El Salvador Wants to Build a Bitcoin City

El Salvador is planning to build a Bitcoin city, funded by Bitcoin [BTC] bonds.

Nayib Bukele, El Salvador’s president, announced the ambitious plan during a Bitcoin event last Saturday promoting bitcoin in El Salvador.

The new city will be built in the south-eastern region of La Union, in the shape of a coin. It’ll be set on the ocean and at the base of the Colchagua volcano. It will take advantage of geothermal power from the volcano to mine bitcoin and power the city.

The city will have zero carbon emissions. It will also have no property taxes, no income taxes, and no municipal taxes.

Invest here and earn all the money you want’, Bukele said during the event.

The only tax will be a 10% value-added tax. They’ll use half of what it earns to pay the municipal bonds and the other half for city infrastructure and services.

They plan for it to raise $1 billion, to be paid back in 10 years with an interest rate of 6.5%, which is less than half of their current 10-year bond yield of 13.5%. Half of that money will go into infrastructure while the other half will go into buying and holding bitcoin. After five years, half of any gains from bitcoin will be paid out to investors.

El Salvador is no stranger to bitcoin.

As you may remember, El Salvador was the first country in the world to start accepting bitcoin as legal tender. They don’t have their own currency, instead using bitcoin along with the US dollar.

Of course, bitcoin is very volatile. But El Salvador gets several perks from using bitcoin.

For one, El Salvador is a country that receives a lot of remittances from abroad. Using bitcoin cuts on the transfer fees and makes it cheaper for people to send money back home.

The country’s central bank expects remittances to increase by 31% from last year to US$6.3 billion this year, and with bitcoin it means way less fees.

Also, close to 80% of people in El Salvador don’t have a bank account, so bitcoin offers them another payment option.

But the country also has quite a bit of debt. In fact, they’ve been in talks with the International Monetary Fund (IMF) for a US$1.3 billion loan facility.

Needless to say, the IMF hasn’t been very happy with the country adopting bitcoin. Back in June, they warned:

Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis.

El Salvador’s central bank isn’t worried. They expect that bitcoin’s volatility will help them grow the economy more than the 9% they expect this year.

As Bloomberg reported last month:

The cryptocurrency will lose its reputation as a speculative asset and prove useful as a legitimate payment system supported by Chivo, the government’s Bitcoin wallet, central bank President Douglas Rodriguez said in an interview Monday. He even expects Bitcoin’s notorious price volatility to help the economy expand more than the 9% the bank forecasts it will this year. 

“We don’t see any risks. Perhaps, upside risks,” Rodriguez said in a virtual interview from San Salvador. Bitcoin will “become a payment system, a system for financial inclusion.”

But right after the country announced its Bitcoin city plans, the IMF launched another warning on using bitcoin:

Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities. Because of those risks, Bitcoin should not be used as a legal tender.

I mean, it’s not surprising the IMF is concerned about what’s happening.

El Salvador moving away from the financial system erodes trust in it, particularly at a time when central banks have printed trillions of dollars and inflation is starting to bite.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

As a side note, if you ever needed any evidence that governments are worried about inflation, we got it this week.

For the first time ever, the US, China, India, Japan, South Korea, and the UK agreed jointly to tap into their oil reserves to pressure OPEC into releasing more oil into the market to bring down energy prices.

OPEC cut oil production when the pandemic hit and demand collapsed last year, and while the US has been asking OPEC to boost production, OPEC is sticking to its guns and has been releasing oil gradually.

Doesn’t look like the move has sat well with OPEC. Let’s see what they decide to do in the next meeting.

But back to El Salvador and the IMF.

We’ll see how the whole thing goes, but if it’s a success, the country will be attracting funding and bypassing IMF…others could follow…


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Selva Freigedo,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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