SLP340 Peter Young – El Salvador On The Ground & Free Private Cities

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Peter Young of the Free Private City Foundation joins me on the show to talk about some of his experiences on the ground and some updates with Free Private Cities. We chat:

  • El Salvador on the ground
  • Bitcoin and Lightning in the real world
  • What it really costs to do merchant processing
  • Free Private Cities
  • Honduras ZEDEs
  • Liberty In Our Lifetime

Links:

Relevant episodes:

Sponsors: 

Stephan Livera links:

Podcast Transcript:

Stephan Livera:

Peter, welcome to the show.

Peter Young:

Great to be here, Stephan. Thanks for having me.

Stephan Livera:

So Peter, I know you’ve been doing a bunch of things in this whole Bitcoin and citadels space, Free Private Cities, of course, that you are working with. And of course, I had the pleasure of meeting you in El Salvador about a month or two ago. I wanted to get your views on the ground. What’s it like there as well as discuss a little bit about what’s happening in the Free Private Cities world. So for any listeners who don’t know you, just give us a little bit of a background on yourself and where you’re at with Bitcoin, and of course, Austrian economics.

Peter Young:

Thanks Stephan. So I’m a Bitcoin consultant, and I mainly work for three clients. The first of them is the Free Private Cities Foundation, which is an organization dedicated to creating voluntary cities and hopefully eventually a more voluntary society. I also work for Saifedean Ammous, the author of The Bitcoin Standard, and he’s quite big in the Bitcoin Maximalist, Bitcoin-only space. And then I carry out work also in economic analysis and writing for a wealth management firm based in Lichtenstein, Austria called Incrementum. And I’ve been traveling in Latin America for the last couple of months. I’ve been really interested in what’s going on in El Salvador and Honduras. The Free Private Cities Foundation—my main client—has some relationships with some projects there. And I guess in terms of the background question, I’ve actually spent most of my career living and working in China, working in trade investment, but I started to get really into Bitcoin and Austrian economics, specifically, from around 2017. And that interest developed into something that I wanted to pursue as a career. So since last year, I’ve been working full-time in the Bitcoin space, and it’s been quite an adventure, quite a journey. And I’m really glad to be chatting to you about it today.

Stephan Livera:

So Peter, there’s been a lot of talk in various directions about what’s going on with El Salvador. We’ve got the Bitcoin Law—the legal tender—we have the Chivo wallet, we have various people using Bitcoin and accepting it for payments. But on the other hand, we also have those who are detractors who are saying, Well, the wallet’s not working that well or this, that, and the other various arguments that have been made. What’s your perspective from the time you spent on the ground in El Salvador?

Peter Young:

Bitcoin adoption in El, Salvador is really exciting. When I heard the news that a country was going to be adopting Bitcoin as legal tender, I was really keen to get over there. And luckily, I had this opportunity, as you did, to come over and take part in the Adopting Bitcoin conference. And it was really exciting to go out there and see—because I was arriving a couple of months after the legal tender law was introduced in early September—that there were many places where you could easily buy things with Bitcoin. And as someone who isn’t a Super OG, but as someone who’s someone who’s been quite involved in the space for a few years, that was really exciting. And people are using Bitcoin in El Salvador, especially the big businesses that have a more international customer base. They’re using it, and they’ve implemented some great technologies for managing the payment system. But in general, it’s still very early days I’d say in El Salvador. But if we think back to how long it’s taking for other financial innovations to really become large globally, like credit cards for example, then I think actually the pace that things are moving forward is pretty quick. And there have certainly been some issues, some problems, with Bitcoin adoption in El Salvador, which we can go into. But when we’re looking at a more medium term to long term time scale, I’m very bullish about what’s going on there, and excited about the pace of development.

Stephan Livera:

Now some might be thinking, Well, what about the fluctuation in the exchange rate? So how does it work then when a merchant in El Salvador wants to take payment for Bitcoin?

