Millionaires are building their own tax-free utopia in Central America on crypto. The locals aren’t happy.

While the nation calls on President Joe Biden to increase taxes on the rich, cryptocurrency millionaires are creating their own tax-free paradise in Central America.

The appeal of creating small cryptocurrency-backed utopias in Latin America is the freedom from taxes and regulation. At the forefront of this movement is the Free Private Cities Foundation, which promotes the idea of a “voluntary, contract-based society” and supports the development of private cities around the world. Their slogan is “The future of governance is private.

The Free Private Cities Foundation, founded by Dr. Titus Gebel, is encouraging the government of El Salvador to put its soon-to-be-created Bitcoin City in corporate hands and make the city governed by the private sector, according to MIT Technology Review.

El Salvador’s plan to build a geothermal-powered Bitcoin City at the base of a volcano is just the tip of the iceberg of the special tax-free economic zones being pitched to various countries abroad.

Expanding Beyond El Salvador

In Brazil, the idea of privatized cities overseen by companies has also been proposed by Gebel’s company, which wants to create multiple international “boom zones. In addition, the Free Private Cities Foundation has set its sights on Honduras.

According to the Honduras International Peace Brigade, there are three main ZEDEs – Zones of Economic Development and Employment – in Honduras, namely Ciudad Morazán, Orquideia, and Prospera, following a 2013 constitutional amendment allowing companies to manage special zones, citing Nacla.org. ZEDEs are economic zones independently managed by companies and are often referred to as “free private cities.”

Jamilia Grier, founder, and CEO of ByteBao, a legal consulting firm in the Web3 industry, have a healthy skepticism about how ZEDEs can function as private cities.

“It’s kind of like the perfect storm between politics, economics, and physical infrastructure as far as building a city. The question is: How do you manage that?” Grier said in an interview with Fortune magazine.

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So, what does private governance mean at ZEDE?

Private governance means just that. According to a National Lawyers Guild (NLG) delegation’s survey of Honduran special economic zones, privatized city-states “exist independently of the legal, administrative and social systems of the Honduran state.”

This means that ZEDEs are not required to pay import or export taxes and are free to establish their forms of government, schools, courts, and social security systems, according to the Federal News Network. Because of the complete lack of regulation, some critics fear ZEDEs could become private sanctuaries for criminal activity.

“If you’re going to create one of these cities within a country, what is the agreement you have with that country that this particular area is not taxable?” Greer questioned.” Sovereign states would have to give up their rights to create this particular tax-free zone that they are proposing.”

How do ZEDEs benefit locals?

Even though ZEDEs give political sovereignty to foreign corporations, from the perspective of the Free Private Cities Foundation, they are creating safe havens in “one of the most violent countries in the world.” Last year, Honduras was second only to El Salvador in homicides and the country had the highest female suicide rate in the world, according to Statista.

The Free Private Cities Foundation announced on March 15 that it is developing the private city of Morazán, which the website describes as a “blue-collar ZEDE” where residents can avoid the structural problems that plague Hondurans in their daily lives, such as “excessive violence.” In addition, Morazán will have housing areas for 9,000 residents, commercial space, schools, parks, and an “industrial zone.”

“Morazán is a community designed to encourage entrepreneurship; the first commercial tenants have already arrived,” according to a March statement.” Tenants have chosen to sign voluntary contracts that spell out their rights and responsibilities so they can be sure the rules won’t change for them.”

In exchange for living in a safer community, the citizens of ZEDEs contract with private companies, ideally to have a haven away from high crime rates.

Potential displacement of locals

While the creators of ZEDEs tout the idea of a higher standard of living for locals, the benefits may be overstated. Although ZEDEs are marketed as a source of employment in Honduras – a country where more than 60 percent of the population lives in poverty – when one of the country’s three main ZEDEs, Próspera, was built on the Honduran island of Roatán, much of that construction work was outsourced rather than made available to local Hondurans.

Economist Carlos Urbizo Solis points out that instead of bringing prosperity to local citizens, the tax benefits of ZEDEs will widen the already high-income inequality in Honduras and benefit only a few.

While the government accepts foreign investment to build special economic zones, locals watch as companies eat away at their land. Critics point out that the area planned for the construction of ZEDE is ancestral land in the Garifuna region, which has been inhabited by indigenous peoples for thousands of years. Therefore, the construction of ZEDE will lead to a massive displacement of the local population.

Many Honduran citizens oppose the existence of ZEDEs, citing issues such as the sale of private territory and land, and increased poverty rates. Moreover, because ZEDEs are independent jurisdictions with their laws, they have full autonomy in the criminal justice system.

“We are seeing a new era of rapid technological innovation,” Ryan Hunter, CEO of Crypto Cannabis Club, told Fortune.” Some of these innovations will be sustainable and some will be unsuccessful but will provide valuable insights for further growth. I think it’s too early for crypto cities, but I do like the entrepreneurial spirit and innovation that this movement represents.”

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