Dressed in pristine white in front of an audience of investors and foreign visitors, El Salvador's president, Nayib Bukele, recently announced plans to create an oceanside "Bitcoin City" at the base of a volcano.
Bukele said his new urban center was inspired by the legendary cities built by Alexander the Great — except El Salvador's would be fueled by cryptocurrency.
“This is not just a nice idea. It’s the evolution of humankind,” Bukele told the audience amid a display of lights, smoke machines, an AC/DC song and images that showed, among other things, his figure descending from a multicolored UFO, his face in maximalist proportions and a re-creation of the square that will be in the center of the new city. Seen from the air, the town square would show the Bitcoin sign.
But several analysts and experts say it's impossible for a project of that magnitude to materialize in the coming years.
No technical plan for the project has been disclosed. Bukele promised that it will be very close to the Conchagua volcano, whose geothermal energy will power bitcoin mining, as well as the city’s needs.
“El Salvador has the natural resources to generate that energy, but it does not have the infrastructure. We must remember that we are one of the poorest countries in the region," said José Miguel Cruz, the director of research at the Kimberly Green Latin American and Caribbean Center at Florida International University. "That money could be invested in health and education."
Bukele said his planned city will be totally ecological and that it will have almost total exemption from taxes: Only a value-added tax will be charged — 13 percent — of which 6.5 percent will go to issue bonds to build the city, and the rest of which will be managed by the municipality for public services and other urban needs.
The incentives to attract investment to the country are a double-edged sword, analysts said, because the government lacks the institutional controls to detect and sanction money laundering activities related to bitcoins.
“The Salvadoran government has been characterized by the systematic destruction of the institutions of political and financial control," Cruz said. "In addition, all projects with bitcoins are not transparent. So we do not know who guarantees that there are no money laundering operations."
A plan 'for other people'
Almost 125 miles away, Dalila Meléndez, 45, watched the event as if it were news from another world.
“In Soyapango, nobody uses those bitcoins, neither my friends nor my neighbors, nor do they receive them in the store. They do not serve us, because here everything is still pure dollars," said Meléndez, who works in a factory in the enterprise zone of San Bartolo. "That [plan] of the president is for other people.”
More than two months have passed since bitcoins began to circulate as legal currency in El Salvador, and a recent survey revealed that, when Salvadorans can choose which currency to pay with, 91.4 percent of people use the dollar, while only a 4.9 percent favor bitcoins.
When a poll by the Center for Citizen Studies at Francisco Gavidia University asked Salvadorans about the decision to adopt bitcoin as the country's currency, 35 percent said they were in favor, while 40 percent were opposed.
“The truth is that now everything is more expensive, everything in the basic basket has risen a lot. Oil, meat — this bitcoin thing has not helped us yet,” Meléndez said.
'Desperation to seek financing'
Despite Bukele's attention-grabbing event, many analysts didn't focus on the idea of Bitcoin City but on another announcement: the issuance of “volcano bonds” in the bitcoin ecosystem worth $1 billion.
According to a document Salvadoran government officials have distributed among potential investors, to which Noticias Telemundo had access, the operation of the bonds would be carried out in 2022, and half of the amount would go to buy bitcoins.
The rest would be used to develop infrastructure in areas like energy and cryptocurrency mining. The bonds would run for 10 years at 6.5 percent interest; that is, if the proposal materializes, El Salvador would have to pay about $1.65 billion to investors.
The announcement came as Bukele’s government was in negotiations with the International Monetary Fund for a loan of $1.3 billion to improve state finances, because, experts said, the country risks defaulting on sovereign bonds maturing in 2023.
“Behind the announcement of the city and the volcano’s bonds, what I see is desperation to seek financing for its populist programs,” said Ricardo Castaneda Ancheta, an economist at the Central American Institute for Fiscal Studies.
“El Salvador’s risk profile has skyrocketed to levels never seen before. If the country went out to place bonds in international markets, it would have to pay an interest rate of 14 or 15 percent — that is, it would be financial suicide. They are looking for alternatives in case the IMF [loan] is not achieved," Castaneda Ancheta said.
Cristian Flores, the president's commissioner for strategic projects, said El Salvador’s foray into the world cryptocurrency scene has given the country an economic boost. He said the new city is one of a series of government projects developing in the southern region.
“This year we achieved a 10-point growth. It's the first time in our history. That had never been achieved, and it's thanks to the economic strategy," he said. "In addition, a few days ago we had more than 2,000 investors, and some had capital of up to $6 billion in bitcoins. Everything is part of a plan."
Salvadorans struggle with bitcoin as official currencySept. 10, 202101:28
After a visit to the country, however, the IMF warned that the country’s public debt could grow to 95 percent of its gross domestic product by 2026. It also said the use of bitcoin as legal currency entails serious risks because of the volatility of cryptocurrencies.
“The government clings to that growth figure, but it's not real," said Carlos Acevedo, a former president of El Salvador's Central Reserve Bank. "It's a rebound due to the 8 percent fall of last year due to the pandemic. In addition, all projections estimate that in the next few years we will grow again between 2 and 2.5 percent. If it really were solid growth, we would have levels of 7 and 8 percent in the following years. But that won't happen."
'A paradise for money laundering'
Bitcoin was created to carry out transactions without the intervention of trusted third parties, such as central banks or financial institutions.
