El Salvador has announced ambitious plans to construct the world's first "Bitcoin City," a groundbreaking project funded by Bitcoin-backed bonds. President Nayib Bukele revealed the initiative during a week-long Bitcoin promotion event, positioning the country as a global leader in cryptocurrency adoption.
Key Features of Bitcoin City
- Location: Planned for the eastern region of La Union.
- Energy Source: Powered by geothermal energy from a nearby volcano.
Tax Structure: No taxes except for Value-Added Tax (VAT).
- 50% of VAT revenue will fund city infrastructure via bonds.
- Remaining 50% will cover municipal services (e.g., garbage collection).
Urban Design and Vision
Bukele likened the project to ancient cities founded by Alexander the Great, emphasizing a circular layout with:
- An airport
- Residential and commercial zones
- A central plaza shaped like the Bitcoin symbol (visible from above)
"Invest here and make all the money you want," Bukele encouraged, highlighting the city’s eco-friendly credentials. "This is a fully ecological city energized by a volcano."
Funding Mechanism: Volcano Bonds
- Initial Bond Issue: $1 billion (10-year term, 6.5% coupon).
- Backing: Secured by Bitcoin; half the proceeds will purchase Bitcoin on the open market.
- Future Sales: After a 5-year lock-up period, Bitcoin holdings will be partially sold to provide investor returns.
Samson Mow of Blockstream projected that the bond strategy could elevate El Salvador to the "financial centre of the world" by absorbing significant Bitcoin liquidity and driving up its value.
Regulatory Framework
- Securities Law: Under development to facilitate bond issuance.
- Exchange Licensing: Bitfinex designated as the primary platform for bond trading.
Broader Implications
- Market Impact: Issuing multiple bonds could remove billions in Bitcoin from circulation, potentially increasing scarcity and value.
- Global Benchmark: Success may inspire other nations to launch similar crypto-backed financial instruments.
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FAQs About Bitcoin City
1. Why is El Salvador building a Bitcoin City?
El Salvador aims to attract investment and position itself as a hub for cryptocurrency innovation, leveraging Bitcoin’s potential to fuel economic growth.
2. How will the city be powered?
The city will use clean geothermal energy from a volcano, aligning with its eco-friendly design.
3. What are "Volcano Bonds"?
These are Bitcoin-backed bonds designed to fund infrastructure. Investors earn interest while supporting the city’s development.
4. Is Bitcoin legal tender in El Salvador?
Yes. El Salvador became the first country to adopt Bitcoin as legal tender in September 2021.
5. What happens to Bitcoin holdings after 5 years?
The government may sell portions of its Bitcoin reserves to generate additional returns for bondholders.
6. How does this project benefit global crypto markets?
By locking up substantial Bitcoin reserves, the bonds could reduce supply and potentially increase the cryptocurrency’s value.