In September 2021, El Salvador became the first country in the world to adopt bitcoin as a legal tender. After that, on November 20, 2021, President Nayib Bukele of El Salvador announced his plans to build the world’s first ‘Bitcoin City’ in El Salvador. Nayib Bukele stated that he would mobilise cryptocurrency to fuel investment in El Salvador.
The government also released a new digital wallet app and gave away US$ 30 in bitcoin to every citizen, installed more than 200 cash machines across the country in order to boost economic development and jobs.
About Bitcoin
Bitcoin is described as a cryptocurrency, a virtual currency or a digital currency. It could be used to buy products and services. The physical bitcoins in photos would be worthless without the private codes printed inside them. Many countries around the world have banned bitcoins altogether. Bitcoin uses peer-to-peer technology to operate with no central authority or banks to manage transactions. They are issued collectively by the network. It is open-source and its design is public—nobody owns or controls it. However, it allows exciting uses that could not be covered by any previous payment system.
El Salvador’s Bitcoin City
The bitcoin city is proposed to be built along the Gulf of Fonseca near the Conchagua volcano. Mining bitcoin and other cryptocurrencies is done using sophisticated computers to solve complex mathematical problems day and night to verify and add crypto coins to the Blockchain network. As such, it is a costly and difficult as well as energy consuming process. The geothermal energy, due to presence of volcano, would be used to power the city and cryptocurrency mining.
Apart from this, El Salvador is already running a pilot bitcoin mining venture at another geothermal power plant near the Tecapa volcano.
According to President Bukele, the residents of the bitcoin city would not have to pay any taxes including property, capital gains or income tax. Only value-added tax would be collected from the residents. From this value-added tax, half would be used to pay the municipal bonds and the rest would be used for municipal infrastructure and maintenance. The city would be built with the purpose of attracting foreign investment. The measure is expected to boost economic development and jobs.
The city would have residential areas, commercial areas, malls, restaurants, port, rail museums, entertainment bars, airport, etc. The city would feature a central plaza designed in a circle (like a coin) bitcoin symbol from top. The country would have access to digital education, technology, and sustainable public transportation. There would have zero carbon dioxide emissions in the city. The estimated cost of public infrastructure would cost around 3,00,000 Bitcoins. One Bitcoin is, at present, trades at just under US$ 60,000 (£45,000).
Issuance of Bitcoin Bonds
El Salvador will initially issue a US$ 1 billion bond backed by bitcoin to begin raising funds for the planned bitcoin city. Out of the US$ 1 billion bond, US$ 500 million would be used to build energy and mining infrastructure and the other US$ 500 million would be used by the country to buy more bitcoins.
Bitcoin services company, Blockstream, would manage the issuance of bitcoin bonds which will be available to a number of users in the world who will have access to invest in small amounts as low as US$ 100. The company will use liquid network and blockstream accelerated mobile pages (AMP) to accept investments in bitcoin bonds and also to pay dividends to bondholders using tools deployed on top of the liquid network. It may accelerate hyper-bitcoinisation and bring about a new financial system to build on top of bitcoin.
The bitcoin bond will represent the start of a reformation of capital markets which will be built on bitcoin and layer-2 technologies like liquid network. This will lead to investment capital flow in from around the world without any friction. Payment of dividends can be done with built-in cryptography which will help maintain confidentiality. Also, this will help in bond-trading 24/7.
Benefits of Bitcoin Bonds
The bitcoin bonds will have a lock-up period of five years. After the locking period, El Salvador will sell some of the bitcoins used to fund the bond to give its investors an ‘additional coupon’. El Salvador’s president believes that the value of bitcoins will continue to rise, and El Salvador will become the financial centre of the world. El Salvador will start selling crypto holdings after five years and pay an initial extra dividend of 6.5 per cent to its bond holders. According to Blockstream’s CSO Samson Mow, once ten such bonds were issued, US$ 5 billion in Bitcoin would be taken off the market for several years. If 10 more countries do the same, that’s half of bitcoin’s market cap.
Criticism of Bitcoin as Legal Tender
Under the country’s Bitcoin Law, businesses will be obliged to accept it or the US dollar, the country’s other official currency, as payment.
Even though the government of El Salvador has claimed that bitcoin tender will boost economic development and jobs, the World Bank has warned against its adoption. The IMF also has recommended El Salvador not to use Bitcoin as legal tender. Analysts feel that is an ‘attention-seeking move’ from the government.
Many surveys have shown that people are not aware about bitcoin and how it is used. According to a survey of chamber of commerce of El Salvador 82.5 per cent of respondents did not want to receive remittances in bitcoin, mainly because its price is so volatile and unpredictable. Bitcoin is intrinsically bad as a means of payment since it is quite costly for small transactions. Bitcoin, a virtual asset with no direct connection to the real economy, has experienced large fluctuations in value over the years.
So, there is general scepticism in El Salvador with regard to bitcoin. The citizens are divided. There have been protests in the capital as well. More than 60 per cent El Salvadorans disagree with the government’s move. Only 4.8 per cent of 1,281 people understand bitcoin.
Creation of Bitcoins
For the bitcoin system to work, one has to make their computer process transactions for everybody. The computers are made to work out incredibly difficult sums, hence people have to set up powerful computers to mine bitcoins. It may take years for mining a single bitcoin.
The Working and Value of a Bitcoin
Bitcoins can be purchased using real money. Sellers allow buyers to pay through bitcoins. Bitcoin is a computer file that is stored in a digital wallet app which can be transferred to other people. Transactions of bitcoin are recorded in a public list, called the blockchain which helps trace the history of bitcoins and avoid fraudulent practices and theft of bitcoins. People are willing to exchange them for real goods and services, and even cash, which enhances their value.
Security of Bitcoins
Bitcoin is secure as every transaction is recorded publicly, and it is difficult to copy them or make fake ones. However, there is a possibility of losing bitcoin wallet or deleting bitcoins. There have been thefts from some websites which allow people to store bitcoins remotely. The value of bitcoins has been extremely volatile which can lead investors lose a lot of money any moment.
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