What Will Be the Bitcoin City in El Salvador?

Introduction

El Salvador's president, Nayib Bukele, unveiled plans to build an oceanside "Bitcoin City" at the base of a volcano in front of an audience of investors and every foreign visitors who are familiar with crypto on CEX.IO.

Bukele claimed that his new urban center was inspired by Alexander the Great's mythical cities, except that El Salvador's would be powered by Bitcoin.

"This isn't just a good thought. It's the progress of humanity," Bukele said amid a display of lights, smoke machines, an AC/DC song, and pictures that included his figure descending from a colorful UFO, his face in maximalist proportions, and a re-creation of the future city's central square, among other things. The Bitcoin sign would be visible from the air in the town square.

However, numerous analysts and specialists believe that such a project will be impossible to complete in the following years.

The project's technical plan has not been revealed. Bukele promised that it would be located near the Conchagua volcano, whose geothermal energy would be used to power Bitcoin mining and the city's needs.

"El Salvador has the natural resources to produce much electricity, but it lacks the infrastructure." "We must remember that we are one of the poorest countries in the region," José Miguel Cruz, director of research at Florida International University's Kimberly Green Latin American and Caribbean Center, said. "That money might go toward health care and education."

Bukele claims that his planned city will be environmentally friendly and that it will be tax-free almost entirely: only a 13% value-added tax will be charged, of which 6.5% will be used to issue bonds to build the city, and the rest will be managed by the municipality for public services and other urban needs.

According to analysts, the incentives to attract investment are a double-edged sword because the government lacks institutional measures to detect and prosecute money laundering actions involving Bitcoins.

"The Salvadoran government is known for systematically destroying political and financial control structures," Cruz stated. "In addition, all bitcoin-related projects are opaque. So we don't know who assures that no money laundering operations are taking place."

"Volcano Bonds"

Despite Bukele's attention-getting event, many observers were more interested in another announcement: issuing $1 billion in "volcano bonds" in the Bitcoin ecosystem.

According to a document distributed by Salvadoran government officials to potential investors and obtained by Noticias Telemundo, the bonds would be issued in 2022, with half of the proceeds going toward the purchase of bitcoins.

The remainder would go toward infrastructure development in sectors like energy and bitcoin mining. The bonds would have a ten-year term and a 6.5% interest rate; El Salvador would owe investors $1.65 billion if the plan is approved.

The revelation came as Bukele's administration negotiated a $1.3 billion loan with the International Monetary Fund to help restore the country's finances, as experts predicted the government would default on sovereign debts due in 2023.

"I perceive the desire to find the money for its populist projects behind the announcement of the city and the volcano's bonds," says Ricardo Castaneda Ancheta, an economist at the Central American Institute for Fiscal Studies.

"El Salvador's risk profile has risen to unprecedented heights. If the country went to international markets to sell bonds, it would have to pay a 14 or 15% interest rate, which would be financial death. According to Castaneda Ancheta, if the IMF [loan] is not secured, they explore alternatives.

According to Cristian Flores, the president's commissioner for strategic projects, El Salvador's entry into the global cryptocurrency scene has boosted the country's economy. He explained that the new metropolis is a collection of government projects in the southern region.

"We increased by ten points this year." This is the first time in our country's history. Thanks to the economic policy that had never been accomplished," he remarked. "In addition, we had over 2,000 investors a few days ago, with some having capital of up to $6 billion in Bitcoins." Everything happens for a reason."

The Energy Problem

Bukele stressed that Bitcoin City would emit "zero CO2" because the new urban core and bitcoin mining operations would be powered by geothermal energy.

Investigations have revealed that Bitcoin mining has a massive environmental impact, consuming as much electricity as a medium-sized country.

"We are true pioneers because geothermal energy accounts for 25% of the country's energy, but it took more than five decades to achieve," said Carlos Martnez Cruz, an electrical engineering professor at El Salvador. "It's not like putting in a plant. And we'll get a well with 90 or 100 terawatts right away? That'll never happen so quickly."

While the facilities on the Conchagua volcano are being developed, the government plans to use some of the capacity of a geothermal plant near Berlin. But according to Martnez Cruz, this would create a new problem that would negatively impact the ecosystem.

Conclusion

Bukele's financial difficulties persist. El Salvador cannot print money, thus, Bukele must find a way to support his massive deficit expenditures.

The IMF has refused to lend the country the $1 billion Bukele requested and has expressed severe concerns about Bitcoin.