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Bitcoin City: El Salvador’s Dreams for Utopia on Hold

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Don't miss CoinDesk's Consensus 2022, the must-attend crypto & blockchain festival experience of the year in Austin, TX this June 9-12.

A place with zero taxes, powered geothermally by a volcano and funded by bitcoin bonds. That is what La Unión, a small city in the eastern part of El Salvador, will become if President Nayib Bukele's ambitious plan comes to fruition.

But nobody is holding their breath. After a buggy rollout of the Central American nation’s bitcoin wallet and delays to its “bitcoin bonds,” some are skeptical of the plans.

According to the outline presented by Bukele in November, Bitcoin City will include residential and commercial areas, restaurants, an airport as well as a port and rail service. With the city laid out in a circle (like a coin), the vision is for a crypto haven with no income, property or capital gains taxes.

Read more: US Senate to Consider Bill Examining El Salvador's Bitcoin Experiment

But La Unión locals have expressed mixed emotions about the plans. On one hand, they hope the investment will boost the economy. On the other, they are wary about whether Bukele will fulfill his promises.

Amilcar Alvarado is the manager of the La Unión outlet of Tienda Par2, a major shoe store franchise. He tells CoinDesk that most residents received the announcement of Bitcoin City positively.

“Here, in La Unión, there is little commerce. La Unión needs more places like Bitcoin City to help the economy grow and La Unión to change, as we see in San Salvador,” he said, referring to El Salvador’s capital city. “There should be many places to visit. In La Unión, we only have the bay and certain shops.”

According to Alvarado, La Unión could become an important city of El Salvador, but with the government making so many Bitcoin announcements recently, there’s a sense of uncertainty.

Anxel Miguel Flores Lainez, an agent in La Unión who helps people use the Chivo bitcoin wallet launched by the government last September, sees Bitcoin City as an opportunity for La Unión to receive foreign investments.

“We've been sidetracked for a long, long time. This has been a joy for the people of La Union. The port here is unused. There are things that have not yet been activated. And many think that La Unión will be able to grow,” he said.

Read more: El Salvador’s Bukele Shoots Down FUD on Bitcoin Bond, Takes Issue With US Lawmakers

Michael Peterson, who founded Bitcoin Beach, El Salvador’s first bitcoin oasis in the beach town of El Zonte, thinks the Bitcoin City plan was probably put together hastily.

“Bitcoin City was something that came together at the last minute. I think there's a good chance the government saw just how much interest there was in El Salvador and all these different businesses that were here looking to invest,” he told CoinDesk.

Still, he added, “I think it's actually something that could come to fruition, and could actually have a big impact on the world.”

What happens in La Unión is tied to the larger progress of El Salvador, which has grabbed international attention with its plans to become a center of bitcoin development.

A delayed bitcoin bond

El Salvador’s government has among its plans the issuance of a $1 billion bitcoin-backed bond. Of that amount, $500 million will be used to help construct needed energy and bitcoin mining infrastructure and the other $500 million to buy even more bitcoin, as Bukele announced in November during his presentation of Bitcoin City.

A tokenized financial instrument developed by Blockstream, the bond projects a 6.5% coupon, or the rate of annual interest payments, with a 10-year maturity on the Liquid Network. Investors will also receive dividends generated by staggered liquidation of bitcoin holdings, which will start in year six.

El Salvador Finance Minister Alejandro Zelaya had projected that the bond would be launched between March 15 and March 20, but at the time of this publication, the issuance hadn’t taken place.

On March 11, Zelaya noted the war between Ukraine and Russia could slow the process. "We have the tools almost finished, but the international context will tell us," he told a local TV station at that time.

Dollar is still king in El Salvador

La Unión is located in the Department of La Unión, which is in the far southeast end of El Salvador. (El Salvador is divided up into 14 departments.) The department has a population of 277,700 and a literacy rate of 72,2%. But in an indication that the plans for Bitcoin City remain up in the air, it isn’t clear the development will actually happen there.

Javier, a local tour guide, said Bitcoin City might end up near Conchagua, another nearby town with a port.

La Unión already knows about bitcoin: Fifty percent of the stores there accept it, according to Alvarado. “Shoe stores, clothing shops and other stores accept it. They have their acceptance sign, just like we do. Pretty much everybody is on board with bitcoin. And that suggests that this is going to work,” he said.

The data, however, points to another reality. According to El Salvador’s Chamber of Commerce and Industry, 86% of local businesses haven’t made any sales using bitcoin, and only 13.9% said that they had. Meanwhile, 3.6% of local stores said that bitcoin has contributed to an increase in their sales, while 91.7% reported that the implementation of bitcoin has had no effect on their businesses.

Cecilia Salazar, a manager of the store Italia in La Unión, said about 10 to 15 customers use bitcoin to pay daily, most of them locals. The store has been accepting bitcoin since it became legal tender in El Salvador in September.

Read more: Behind the Scenes of El Salvador’s Bitcoin Bond With the Man Who Designed It

The government released videos explaining how to use bitcoin and spurred use of its Chivo Wallet by airdropping $30 in bitcoin to adults.

Bitcoin’s price volatility is a drawback. “You have one amount of bitcoin, then another. But that is because of the conversion of the cryptocurrency,” Alvarado said.

Flores Lainez, a Chivo adviser in La Unión, says much of the population is still coming to terms with it all.

“First of all, they don't understand what satoshis are, what the currency itself is. Most of La Union’s population didn't have any kind of information about bitcoin,” Flores Lainez said. El Salvador isn't known as a country with a high technological penetration, he noted.

According to the World Bank, about 50% of the population of 6.5 million had internet access as of 2019.

“The elderly don't know how to use bitcoin. They have had several problems in that sense,” said Flores Lainez, who added that most of the population who use Chivo Wallet are adults between 20 and 45 years old.

Despite El Salvador’s bitcoin-friendly reputation, a recent survey found that more than 91% of Salvadorans still prefer the dollar.

“Almost nobody prefers to be paid in bitcoin,” says Zayra Cotefani Miranda, manager at Bliss Boutique, a clothing store located in La Unión, who added that the U.S. dollar will always be predominant.

Read more: Why Is the IMF So Afraid of Cryptocurrency?