El Salvador to Build World's First "Bitcoin City" with $17 Billion, Why Did the Country Choose to Go "All In" on Bitcoin?

On November 21, Salvadoran President Nayib Bukele announced at a Bitcoin conference that the country plans to issue Bitcoin bonds to fund the construction of the world's first "Bitcoin City." "Bitcoin City" will use volcanic geothermal energy to power Bitcoin mining, and will not levy any taxes except for value-added tax (VAT). This news has once again drawn widespread attention from media outlets, countries, and institutions.

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El Salvador announces "Bitcoin City" project at Bitcoin conference

This year, El Salvador has already adopted Bitcoin as national legal currency, launched its own digital wallet , and continued to purchase large amounts of Bitcoin . This small Central American country has become a "Bitcoin paradise" in everyone's eyes. What kind of city is this "Bitcoin City" that El Salvador plans to build? How did El Salvador start becoming "obsessed" with Bitcoin ? What other countries in the world are currently going "all in" on Bitcoin? What kind of impact can Bitcoin bring to a country like El Salvador? With these questions, we will analyze them one by one.

Building the World's First "Bitcoin City"

According to Salvadoran President Nayib Bukele, this "Bitcoin City" will be built in the eastern part of La Unión Department (eastern border province of El Salvador), at the foot of the Conchagua volcano between La Unión (the department capital) and Conchagua city. The site selection was primarily driven by the enormous energy consumption of Bitcoin "mining," while "Bitcoin City" will use volcanic geothermal energy for power generation and is committed to becoming a zero-emission city. Bukele compared "Bitcoin City" to the city founded by Alexander the Great of Macedonia and plans to build this new city in a circular shape, representing the shape of Bitcoin. The city construction will include commercial districts, residential areas, an airport and a port, as well as a central plaza that resembles the Bitcoin symbol when viewed from above.

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"Bitcoin City" will exempt all other taxes, only collecting value-added tax (VAT). Half of the VAT revenue will be used to service the Bitcoin bonds related to city construction, and the other half will be used for municipal construction and maintenance, such as garbage collection and other services. The Salvadoran government will vigorously provide land, infrastructure, and employment opportunities to attract people to "Bitcoin City" for investment. According to Bukele's estimate, the public infrastructure expenditure for this new city will require approximately 300,000 Bitcoin, which at the current price of $57,038 per coin, amounts to approximately $17.1 billion.

To raise these funds, El Salvador will issue the world's first Bitcoin sovereign bonds, known as "Volcano Bonds," in 2022, with blockchain company Blockstream providing technical support. According to Blockstream Chief Strategy Officer Samson Mow, the "Volcano Bonds" will initially issue the first tranche of 10-year, $1 billion Bitcoin-backed bonds with a coupon rate of 6.5%. Half of the funds raised by the bonds will be used directly to invest in Bitcoin, and the other half will be used for the construction of "Bitcoin City" and Bitcoin mining. After a five-year lock-up period, El Salvador will sell some of the Bitcoin used to finance the bonds to provide investors with "additional coupons."

El Salvador Becomes a Bitcoin Paradise

El Salvador's "Bitcoin City" plan is indeed the first large-scale Bitcoin project initiated by a national entity on a global scale, with extraordinary influence and significance. However, this is actually not the first time El Salvador has supported and invested in Bitcoin so vigorously.

El Salvador first gained widespread attention on June 9 this year, when the Salvadoran Congress voted to approve the "Bitcoin as Legal Tender" proposal submitted by its president, the "El Salvador Bitcoin Law," which officially took effect 90 days later. On September 7 this year, Bitcoin officially became El Salvador's legal tender, circulating alongside the US dollar. Since then, El Salvador has become the first country in the world to officially adopt Bitcoin as legal tender. The Salvadoran government hopes that this measure will enhance financial inclusion, drive economic development, and improve the current fiscal situation.

And this Bitcoin law has indeed brought profound impacts and changes to El Salvador, which has since begun its grand Bitcoin "layout."

First, in response to this law, almost on the same day the law took effect, catering giants such as McDonald's, Starbucks, and Pizza Hut immediately announced that they would accept Bitcoin payments in El Salvador. Additionally, many local Salvadoran businesses also began accepting Bitcoin payments. Since then, El Salvador has also established more than 50 Bitcoin payment training centers nationwide, with over 7,000 entrepreneurs having received Bitcoin transaction training.