Peter Young:

So the vast majority of merchants in El Salvador that are using Bitcoin are using the Chivo wallet. The latest stats I heard was something like 60% of transactions going over the Lightning Network are taking place via Chivo. Chivo is the government wallet that was set up in preparation for the announcement of Bitcoin as legal tender. And the main reason why Chivo is so widespread is because the government launched Bitcoin by giving every Salvadorian citizen $30 US dollars via this Chivo app. So there was a large incentive for large swathes of the population to download this app so they could claim their $30. And what that means is that they all have the app, and they’re also able to use it to transact with each other. And another key feature of the Chivo app—because one of the currencies that El Salvador uses is the US dollar, is the dominant currency. And there’s a lot of remittances from particularly the United States, but also Canada and Europe, coming in from El Salvador in dollars. The Chivo wallet allows for free exchange between US dollars and Bitcoin. And that’s a really key feature, because it means that people from El Salvador can interface with the US dollar system reasonably seamlessly, and they can also trade back and forth. In terms of the question though of how they manage volatility, basically people need to be aware that Bitcoin’s price in US dollars is going up and down. And what the Chivo app allows them to do is to just accept Bitcoin, but hold a balance in US dollars. So if they don’t want to be exposed to that volatility, they can just keep the US dollar balance, and they can convert it to Bitcoin whenever they want. So they can take advantage of the upside volatility of Bitcoin, but also, the downside is the risk that they would have to bear if they’re holding in Bitcoin. But people have the option to do that for Chivo. And I think it’s a learning process. People—as you will have observed from your time there—people are still not really understanding the difference between, say, Chivo wallet and what Bitcoin actually is, and what a wallet is versus what the Bitcoin network is. So there are certainly people that don’t quite get this and that are a bit annoyed when their balance goes down in US dollar terms. But again, there are options for people that want to avoid this volatility and have specific USD-denominated payment obligations they need to make.

Stephan Livera:

I see. And of course they are able to use the Chivo ATM network as well, because Chivo is also a smartphone application, but it is also the ATM network that allows people to go back and forth between Bitcoin and US dollar physical cash. And so I suppose for many Salvadorians, they may be using that also just to go back and forth in some cases, where if they are still purchasing things for cash as a cash-based economy, then maybe that’s also an important factor there. I’m also curious as well your thoughts on this idea—I’m sure you’re familiar with the work of say someone like Vijay Boyapati—who speaks about this idea that Bitcoin is most likely to be adopted first as a reserve asset or as a savings, as a collectible, and then store of wealth, before it’s then used in a day-to-day context. Do you have any thoughts on that idea? Do you see that that part is what’s going to happen first? Or do you actually see it more like there will be this kind of day-to-day receiving Bitcoin and spending Bitcoin for Salvadorians, or people in El Salvador?

Peter Young:

Great question. And yeah, I’m a huge fan of Vijay’s ideas. I would tend to agree with what he said there. And the reason for that is that I think the key value proposition of Bitcoin, really, is that it’s non-inflationary, non-centralized money. And when you have a system where people are already able to transact fairly seamlessly with fiat currency—because the problem with fiat currency is not a transaction usability problem—the problem with fiat currency is that it’s inflatable. And that has profound societal impacts. So what people I think tend to think about when they think about money, is how we solve the payments problem. But the payments problem with money is relatively trivial to solve. We all know how easy it is to pay with things on our debit card. It doesn’t work a hundred percent of the time, but it’s the way the vast majority of people in developed countries transact these days. And we can look at countries like China, where they have centralized payment processing solutions like WeChat and Alipay that have been in use for the best part of a decade. And they just work seamlessly. They’re used absolutely everywhere. They used to cross all demographics of society in China. And it wasn’t that difficult. I mean, obviously, it wasn’t trivial, but there are lots of examples where payment solutions that work seamlessly have been created. So people tend to think of that as the problem that Bitcoin solves, but I would tend to agree that actually the store of value and the uncensorability and the uncontrollability of the Bitcoin network is its key value proposition. And when you’re talking about stores of value and inflation, it takes time for that difference to become apparent. So for people in El Salvador that are losing—depending on your metric for inflation—between 2% and say 25% of the value of their savings in US dollars every year, that difference doesn’t manifest itself immediately. And when you have volatility in the US dollar price, people can think in the short term, Ah, I’ve lost out. But when you start looking at a period of years, that’s when people that have held Bitcoin start to see, Wow, I have actually been able to protect my savings. And so I think it’s to be expected that, actually, when you look at how Bitcoin’s being used in El Salvador, there is some use in transactions. I would estimate somewhere like 1% of Salvadorians are regularly using Bitcoin for transactions, and there’s some statistics that support that figure as well. But it’s already taken something like 5% of the remittance market in El Salvador, which is huge. And it’s already being used quite widely as—well the Chivo wallet in particular is already being used to trade back and forth with Bitcoin, which suggests some more understanding of this asset as something that has uses as this investment/savings vehicle. So we’re seeing that and I think that’s to be expected. And I think over time, we’ll move towards that state where it really does become a medium of exchange, but that will take a larger market cap so that we have less volatility and pricing, as a unit account is more feasible.

