San Salvador, Dec 7 (EFE).- El Salvador on Tuesday marked the three-month anniversary of allowing Bitcoin to be used as a payment mechanism along with the US dollar amid expectations sparked by the announcement to build what it has said will be the first “Bitcoin City” in the world.
Despite warnings that doing so would be folly, the Central American country on Sept. 7 became the first and only nation in the world to adopt the most popular of the cryptocurrencies as a valid means of payment.
The past three months have been marked by scanty acceptance of Bitcoin among Salvadorans, the lack of transparency in the management of state funds and complaints about alleged identity theft to collect Bitcoin bonuses.
To all this may be added the announcement by President Nayib Bukele on Nov. 21 of a project called “Bitcoin City,” to be financed initially by issuing Bitcoin bonds.
According to the president’s announcement, the city will be built near the Pacific coast on the Gulf of Fonseca – coastline on which is shared by El Salvador, Honduras and Nicaragua – will not pay any taxes, except for a 10 percent value added tax (VAT), and the government will issue $1 billion in Bitcoin bonds to finance the construction.
A total of $500 million will be used by the government to buy Bitcoin and the other half of the bond-raised funds will be devoted to creating city infrastructure.
Economist Ricardo Castaneda, with the Central American Institute for Fiscal Studies (Icefi), said that the project is “risky” and the announcement that El Salvador will issue Bitcoin-backed bonds “in reality, is a desperate measure.”
Castaneda said that, according to the scanty information available, El Salvador “would create a type of securities exchange on which these bonds would be placed.”
“If that goes well, President Bukele will be an example and will be able to tell multilateral organizations and the international community that we don’t need them, but if it goes badly those who will lose will be (El Salvador’s) entire population,” he said.
The economist, who is Icefi’s coordinator for El Salvador and Honduras, said that the project, which he said is an “experiment,” “requires a whole institutional architecture to move forward and one of the points that we must not lose sight of is how the traditional financial system is going to react to this.”
In addition, he emphasized that it would be necessary to create “special legislation” on the matter because the country “doesn’t have the institutions or the legal framework for it.”
“Even when (the legal framework) is created, if it is, one will have to wait to see how the other countries view El Salvador.”
He added that the idea of creating a special economic zone “seems to be really serious” where “a company or investors are never going to pay taxes and when a person doesn’t pay taxes that means that someone else will have to do so, and that someone else is the general public.”
Castaneda said that the announcement of Bitcoin City “is like selling an illusion for Bitcoiners and giving them an incentive.”
He said that it has been said that the government will place $1 billion in bonds at a 6.5 percent interest rate and “any investor with a little knowledge about finances would never buy from the government, at this time, bonds with such a low rate.”
“This means that what the president is banking on is for the people who buy this kind of instrument to be people who are so in love with Bitcoin and who don’t care about taking into account that there’s a lot of risk in El Salvador and that the financial situation is very complicated,” he said.
He added that “We’re going to really see if the Bitcoin City announcement is powerful enough to make Bitcoiners fall in love with it and practically close their eyes to reality and loan money to the government. It’s a very big challenge.”
According to a recent public survey, more than 91 percent of Salvadorans prefer to use the US dollar.
The survey conducted by the Citizens Studies Center at the private Francisco Gavidia University found that, when presented with the option of both currencies, 91.4 percent of Salvadorans leaned toward the dollar, 4.9 percent toward Bitcoin and 3.7 percent did not respond.
However, when asked about the decision to adopt Bitcoin as a currency, 35 percent said they were in favor and 40 percent they were not in favor of the move.