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Second, to promote Bitcoin trading payments and exchange with US dollars, the Salvadoran government approved the establishment of a $150 million Bitcoin trust fund and launched a series of free services and hardware and software for citizens, such as launching the official digital wallet Chivo and giving each citizen who uses the wallet $30 in Bitcoin, setting up approximately 200 Chivo ATMs for Bitcoin and US dollar exchange, providing deposit and withdrawal services from 50 banks, and so on. Users do not need to bear any of these trading and exchange fees, all of which are covered by the state.

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In addition to making Bitcoin legal tender, El Salvador is also directly investing in Bitcoin. Starting this September, the Salvadoran government has made multiple concentrated purchases of Bitcoin, having purchased a total of 1,100 Bitcoin (currently worth approximately $62.1 million), making it the third-largest country by holdings.

El Salvador's series of "all in" Bitcoin moves have made the country virtually the current global "Bitcoin paradise."

Why Choose to Go "All In" on Bitcoin?

So why would El Salvador choose a highly volatile asset like Bitcoin as its legal tender, even spending heavily to plan the construction of a "Bitcoin City"? This brings us to the background of El Salvador as a country.

El Salvador is a coastal country located in northern Central America and is the most densely populated country in Central America. The country's domestic economy is primarily agricultural, with a weak industrial base, making it one of the world's "lower-middle-income countries." Affected by the 2008 financial crisis, economic growth has been very slow. As of July 2021, El Salvador's inflation rate was -0.37%, unemployment rate was 6.98%, and GDP was -7.9%.

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Geographic location of El Salvador

According to GDP data released by the Central Bank of El Salvador on March 31, due to the impact of the pandemic, El Salvador's nominal GDP in 2020 was $24.639 billion, a year-on-year decrease of 8.4%, with annual per capita nominal GDP of only $3,642.

Since El Salvador does not issue its own independent sovereign currency and has always used the US dollar for settlement, and only about one-third of Salvadorans have bank accounts, cross-border remittance business in the country accounts for approximately 24% of annual GDP. Data from the Central Bank of El Salvador shows that in 2020, total remittances from abroad reached $5.9 billion (more than 2 million Salvadorans live abroad). Before adopting Bitcoin, Salvadorans who wanted to make international remittances could only do so through remittance companies like Western Union. This process was not only inconvenient in terms of transportation, but remittances also incurred high fees (up to 10%). Later, with the support of Strike company's Bitcoin Lightning Network in El Salvador, users can conduct foreign exchange trading through Bitcoin transfers, which not only bypasses intermediaries and high fees but also significantly shortens transfer times, bringing convenience to the people and saving costs for El Salvador.

Going further back, Bitcoin actually had unofficial adoption "trial" cases in El Salvador as early as 2018, when some Bitcoin supporters from the United States launched a project called "Bitcoin Beach" in the coastal town of El Zonte in southern El Salvador. These cryptocurrency enthusiasts provided each family in the town with $50 worth of Bitcoin, encouraged local merchants to use Bitcoin, and promoted the Lightning Network to provide basic transfer services for Salvadorans. Users can conduct instant peer-to-peer trading with their mobile phones and store their assets as BTC , convert them to US dollars, or make international remittances.

This project and the fast, low-cost transfer advantages of the Bitcoin Lightning Network drew Bitcoin to the attention of the Salvadoran president. Thus, Bitcoin in El Salvador evolved from a niche experiment to today's national legal tender.

In terms of impact, following El Salvador's legalization of Bitcoin and proposing grander Bitcoin visions like "Bitcoin City," these measures are not only a huge boost for the cryptocurrency community and of great significance to Bitcoin's widespread adoption, but also serve as inspiration and demonstration for many small countries. Multiple South American countries neighboring El Salvador are also eager to try. According to media reports, in September 2021, the bill recognizing Bitcoin and other cryptocurrencies issued by the Central Bank of Cuba came into effect, and cryptocurrency has become a legal payment method for commercial transactions in Cuba.

However, it should be noted that even though El Salvador is called a "Bitcoin paradise," adopting Bitcoin as legal tender does not mean El Salvador will become a truly decentralized Bitcoin country. As a national entity, it will inevitably play a centralized and central bank-leading role. Additionally, due to Bitcoin's price volatility and deregulatory characteristics, international financial institutions such as the World Bank and the International Monetary Fund (IMF) have expressed concern or even opposition to adopting Bitcoin as legal tender.

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