Stephan Livera:

Yeah. Now I broadly agree with you, but I think there’s one other counterpoint that people might be thinking, or they might have heard: they might have heard some rhetoric or some of arguments around this idea that, Look, think how many people are totally unbanked in El Salvador. And this is actually part of what President Bukele’s argument was, around saying, Look how many people have downloaded the Chivo wallet. We have more people using the Chivo wallet than all these people who have bank accounts. That actually there were all these people who previously were not able to access bank accounts and financial products like you and I can with our debit cards and credit cards and the like. That there’s an argument around the access part there also. Would you summarize that as saying, Well, there are some people who’ve gotten access to financial services in a sense now with Bitcoin, but still the more important part is the savings part? Or how are you thinking of that?

Peter Young:

I think that overall, the long term thing that excites me about Bitcoin is the economic change it stands to bring about through the removal of inflation and through taking money out the hands of centralized power. But in the short term, there are issues which are incredibly important to countries like El Salvador. And you raise a really important one, which is the financial access one. And as President Bukele has pointed out, only 30% of the population of El Salvador has a bank account. So that means the rest are operating largely in a cash economy. But we’re in a country where there are 1.6 smartphones per head of population. And actually this is true virtually anywhere in the world that you go. Like, the problem of owning smartphones—there’s really not anywhere where it’s really, really difficult to get a smartphone if you want one—if you’re set on doing that. There are obviously elderly people and there are some very remote parts of the world where this isn’t possible, but really, smartphones are everywhere in the world right now. And they’re everywhere in El Salvador. And if you are an elderly person who’s not particularly tech-savvy, they’ll be someone in your family who will be able to help you with those kinds of things. So what Bitcoin has done, is it has given financial access for people that are willing to try and use Chivo app, or other Bitcoin wallets, to really anyone in the population that wants to use it. And that’s incredibly powerful, because—I’ll give you an example: I was talking to some people down in El Zonte, where the Bitcoin Beach project was launched a couple of years ago. And they were saying that they had some problems regarding paying suppliers for a small business. And they used to have to go and actually hand physical cash to their suppliers once a week. And because of having access to the Bitcoin Chivo wallet, they were able to just send the money to their supplier and get back that time, spend it with their family, or for doing more work, or whatever they wanted to do. So there are actually real financial access problems. I think one of the tendencies people sometimes have when they’re in Western countries is to look on and say, Oh, well look how far behind El Salvador is. Really the problem is they need to catch with us. And there would be benefits to there being more financial access in El Salvador. But for me, the overall story with Bitcoin adoption is way, way bigger than that. And that’s the thing that excites me. And that’s the thing that I tend to focus my thinking around.

Stephan Livera:

Gotcha. And with the Chivo wallet, were you seeing any perception in Salvadorians who you were speaking with that—did they see Chivo as Bitcoin? Or did they also understand that Bitcoin is this open source network and that there are many, many wallets and services and providers?

Peter Young:

So my perception is that there’s not a very deep level of understanding amongst the general population in El Salvador regarding what Bitcoin actually is. And that’s understandable, because Bitcoin—in a way it’s very simple—but to actually understand how it works and the layers to it, and some of these distinctions between what a wallet is, what the Bitcoin network is, what a Bitcoin is, these things do take a bit of sitting down and looking at to understand. And so, because the vast majority of transactions are done on Chivo, and because this is the government wallet, and because people tend defer a bit more to government in El Salvador than they might do in other places, people are, I’d say, tending to equate Bitcoin and Chivo. And if there’s a problem with Chivo wallet—and there have been a few problems we could talk more about—people tend to associate that as being a problem with Bitcoin and be a bit put off by that. And so I’d say that’s a big issue, but there are on the other hand organizations like My First Bitcoin, which are doing outreach work with communities across El Salvador. And they’re trying to educate people about differences between Chivo, and other wallets, and Bitcoin, and the Bitcoin network, and all these different things. And I was talking yesterday to a friend who works for the IBEX payment system. And he was saying that, The thing to bear in mind about El Salvador is that there’s a new Bitcoiner born every day in El Salvadore—created every day in El Salvador through what’s happening. And the great thing about Bitcoin is that once you learn it, you’ve kind of learnt it. And I think it’s very rare for people who are orange pilled to then become un-orange pilled again. Because once you start going down the rabbit hole and really do understand what Bitcoin is, then the story, the potential, the utility to you as a business or an individual becomes pretty apparent. And the more that grows—like, I don’t think that that is going to reverse. So it’s exciting to see how people are adopting it. But yeah, at the moment there are certainly those teething issues, and there’s certainly issues regarding perception of what Chivo is doing and how that relates to Bitcoin.

