El Salvador is planning the world’s first tax-free ‘Bitcoin City,’ which will be backed by Bitcoin bonds.

El Salvador plans to build the world’s first “Bitcoin City,” with the funds coming from Bitcoin-backed bonds, according to President Nayib Bukele, who is betting that the cryptocurrency will help the Central American country increase investors.

During a ceremony that closed off a week­long marketing of Bitcoin in El Salvador, Bukele claimed that the city planned in the eastern region of La Union would acquire geothermal power from a volcano and would not impose any taxes save the value­added tax (VAT). As of 10:30 a.m. IST on November 22, the price of bitcoin in India was Rs. 46.84 lakh.

Bukele projected that the infrastructural development would cost around 300,000 Bitcoins, with half of the VAT collected going to support the city’s development projects and the other half going to pay for services like trash collection.

In September, El Salvador became the first country in the world to accept Bitcoin as legal tender.

Despite Bukele’s popularity, opinion polls suggest Salvadorans are wary of his love of Bitcoin, and the currency’s rocky debut has sparked anti-government rallies.

Bitcoin City, according to Bukele, would be circular, with an airport, residential and business parts, and a centre plaza designed to resemble a bitcoin symbol from the air, similar to Alexander the Great’s cities.

“If you want Bitcoin to spread over the world, we need to construct numerous Alexandrias,” said Bukele, a tech-savvy 40-year-old who dubbed himself “dictator” of El Salvador on Twitter in September in apparent joke.

El Salvador planned to issue the first bonds in 2022, according to Bukele, implying that it would be in 60 days.

According to Samson Mow, chief strategy officer of blockchain technology startup Blockstream, the first 10-year sale, called the “volcano bond,” would be valued $1 billion, backed by Bitcoin, and carry a 6.5 percent yield. Half of the proceeds will be used to buy Bitcoin on the open market, according to him. Other relationships would surely form as a result.

After a five-year lock-up period, El Salvador will begin selling a portion of the Bitcoin used to fund the bond to offer investors an “additional coupon,” according to Mow, who expects the cryptocurrency’s value will continue to rise substantially.

“This will make El Salvador the world’s financial centre,” he said.

The bond would be released on the “liquid network,” a Bitcoin sidechain network. According to Mow, the government of El Salvador is working on securities legislation to aid the process, and Bitfinex will be awarded the first license to run an exchange.

Cryptocurrency transactions Bitfinex was announced as the bond’s book-runner during a ceremony held behind Mow.

According to Mow, once ten such bonds are produced, $5 billion (approximately Rs. 37,175 crores) in Bitcoin will be removed off the market for several years. “And if 100 additional countries participate in these bonds, that’s half of Bitcoin’s market capitalization right there.”

According to Mow, the “game theory” on the bonds provided initial issuer El Salvador an advantage: “If Bitcoin hits $1 million (approximately Rs. 7.4 crore) at the five-year mark, as I believe it will, they will sell Bitcoin in two quarters and recuperate that $500 million (about Rs. 3,720 crore).”

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