That is one of its great attractions, and, paradoxically, it's what makes Bukele’s commitment so novel, because it means spending part of a country’s budget in a deeply speculative market — much more speculative than investing in commodities like oil, for example.
“This is almost like a national casino. It is playing with public money, betting it without having any certainty. If there is a stroke of luck and it generates a lot of money, in the end it is not clear how it is going to be invested and distributed in the country," said Cruz of Florida International University. "But the worst thing is that bitcoin falls, and it is an irreparable loss for such a poor nation."
Another element that concerns experts is one of bitcoin's most touted advantages: allowing transactions using only digital identities, which gives users a certain degree of anonymity.
Its increasingly widespread use has made bitcoin the preferred currency for many illicit activities, such as computer attacks, or for intricate digital networks of illegal trade in drugs and weapons and even to hire hitmen, according to reports.
“At this time, the government does not have the ability to determine if a bitcoin comes from an investor who obtained it by mining, in legal exchanges or from someone who extorts or is engaged in drug trafficking. Criminals are going to find a fertile field, because there is no institutional framework — El Salvador could be considered a paradise for money laundering," Castaneda Archeta said.
In addition, financial regulations weren't modified after the law that allows the circulation of bitcoins was approved, so “there is no legal framework” to detect and sanction illicit operations carried out with cryptocurrencies, Castaneda Archeta said.
Flores, the commissioner, said El Salvador is out in front in the fight against corruption, and Bukele has demanded that the government’s finances “be clean.”
“We have seen the development of cryptocurrencies and how control mechanisms have improved,” Flores said. “As a country, we know that it is necessary to be open to these investors, but they must always go through a filter, a knowledge process, that allows our laws to be applied. Everything in life improves and changes, so our laws will evolve as different cases arise.”
But in July, the U.S. State Department publicized a list of senior officials in Central America deemed to be corrupt, including seven current and former top Salvadoran officials, among them Bukele’s labor minister, Rolando Castro; his Cabinet chief, Carolina Recinos; and his former justice and security minister, Rogelio Rivas.
A city built from scratch?
Bitcoin City is intended to be in an environment with many tourist attractions on nearby beaches, so it lacks the infrastructure to house thousands of people and dozens of companies.
Flores said the south of the country will become a center for tourist, economic and technological development with the construction of the Pacific airport, the reactivation of the port of La Unión — a project that has never operated efficiently — the building of a shipyard and, of course, the new Bitcoin City. He said over $2 billion in private tourism investment is projected in the area of the Gulf of Fonseca.
“The first thing we need is to have the capital, because urban projects of this size are sold in plans, and then you start to decide the timeline," Flores said. "I think that in the next five years we could have great advances in the works and — why not? — in 10 years, the developed project."
In general, building a city is a slow process despite contemporary technological advances. Bitcoin City would require the creation of a municipality and the use of national land to start building infrastructure, including the possible expropriation of land.
“It’s crazy to think that everything will be done in a few years. In fact, I don’t remember any project in a Salvadoran city that has been built from scratch in the last century, and this is going to cause problems for the people who live in those areas, because we are a densely populated country. So they will have to expropriate” land, Cruz said.
Three days after the event on Mizata beach, the Salvadoran Legislative Assembly, dominated by the ruling party, approved a law that allows the expropriation of real estate for municipal works.
The energy problem
In his presentation, Bukele emphasized that Bitcoin City will have “zero CO₂ emissions,” because the new urban center, as well as the cryptocurrency mining operations, will use geothermal energy.
Investigations have warned of the vast environmental impact of bitcoin mining, because it can consume as much electricity as a medium-size country.
“It is true that we are pioneers, because 25 percent of the energy that the country uses is of geothermal origin, but that has been achieved in more than five decades," said Carlos Martínez Cruz, a professor of electrical engineering at the University of El Salvador. "It is not installing a plant. And at once, we are going to get a well with 90 or 100 terawatts? That will never happen so fast."
The government plans to use part of the capacity of a geothermal plant in the town of Berlin while the facilities are being built on the Conchagua volcano. But Martínez Cruz said that would create another problem that would end up affecting the environment.
“They are going to use a plant that is already operational to use that clean energy in the cryptocurrency industry, but that is going to leave a lot of people without electricity, because we import electricity. So they are going to have to create plants that burn petroleum derivatives to cover the deficit, and that will increase pollution," he said.
The new city will be in a very hot area, so mining not only will consume electricity as the computers are processing, but also require solutions to cool the equipment, which consumes much more energy, Martínez Cruz added.
For entrepreneurs like Juan Mayén, the director of the Honduran company TGU Consulting Group, El Salvador is the promised land, a place where you can pay for a coffee or a pizza with an electronic wallet. He said he believes that will boost the use of cryptocurrencies in the region.
“We recently installed the first bitcoin ATM in Honduras, but what the government of El Salvador is doing is very innovative," Mayén said. "I think Bukele is going to raise a lot of money with the bonds and the city. This can change things."
Meanwhile, many Salvadorans, like Dalila Meléndez, distrust money they can't touch and continue to prefer dollars for their daily lives.
“In my neighborhood, many people took the $30 from the Chivo wallet but then didn't use it anymore,” Meléndez said, referring to the digital bitcoin wallet the government created to promote the use of bitcoins. “I don’t understand much of it.”
An earlier version of this story was published in Noticias Telemundo.
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