Stephan Livera:

Speaking of issues, or teething issues, problems around access—what kinds of things were you seeing the last time you were in El Salvador? Of course, it seems like things are improving, but at least at the time you were there, what was the state of play?

Peter Young:

There were issues at the time. I was in El Salvador in October. And there were issues now. So one of the main issues that I thought, Wow, this is a really big issue, was the problems with compatibility between the Chivo wallet and outside wallets. Because when people are paying in Bitcoin, they’re normally doing Chivo to Chivo, they’re basically using a centralized payment system like Alipay or WeChat pay. And so they have no problem. They scan a simple QR code, money goes from one account to another account, but they’re not actually using Bitcoin. They’re just operating on a centralized server. And so they can feel like it’s working. But for people like me that aren’t Salvadorian citizens, we don’t have the Chivo wallet, because you need a government ID in order to register for one. Or an address I think in El Salvador to register for one. So I went to interact with the Bitcoin network using my default wallet, which is Bluewallet. And what I found was that on-chain payments to a Chivo wallet were no problem. But when you wanted to do Lightning payments, it was fine when you were sending it to the personal version of the Chivo wallet. But when you were using the merchant version, the first thing was that there are a number of steps that weren’t particularly user-friendly. The UX of the product was not particularly well designed. So I’d have to work there with the merchant and talk them through about four steps they needed to go through to accept my Lightning payment. And that was the first issue. But the major issue was that actually there were technical problems, whereby Lightning payments were actually registered as leaving an outside wallet account, and then they weren’t being received by the Chivo wallet. And for a few dollars, for me it was like, Okay, well, this is annoying, but this is not something that can be happening regularly in El Salvador. Like if someone in El Salvador, with a vast majority of people like [inaudible 18:53, sounds like connocky]—it’s a really big deal if they lose some money on a transaction—this can’t be happening. And unfortunately this is a problem with Chivo wallet. It’s a technical issue that can totally be solved. And if you use other wallets, you’ll realize how incredibly user friendly the Lightning Network can be. But I think the issue with Chivo, the reason why it’s got these teething issues is, is because it’s trying to have this seamless interface with the US dollar, which is something that—I think it is needed for El Salvador, but what that means is that sometimes you have these compatibility issues. And I’d add to this, Stephan, that around Christmas, there was an important update to the Chivo wallet. So I wasn’t actually in the country for this, but I’ve heard through some of my contacts there that this has taken place. And what this meant was that the personal wallet side of Chivo has improved by a lot, and now that’s pretty seamless, but there are still these issues with merchant wallets on Chivo. And so it’s kind of annoying, in a way. I don’t want to be too critical of Chivo, because they’re pioneers. They’re trying to do something that’s really new, and they’re trying to solve a difficult problem. But I guess the solution that people like me and organizations like My First Bitcoin try to promote is like, Where you can, operate on the Bitcoin network, understand that you can have your own wallet—it doesn’t have to have anything to do with the government. And if you opt for these solutions, you can have an incredibly seamless experience using things with Bitcoin. And of course, Chivo is hugely important, and I really hope Chivo does well, but I’m worried to a certain extent—in the short term—the technical issues that people are having with Chivo will put some people off and delay their adoption of Bitcoin a little bit.

Stephan Livera:

And there are alternative payment processes though, correct? OpenNode or IBEX Mercado also offer payment processing, but I suppose those are not free like the government one, or government subsidized.

Peter Young:

Correct. So if you’re using IBEX, you’re paying—depending on what you do—you’re paying between 0.7% and say maybe up to 2%-3% on every transaction that you do. The main cost with something like IBEX comes when you start to interface, again, with US dollars. And so there’s a conversion fee on that, which I think is something like 1.5%. And when you process a payment in Bitcoin, you’re paying—I think it’s 0.7% just as a standard fee, plus what you pay on the Lightning Network. So that’s probably about 1% that you’re paying. Now of course, that is something that is much lower than what you’d pay on Visa or MasterCard, where you’re looking at 3%, 4%, 5% per transaction. And most people I think in Western countries don’t realize how expensive it is to do a Visa MasterCard transaction, because in Western countries, these costs are taken on by the merchant. But I’m here in Mexico at the moment in Tulum, and here, and also other parts of Mexico, the standard practice is actually to have the customer take on this extra fee for processing a card payment. And so here it’s really like in your face all the time, like, Oh, if I pay on card, I’ve got to pay an extra 4%-5%. And you start to realize, Hey, this is a really big problem. Like, 4%-5% is a lot to pay if you’re doing this for every credit card transaction. And so when I was in El Salvador and I was directly in Bitcoin, I was paying people 0.3%. So I was paying people a 10th of what was being paid over here when we use Visa or MasterCard. And that’s what we can get to. If we get to a point where economies are just functioning on Bitcoin with the technology we have today, we can get that down to 0.3%. And that’s huge in terms of costs and time saved by merchants and customers. So there are these payment solutions that do make it easier. They’re way better than Visa and MasterCard. They work seamlessly like OpenNode and IBEX, as you mentioned. But yeah, if we get to a fully Bitcoinized economy, we can go way further and make that process even more seamless.

