Bitcoin City: El Salvador reveals plans amid fears of default | International | EL PAÍS English Edition
The president of El Salvador, Nayib Bukele, presented on Tuesday the first images of the bitcoin city, which will be built near the Conchagua volcano in the Gulf of Fonseca in the southeast of the Central American country.
The project, which was announced in November 2021, seeks to create a smart city entirely based on the use of bitcoin as a cryptocurrency. bukele shared illustrations and models of the metropolis on twitter, but did not clarify when construction will begin.
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Last year, Bukele announced that El Salvador would become the first country in the world to accept Bitcoin as legal tender, along with the US dollar. el salvador was going to finance the project with $1 billion in bonds. these public debt securities would be collateralized with bitcoin instead of fiat currency. These so-called volcano bonds were supposed to be issued in March, but the date was pushed back to September.
Although the bitcoin city appears golden in the images shared on twitter, bukele said that in real life it will be full of green areas. He added that it will also house monuments, a lookout over the volcano, commercial and residential areas, and an airport. In announcing the project last year, the president explained that the bitcoin city would be exempt from most taxes.
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“We won’t have income taxes, forever. no income tax, zero property tax, no acquisition tax, zero council tax, and zero CO2 emissions,” he said in a statement in November. “The only taxes they will have in bitcoin city is VAT, half will go to pay the municipal bonds and the rest to the public infrastructure and maintenance of the city.”
Bukele also announced on Tuesday that his government had bought 500 bitcoins, its largest purchase of the cryptocurrency to date. The news comes as bitcoin has plummeted more than 50% from its all-time highs. For the first time since July 31, the price of bitcoin has fallen below $31,000. In his message on Twitter, Bukele said the government had purchased its latest bitcoins at an average price of $30,744.
the agency bloomberg estimates that el salvador has bought 2,301 bitcoins since it became legal tender in september 2021. these tokens currently have a total value of $74 million, well below the $103 million bukele paid for them.
Moreover, the Caribbean country is not in a position to assume such expenses. el salvador’s cost of sovereign debt collapsed in april, falling 15.1% to record lows, a drop second only to ukraine since the outbreak of the russian invasion. government bonds are trading at 40% of their original value as investors begin to doubt the country will be able to meet its next debt payment in January 2023.
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While the president of El Salvador’s central bank said there is “zero risk” of the country defaulting on its creditors, credit rating agencies have a more negative outlook.
in february, fitch ratings downgraded el salvador’s rating to ccc, rated as “garbage” in the industry. In a statement, Fitch explained: “The downgrade reflects heightened financial risks stemming from increased reliance on short-term debt, an $800 million Eurobond payment due January 2023, a still-high fiscal deficit, limited scope for additional financing in the local market, uncertainty access to additional multilateral financing and financing from the foreign market due to high borrowing costs.”
El Salvador’s transition to a blockchain and cryptocurrency-based economy appears to have failed. a study conducted by the national bureau of economic research in 2021 found that of salvadorans who downloaded an app called chivo wallet, which the government designed to facilitate daily cryptocurrency transactions, only 20% continued to use it after spending the $30 they the authorities gave them. promote its use.
Given the volatility of bitcoin and its low adoption among the general population, the international monetary fund (imf) has urged el salvador to eliminate bitcoin as legal tender. Bukele’s insistence on keeping it legal tender complicated his negotiations with the IMF, which said it must assess the cryptocurrency’s risk before granting El Salvador a loan.
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