Monday 22 November 2021
Risky bet for El Salvador
Billions dance on the crypto volcano
It is too early to take stock of the introduction of Bitcoin as a currency in El Salvador. But the bustling head of state of the poor country is already planning his next crypto project: a tax-exempt Bitcoin city that is powered by volcanic energy and financed with billions in debt. What’s going to go wrong there?
Bitcoin has been legal tender in El Salvador, the first country in the world, for a good two months. If you ask how the crypto revolution is going, you get, as is to be expected at such an early stage, very different answers. Bitcoin enthusiasts enthusiastically report how quickly and, above all, free of charge they can transfer money and make payments with the official Salvadoran Chivo crypto app. Critics, on the other hand, point out that these are usually only transactions within the app that work with US dollars as well as with Bitcoin and do not involve the blockchain, the core of Bitcoin technology, at all. Real, decentralized Bitcoin transactions using blockchain, on the other hand, are considerably more complex.
In addition, even the initiator behind the introduction of the currency, Bitcoin fan and President Nayib Bukele, had to dampen enthusiasm by pointing out that employers are prohibited from paying their employees in Bitcoin without their consent. Because many Salvadorans are extremely concerned that their often meager income could lose massively in value due to the extreme price fluctuations of the Bitcoin before they have the chance to exchange it for dollars or spend it. As if to demonstrate this problem, the Bitcoin price had temporarily collapsed after its record high almost two weeks ago. Bukele had already relativized the obligation of companies to accept Bitcoin payments some time ago.
The President’s remarks had caused confusion because the Bitcoin law, which he himself initiated, contains the obligation for everyone to accept payments in Bitcoin. But that Bukele has no plans to backtrack, he now made it clear over the course of a whole Bitcoin week. The controversial head of state, for example because of the recent dismissal of dozens of judges who did not please him, not only campaigned among his citizens and investors for a wider use of Bitcoin and Chivo apps. At the end of the week of action, he announced the construction of an entire Bitcoin city, exempt from all direct taxes, located on and powered by a volcano, financed with billion dollar Bitcoin bonds.
High interest rates for investors
What sounds crazy is at least economically highly unorthodox and risky. The Bitcoin city should therefore attract investors for all kinds of cryptocurrency projects, including energy-intensive Bitcoin mining. The energy required for this is to be obtained from the hot volcanic underground by means of geothermal energy in a climate-friendly manner. The main argument for investors, however, is likely to be the tax exemption promised by Bukele. Only a low value added tax should be levied in the Bitcoin city.
The poor state, which is already largely dependent on the support of the International Monetary Fund, wants to continue to borrow for the construction of the project, which is to include its own new airport, among other things. Bukele wants to raise a total of ten billion US dollars through so-called Bitcoin bonds. These are ten-year dollar government bonds running on a blockchain from the company Blockstream, which promise investors at least 6.5 percent interest per year.
The concept behind these bonds is to invest half of the billions raised directly in Bitcoin. The other half will be used to pay for the construction and operation of Bitcoin City. Since hardly any taxes are paid in this city, the repayment of the bonds, including interest, is apparently largely due to a planned increase in the value of the purchased Bitcoin. Apparently without being aware of the ambiguity, the head of Blockstream, the company responsible for issuing the debt securities, spoke at the presentation of the “Vulkan bonds” project. Bitcoin currently costs around $ 57,200. That is almost 20 percent less than the record rate two weeks ago, but more than twice as much as at the beginning of the year.