Bitcoin City Will Be Funded By Bitcoin Bonds

To investors,

The President of El Salvador announced on Saturday night that he was planning to build the world’s first “Bitcoin city,” which would live at the foot of a volcano in his country. There is a lot to unpack here. Before we get into the details though, it is important to remember what El Salvador and President Bukele have already accomplished.

The country announced in June at the Bitcoin Conference that they would make the digital currency legal tender across the nation. This legislation was proposed and approved just a few days later, which eventually led to “bitcoin is legal tender” going into effect in September of this year. Along with the legal tender decision, El Salvador has also created and launched a bitcoin wallet and payment system named Chivo, which has been downloaded and used by more than 50% of the 6.5 million Salvadorians. Bukele and his team then created a network of more than 200 bitcoin ATMs that have been spread across El Salvador to help onboard more bitcoin users. Lastly, the government created a bitcoin mining facility at one of the many volcanoes in the country so they could leverage volcano energy to mine bitcoin.

This context is important because President Bukele has a track record of not only successfully executing on his plans, but doing so in lightning fast speed. We live in an age of politics where you can discount almost any announcement and reliably believe a very small percentage of plans will actually be accomplished — that doesn’t seem to be the case in El Salvador at the moment.

So the country isn’t scared to make big announcements and then has a track record of delivering on them…great. But what about Bitcoin City?

The general idea here is to create a brand new city that would serve as the shining example of what is possible in the 21st century. Bukele specifically referenced the need for nation states and leaders to build modern-day versions of what Alexander the Great built in Alexandria, Egypt. The city’s ancient history is described with the following:

“Alexandria was best known for the Lighthouse of Alexandria (Pharos), one of the Seven Wonders of the Ancient World, its Great Library (the largest in the ancient world), and the Necropolis, one of the Seven Wonders of the Middle Ages. Alexandria was the intellectual and cultural centre of the ancient Mediterranean for much of the Hellenistic age and late antiquity. It was at one time the largest city in the ancient world before being eventually overtaken by Rome.”

The idea of Bitcoin City in El Salvador would include a quadruple-threat approach to an urban location — renewed ideas around energy, physical space, and taxation.

First, the energy approach is simple. The city will have no CO2 emissions and everything will be powered by the volcano that sits adjacent to the planned site. I’m not an expert on volcanic energy, nor do I have enough understanding of urban electrical grids to evaluate the potential efficacy of this plan. But the idea of using volcanoes to power energy demand isn’t a groundbreaking idea, so let’s give them the benefit of the doubt that this will be relatively straightforward to pull off.

Second, the physical space will be a fully functioning city. Everything from an airport to housing to commercial real estate. The overall shape of the city will be circular in design and will include a central plaza, where people can gather, that will look like the bitcoin symbol from above. These ideas are not new. In fact, they are quite old, especially given some of the inspiration goes as far back as Alexander the Great. The renewed focus on applying these old ideas is what makes it novel in modern society.

Third, there will be no income, capital gains, property, payroll, or municipal taxes in Bitcoin city. Yes, you read that right. The only taxation of a citizen in Bitcoin City would be a 10% sales tax. Every other tax plan that you have grown accustomed to in the developed world will be absent for residents.

It is easy to see why people are getting excited about this new city, but you may be wondering why it is called Bitcoin City?

It isn’t because bitcoin will be legal tender - bitcoin is legal tender in every city in El Salvador. It isn’t because many bitcoiners will consider moving there, although that is the hope. The new city is being called Bitcoin City because it will partially be funded by bitcoin-backed bonds.

This is where things get interesting. The local government will be issuing a $1 billion tokenized bond that will carry a 6.5% yield for investors. Approximately $500 million will go towards building the city, maintaining the infrastructure, and generally solving the cold start problem when you create a new place for people to live. The other $500 million in proceeds from the bond offering will be invested in bitcoin.

These are considered bitcoin-backed bonds for two reasons: (1) half of the bond proceeds will be invested in bitcoin and (2) the bonds will be tokenized on Blockstream’s Liquid side-chain. Both of these concepts are novel and innovative.

Here is the description from Blockstream’s blog post:

“Today, the president of El Salvador and I have announced that they will be issuing a $1 billion US “Bitcoin Bond” on the Liquid Network. The $1 billion US raised will be split between a $500M allocation of bitcoin (BTC) and a $500M infrastructure spend for building out energy and Bitcoin mining infrastructure in the region.

El Salvador also aims to create a government securities law and grant a license to Bitfinex Securities to process the bond issuance.”

They go on to talk about a special dividend from the bond as well:

“The Bitcoin Bond will have special dividends dispersed on an annual basis generated by the staggered liquidation of bitcoin. Using Blockstream’s Asset Management Platform (AMP), dividends are easily paid out to bond holders.

Since we’re using the Liquid Network and Blockstream AMP, we’re also able to easily accept investments as small as $100 to democratize access to the bond.”

And finally, the blog post culminates with the following statement:

“The Bitcoin Bond represents the start of a reformation of capital markets, built on Bitcoin and layer-2 technologies like the Liquid Network. Now, investment capital can flow in from around the globe without friction. Dividends can be distributed to investors instantly, with built-in cryptography to maintain confidentiality. Bonds can be traded 24/7 with other assets like stablecoins, using protocols that help eliminate the need for trust.

Bitcoin will save the day.”

There are two main takeaways that I have from the early information that we have received. First, El Salvador is plugging their entire country into the bitcoin network in the same way that MicroStrategy plugged their company in the network last year. This will likely prove to be an incredibly intelligent decision, but it will also create a number of fast followers that will attempt to emulate pieces of the El Salvador plan.

Second, I would imagine there will be immense interest in the El Salvador bitcoin-backed bonds. They are reportedly going to carry a 6.5% yield, which would make them competitive in the market by itself, but the bitcoin-backing means that they will become even more attractive. If El Salvador is able to easily capture demand for the bonds, you can anticipate them to issue many more of them, along with having a multitude of countries, states, and cities racing to do the same.

People around the world will have a million questions about the plan, how the government expects to execute it, and what their ultimate intentions are. I don’t pretend to have those answers, but it is obvious that no one is pushing the pace of innovation and experimentation at the nation state level faster and further than the country of El Salvador.

No one had nation state adoption of bitcoin on their 2021 bingo cards, which means it is unlikely that anyone had bitcoin-backed bonds to build Bitcoin City in a country where bitcoin is legal tender on their bingo cards either. We are living in wild, unprecedented time. Now would be a good time to start paying attention.

The world is changing. No one can predict the future, but we sure can study intently what is happening right now. Hope everyone has a great start to their week. I’ll talk to you all tomorrow.

-Pomp

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