Próspera is a charter city within Honduras that has detailed a framework for making bitcoin legal tender, but what is it really trying to achieve?

When Samson Mow, architect of the “Bitcoin Bond,” announced that the charter city had adopted a bitcoin standard, many watched in confusion as this small city was largely unknown. Now, Próspera is trying to show the world what it means to exist semi-autonomously from nation-state control while still being part of a nation-state.

Joel Bomgar, the president of Honduras Próspera Incorporated (the private company behind the creation of Próspera) sat down virtually with Bitcoin Magazine for an interview where he referred to Próspera as “a free city that has adopted bitcoin as legal tender.” Bomgar chose these words specifically because the city isn’t just about bitcoin, it’s about freedom. Bitcoin just happens to be the quintessential tool for achieving its economic freedom.

Speaking of economic freedom through the adoption of bitcoin as legal tender, one’s mind might wander to thoughts of El Salvador doing this very same thing at the nation-state level. However, the scale of Próspera is much smaller, and the election to use bitcoin as legal tender is a choice, not a requirement. Critics of El Salvador’s have challenged the adoption process of El Salvador, and while we will not discuss those differences here today, it is important to note that the forms of adoption between Próspera and El Salvador are vastly different.

But what exactly is this free city, and how did it come to recognize bitcoin as legal tender?

Exploring Próspera

Within the paradisiacal landscape of Roatán — a Western Caribbean tropical island off the coast of the Northern Corridor of Honduras — Próspera entered into a charter agreement with Honduras guaranteeing the autonomy of governance for its residents for 50 years. This agreement can be renewed and allows the charter city to create its own civil law, regulatory agencies and oversight committees, and largely act as an independent jurisdiction with its own taxation under a select few restrictions including that the City of Próspera must adhere to the Honduran constitution, international treaty and criminal law code.

Images source: Bomgar

Outside of those parameters, Próspera has its own constitution of a kind as well as a legal code well over 3,500 pages in length. However, Próspera currently only holds hundreds of acres of land on the island of Roatán, which means the Honduran Zone for Employment and Economic Development (ZEDE) will initially rely heavily on digital residency through ePróspera, the company’s digital governance platform, while it acquires more land over time.

How will Próspera acquire more lands? Taxation and other fees associated with being a resident or operating company within the city will generate a multitude of revenue streams that can be used to buy more land. Of this revenue, 12% is to be remitted to the Honduran government and Próspera keeps the rest. There is no target of money that must be hit in terms of remittance to the Honduran government, which keeps Próspera from having skewed incentives for taxing or tacking on fees for its citizenry. The free city can also fundraise at any point, which it has already successfully done to the tune of $60 million.

Revenue aside, let’s discuss the next big question.

How Is Bitcoin Recognized As Legal Tender?

Taxation. At least, that’s how bitcoin was initially recognized as legal tender. In Próspera, taxes include: a 5% individual income tax, 2.5% sales tax for goods and services, 1% corporate revenue tax, and 1% land value tax. That’s it.

There are no other taxes (not even capital gains taxes) levied within Próspera. This allowed residents and businesses to transact in whatever currency they deemed appropriate which made bitcoin a de facto legal tender, if that was their choice. However, Próspera went one step forward in May of last year and released a resolution for the acceptance of bitcoin and other cryptocurrencies as legal tender. The resolution states that, in order to use bitcoin, the amount of bitcoin used must be equivalent or greater to the value denominated in USD or the Honduran lempira at the time of the transaction.

“Próspera is the world’s most advanced governance platform that unlocks unlimited potential for its residents and users,” Bomgar told Bitcoin Magazine. “Because it’s the most innovative currency and store of value, Bitcoin plays an important role in this endeavor. Just as Próspera enables residents to live, work, and build their futures in a low-friction way, Bitcoin enables them to transact and store value in a low-friction, accessible way.”

Furthermore, Próspera has built out its regulatory authority for the issuance of Bitcoin bonds. Currently, the plan is to mirror the issuance of Bitcoin bonds currently underway in El Salvador. In order to do this, a platform such as Bitfinex or Blockstream would issue tokens on a Bitcoin sidechain such as the Liquid Network, representing the value of the bonds. The framework for bond issuance is still not yet solidified, but Próspera has the freedom of being a charter city which allows for quick regulatory movement once a framework is presented.

Now, returning back to the idea of a charter city or “free city.” It’s important to detail how these entities interact with nation-states.

Do Charter Cities Exit Nation-States?

