2021

Explained: What is El Salvador’s Bitcoin city?

El Salvador's “Bitcoin City” would be funded with the issuance of a $1 billion Bitcoin Bond. The city will be located along the Gulf of Fonseca near a volcano.

Written by Mehab Qureshi , Edited by Explained Desk | Pune |
Updated: November 23, 2021 12:25:22 pm
El Salvador's president Nayib Bukele speaks at the closing party of the “Bitcoin Week” where he announced the plan to build the first "Bitcoin City" in the world, in Teotepeque, El Salvador November 20, 2021. (Reuters)

El Salvador, the only country to recognise Bitcoin as a legal tender, is planning to build an entire city based on the largest cryptocurrency Bitcoin, President Nayib Bukele announced to a gathering of Bitcoin enthusiasts on Saturday at Bitcoin Week in El Salvador.

El Salvador’s “Bitcoin City” would be funded with the issuance of a $1 billion Bitcoin Bond. The city will be located along the Gulf of Fonseca near a volcano.

Bukele’s administration is counting on Bitcoin to spur the country’s economic growth, and investment, assuming that Bitcoin price remains on an overall upward trajectory. Here we explain Bukele’s plan for a Bitcoin city.

What is Bitcoin city? How will Salvadorans benefit?

Bitcoin city, as planned by the El Salvador president, will be laid out in a circle (like a coin) and in the city center will be a plaza that will be host to a huge Bitcoin symbol, according to a report by Reuters.

The city will be built near the Conchagua volcano to take advantage of the country’s geothermal energy— to power both the city and cryptocurrency mining —an energy consuming process of solving complex mathematical calculations day and night to verify and add crypto coins to the Blockchain network.

It is worth noting that El Salvador is already running a pilot Bitcoin mining venture at another geothermal power plant beside the Tecapa volcano.

According to Bukele, the residents of Bitcoin city won’t have to pay any income, property, capital gains or even payroll taxes. The city would be built with attracting foreign investment in mind.

Further, there would be residential areas, malls, restaurants and a port in the Bitcoin city, Bukele said. In addition, the country will have access to “digital education, technology and sustainable public transportation,” Bukele noted in the event. “Invest here and earn all the money you want.”

Besides, the only tax collected there will be the value-added tax, half of which will be used to pay the municipal bonds and the rest for municipal infrastructure and maintenance. Bukele pointed out there would be “no property, income or municipal taxes and the city would have zero carbon dioxide emissions,” as per a report by AFP. However, the El Salvador president didn’t provide a timeline for the city’s creation.

What are Bitcoin Bonds?

Bukele unveiled a $1 billion US “Bitcoin bond”—half of which ($500 millions) would be used to build energy and mining infrastructure, and the rest ($500 millions) will be used by the country to buy more Bitcoins.

The issuance of these bonds will be managed by Blockstream, a Bitcoin services-focused company. The tokenised bond will be available to a number of users in the world that will have access to invest in small amounts as low as $100 dollars, according to statements from Blockstream’s CSO Samson Mow. “Since we’re using the Liquid Network and Blockstream AMP, we’re also able to easily accept investments as small as $100 to democratize access to the bond.”

Dividends will be paid easily to bondholders using tools deployed on top of the Liquid network. “We believe this bond has the potential to accelerate hyperBitcoinization and bring about a new financial system built on top of Bitcoin,” Blockstream, the company issuing these bonds, said in a blog post.

“The Bitcoin Bond represents the start of a reformation of capital markets, built on Bitcoin and layer-2 technologies like the Liquid Network. Now, investment capital can flow in from around the globe without friction. Dividends can be distributed to investors instantly, with built-in cryptography to maintain confidentiality. Bonds can be traded 24/7 with other assets like stablecoins, using protocols that help eliminate the need for trust,” the company issuing the bonds added.

How will the bond benefit people?

After a five year lock-up of the bonds, El Salvador would eventually start selling some of the Bitcoin used to fund the bond to give investors an “additional coupon”, Mow said. He believes that the value of Bitcoin would continue to rise robustly. “This is going to make El Salvador the financial center of the world,” he said.

“El Salvador would start selling crypto holdings after five years and pay an extra dividend to bond holders. With an initial 6.5 percent yield, this could represent a significant windfall for the country if all goes well,” Mow asserted.

“Once 10 such bonds were issued, $5 billion in Bitcoin would be taken off the market for several years, and if you get 10 more countries to do these bonds, that’s half of Bitcoin’s market cap right there,” Mow said as quoted by Reuters.

Mow suggested that if the value of Bitcoin at the five-year mark reaches $1 million, which he firmly believes, then El Salvador “will sell Bitcoin in two quarters and recoup that $500 million.”

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