El Salvador's "Bitcoin City" will likely join a long list of failed urban crypto fantasies

23 November 2021

There’s a bizarre fantasy popular in crypto circles known as the ‘Bitcoin Citadel’. The fantasy goes back to 2013, when Redditor Luka Magnotta uploaded a post as a time traveller from the future. He described his world as a wildly unequal dystopia divided between bitcoin maximalists and their eternal no-coiner slaves. In his premonition, bitcoin early adopters reside in isolated citadels as kings, while everyone else suffers the social collapse outside.

Although meant as a nightmare vision of a future under bitcoin, predictably, Magnotta’s post was lauded by crypto enthusiasts. The Bitcoin Citadel connected to their libertarian dreams of cosseted bunkers and private enclaves, where fortuitous crypto speculators would be free to amass great wealth without doing any work, or paying any tax.

With the news this week that crypto-savvy despot, Nayib Bukele intends to build an isolated Bitcoin City in El Salvador, many Bitcoin Bros jumped to buy a plane ticket.

Funding for the city will come from issuing a $1 billion bitcoin-backed “volcano bond”. Half the funds raised will go towards buying more bitcoin. The other half will be used for infrastructure and bitcoin mining powered by geothermal power from the Conchagua volcano.

But El Salvador does not produce enough energy to meet its existing needs. The country imports 25 per cent of its electricity from fossil fuel power plants located elsewhere in the region. Bukele claims Bitcoin City will be carbon neutral, but the carbon footprint of the bitcoin network could be staggering because of it. It’s worth remembering that bitcoin’s carbon emissions swell or shrink with its price. According to one of the scheme’s designers, Samson Mow, for the city’s proposed funding mechanism to work out, the market price of bitcoin would need to rise to $1 million after 5-years. But Alex de Vries of the Digiconomist website points out that even at $0.5 million, bitcoin’s global emissions would be belching out 617 million tonnes of carbon a year. Bitcoin mining would be responsible for 70% more emissions annually than the whole of the UK. Its pollution levels would approach Germany’s at 696 million tonnes. And that’s just the halfway point.

National governments in China, India and Europe are already starting to intervene in bitcoin’s ram raid on the Paris climate agreement. Bitcoin City’s green credentials are as fantastical as the project’s finances.

As well as the offer of permanent residency for just 3 bitcoins, foreign settlers to Bitcoin City will pay little in the way of tax. El Salvador’s persistent poverty issues could be solved with tax systems that target the incoming crypto-rich. But funding for basic services such as healthcare and education will need to come mainly from VAT and perhaps taxes introduced on foreign donations to local charities, which now attract a 40% tax deduction. Transparency International has described that as an attempt by Bukele to stamp out criticism of his populist government. Several charities working on education, human rights and women’s rights were raided by government officials recently.

Bukele isn’t the first bitcoin bungler to overpromise and underdeliver on FinTech fantasies. Consider Blockchain City, supposedly being built by crypto-millionaires in the Nevada desert. Then there’s the Utah desert Crypto-Kingdom of Bitcointopia, an elaborate scam, which as it turns out, doesn’t have any desert to speak of. To avoid land issues, the MS Satoshi was to be the world’s first floating citadel for libertarian tax-dodgers. It’s now back to being a cruise ship.

But it’s the Global South where poor and vulnerable communities are most let down by the false promises and ulterior motives of Bitcoin Bros. Facing a huge public debt crisis, the Caribbean island of Puerto Rico has become a hub for crypto developers, attracted by short-sighted tax incentives and light-touch regulation. In the aftermath of Hurricanes Irma and Maria in 2017, Bitcoiners started snapping up urban beach-front property on the cheap, building exclusive libertarian enclaves, pricing-out the locals and offering little in return.

And the false promises don’t get any more grandiose than Senegal’s Akon City, a $6 billion smart city with its own purpose-built cryptocurrency, Akoin. The city was modelled on Wakanda from Marvel’s Black Panther comics. US R&B star Akon reportedly raised $2 billion to kick start the development. But despite fireworks and fanfare, the site remains as grassland, leaving locals wondering about their future.

Recent research from Northumbria University suggests Bitcoiners are drawn to these poor and vulnerable communities like War Lords to blood diamonds. Crypto enthusiasts take advantage of economic instabilities, weak regulations, and access to cheap energy and other resources.

For example, while the civil war in Ethiopia has left vulnerable people and local infrastructure in tatters, a US tech firm, IOHK is pushing for their Cardano cryptocurrency (ADA) to be legal tender across the country. Cardano also sees potential for its cryptos in war-torn Afghanistan.

Playing the crypto casino in these politically unstable contexts carries significant risks. But according to Samson Mow, bitcoin bond investors should weigh up the risks against all the benefits for the people of El Salvador. For crypto commentator, David Gerard, “Bukele and the Bitcoiners each consider the other a sucker they are absolutely going to skin”.

But as with all the other failed attempts at building Crypto El Dorado, the biggest losers will likely be the locals, whose land and resources are being promised for a libertarian citadel fantasy to foreign Bitcoiners.

An amended version of this post was published on 1st December 2021, in The Independent.