No. At least, not in this case. Mark Lutter, founder and executive director of Charter Cities Institute, wrote an essay explaining the lessons to be learned from the failing of previous charter cities, or specifically designated economic zones. In this essay, Lutter noted six necessary components to ensure success within the bounds of another nation, as charter cities will rarely hold the militaristic fortitude to defend themselves against a sovereign aggressor.

The success of a charter city — such as Próspera — will depend on its capacity to drive innovation in the region while paying its fair share to its host government, according to Lutter. Próspera seeks to achieve this level of innovation by offering companies a customized regulatory framework.

For instance, if you run a bitcoin exchange and there is a regulatory framework in Canada that works best for your business, you can copy and paste that framework into your operations based in Próspera. Not only can a company create a custom framework, but Próspera also enters into an agreement stating the city cannot change the regulations on you down the road. As long as you operate within the bounds of the previously mentioned legal framework, it’s all customizable.

“What Próspera offers is not just a Bitcoin-friendly tax environment, but regulatory certainty that allows people to build with Bitcoin without worrying about whether a regulator will swoop in one day and change all of the rules,” Bomgar explained.

This customization entices businesses and investors to the area by allowing them to play a game of their own making, and the lax tax regulations allow the residents and businesses of Próspera to determine the currency they use — which in this case is bitcoin.

“Most governments have not figured out an elegant way to integrate Bitcoin into their existing regulatory framework,” Bomgar continued. “We speak with people in the Bitcoin community from around the world on a daily basis, and many of their concerns are the same. Their jurisdictions don’t understand Bitcoin, so they’re stuck using antiquated regulations that make it difficult for them to pursue their dreams.”

“We’ve found that this certainty is valuable for the Bitcoin community, and for that reason Bitcoin will be a huge part of Próspera well into the future,” said Bomgar.

Sounds great, right? A charter city operating within the boundaries of Honduras that can enact its own civil and corporate practices and legislation as long as it remitts and interfaces with its host government. But, how is Próspera governed and is the governance a risk factor?

The 51% Attack On Próspera

Currently, all representatives are appointed by HPI, but as more people actually move to Próspera there are requirements to appoint elected officials based on the population. Today, the responsibility for the governance of Próspera lay in the hands of nine council members, five of whom will be elected once Próspera reaches a population of 100,000, while the other four will continue to be determined by Honduras Próspera Incorporated (HPI) the company behind Próspera.

However, the council requires a 66% majority to accomplish any policy change which would mean at full operation, five elected officials would still need the participation of an HPI appointee to enforce actual change. After the council is in full effect, should the population of Próspera wish to initiate change for themselves, the public has the right to call a referendum. If the public disagrees with a particular decision then a referendum can be called on within seven days and overturned with a 50% majority vote. After the initial seven days, the public can still act against a policy change, but the voting requirements increase to 66% in order to repeal a law.

Furthermore, once the population goal of 100,000 is met, eligible voters can call a referendum and change absolutely anything (as long as it operates within the aforementioned Honduran framework) with a 51% majority vote. In fact, residents could kick out HPI, return to being part of Honduras, or change the form of governance entirely. Próspera hopes this incentive structure will keep them aligned with the public in a way that will ensure this does not happen.

Now, with all of this being said, we’ve still said very little about the city of Próspera, so we’d like to provide resources, many of which we used to write this article, which can give a grander detailing of how Próspera came to be, its plans for the future, and even some opinions that challenge whether or not the charter city is a good idea.

Additional resources detailing the structure and operation of the charter city include; the Journal Of Special Jurisdictions performing a case study on the governance of Próspera which details the inner workings of the charter city, plans for a Bitcoin educational program, an in-depth overview of facilities and governance such as healthcare and education, a 44-page FAQ (including details about structure, governance, taxes, ZEDE structure, business models, politics, residency and more), as well as an interview with the founder and other resources within each of the provided links.

Indeed, Próspera is a momentous endeavor embedded into a multi-faceted structure that seeks freedom, but also must maintain a profit margin and a relationship with its host, Honduras. The complexities are many, but this charter city intends to remove the bureaucratic hurdles of most sophisticated nation-states and give the power of choice back to its residents. Próspera’s acceptance of bitcoin is the first of many choices meant to provide true financial freedom and inclusion to its residents while also providing a level of certainty that most people no longer feel about the state of their economy.

“We’ve found that this certainty is valuable for the Bitcoin community, and for that reason Bitcoin will be a huge part of Próspera well into the future,” Bomgar told Bitcoin Magazine.