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El Salvador Doubles Down on Bitcoin Bet

El Salvador plans to build a “Bitcoin City” at the base of its Conchagua volcano, using the cryptocurrency to fund the project, President Nayib Bukele announced last month.

El Salvador also plans to raise approximately $1 billion via a “Bitcoin Bond” in partnership with Blockstream – a digital assets infrastructure company. Half of the funds will be used to buy bitcoin, while the other half will go toward energy and bitcoin mining infrastructure, according to the government.

El Salvador’s Bets on Bitcoin

In the fall of this year, El Salvador became the first country to make Bitcoin legal tender. The move means that every business must accept Bitcoin as legal tender for goods or services, unless it is unable to provide the technology needed for the transactions.

In a tweet posted shortly before the historic vote, President Bukele said: “It will bring financial inclusion, investment, tourism, innovation and economic development for our country”. The government has also created its own digital wallet and is giving out $30 in bitcoin to every citizen who downloads it to foster adoption.

Three months after introducing Bitcoin as legal tender, El Salvador is doubling down on its crypto bet, planning to build an entire city dedicated to the cryptocurrency and raising $1billion in bitcoin-backed bonds.

The “Bitcoin City will be built in the Southeastern Region of La Unión and take the shape of a large circle, to represent a coin. According to a BBC article, the city will “include everything” from residential and commercial areas to museums, bars, restaurants and even an airport.

But running an entire city on bitcoin raises concerns about how these operations will be powered, as Bitcoin is notorious for its immense energy consumption – this is mainly due to the computing power required to solve the complex mathematical puzzles to mine bitcoin. To learn more about the Bitcoin energy problem, read our previous blog post here.

El Salvador plans to solve this problem through a strategic choice of location: the city will be built at the base of the Conchagua volcano in order to use geothermal energy to power the crypto operations.

The president said that no income taxes would be levied in the city, only value added tax (VAT), of which half will be used to build the city and the other half to maintain the infrastructure once built. While no exact dates and figures were mentioned in reference to building the city, the president estimates that the project will cost around 300,000 bitcoins.

El Salavdor also plans to issue a bitcoin-backed bond, known as the “volcano bond”, in 2022, according to a CNBC article. The bond would be worth $1 billion, backed by bitcoin and carrying a coupon of 6.5%.

Concerns About the Country’s Adoption of Bitcoin

While President Bukele aims for the adoption of bitcoin to turn El Salvador into “the financial center of the world”, there are some concerns about the country’s embrace of the cryptocurrency. The most notable concern revolves around Bitcoin’s fluctuations in value, with many citizens fearing the currency’s high volatility.

Additionally, a significant portion of the Salvadorean population does not have access to the know-how and technological infrastructure to make use of the cryptocurrency.

A survey by the Central American University (UCA) found that only 4.8% of the 1,281 people who took part understood what Bitcoin was and how it was used, and more than 68% of those questioned said they disagreed with using cryptocurrency as legal tender.

While it may not be smooth sailing for El Salvador’s embrace of Bitcoin, many believe that it can fuel investment in the Central American country and lead to increased economic prosperity. With several other countries around the world making moves toward a crypto-supportive infrastructure, El Salvador may be the first of more countries adopting the currency to such an extreme.

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