Stephan Livera:

Yeah. Right. And so, as things mature, we’ll see more and more people use Bitcoin and Lightning more natively. But it is a fair warning or reminder to people that these things are not free. Somebody still has to run that Lightning node. Somebody still has to manage the Lightning channels. There will still be on-chain open and closed routing fees associated with that. And so probably as we speak today, as you say, it’s probably something like 0.3%, 0.4%, around that range. But when you consider that against the alternative of paying 3%, 4%, 5%, which is actually what credit card companies pay—and really what you’re paying for there is often like a fraud aspect of it—because they have to deal with the fraud risk or chargebacks and so on. And basically by the time you’ve dealt with all of that and the regulatory aspects of it, that’s where the 3%, 4%, 5% comes in. So it remains to be seen what happens in—let’s say, if we were to go down the track 5 years, 10 years from now, and if all the people are spending directly natively in Lightning, what is the actual ending fee really going to be? And also the important part, as you correctly say: Is it a customer-borne fee or is it a merchant-borne fee? And so that will obviously change things a little bit in terms of the perception, because a customer thinks, Oh, I don’t have to pay a fee—but really it’s just built into the price by the merchant.

Peter Young:

Exactly, yeah.

Stephan Livera:

All right. So that’s interesting to see about how that’s happened. Were you seeing any benefits for Salvadorians? What kind of benefits were they seeing? Was it increased business? Was it a better user experience for the customer? What kinds of things were you seeing?

Peter Young:

When I was in El Salvador, I made a visit to San Miguel, which is the largest major city near to the site where Bitcoin City is going to be built—the new announced project by Bukele in November. And I went there because I was really curious about this project—you mentioned my association with Free Private Cities in the introduction. And I just wanted to go and find out what the perceptions of people were on the ground in the area near to this site. And so I went around and I interviewed a lot of people about how they’d been using Bitcoin. I started looking out for the Bitcoin or the Chivo signs on businesses, and the answers people gave me were things like, It’s helped to increase sales, because I think partly there’s a very practical upside in the fact that suddenly everyone in El Salvador had $30 US dollars that they could spend through this app. And the merchants that were more savvy and caught onto that quickly did increase their sales, because people were like, Hey, I can use my Chivo dollars here and I can buy something. There’s definitely an aspect of that. There’s also a supplier’s issue, the kind of supplies which I mentioned earlier in the interview. I talked to someone in Conchagua. She was quite a young mobile phone saleswoman. And she was saying that using electronic payments in general as opposed to cash was more hygienic, and that was a reason that she preferred to use Chivo. And then there were people that were telling me about the use of Bitcoin to save. And they liked the fact that they could spend it when the price went up and they could save it when it went down. And they said that they understood that it was going up and down, and probably up in the long term. So these were all positive things that were said to me by people on the ground. And it’s great to have this list of examples at such an early stage. And I think the store of value thing will start become bigger and bigger as time goes on. And also the permissionless aspect of it will start to become bigger, because—as I’m sure you and lots of people in your audience would be aware—actually getting payments to properly go through with our current system is a problem much more than it is when you are just purely operating on Bitcoin over the Lightning Network. I much more frequently get problems transacting with the fiat monetary system than I do when I’m just using Bitcoin. When I’m just operating on Bitcoin, sure you can have issues when it’s a specific app, like Chivo has a problem. But with the fiat money, as I said I’m here in Mexico, I’m meeting people, we’re sharing bills and things, and there are a few applications, but it’s not trivial for me to split a bill with an American sitting around the table. We have to both have apps and, and it takes a bit of time. Whereas with Bitcoin, that’s a trivial thing to do. And there are these kinds of advantages. Another example was the other day I was trying to book a flight. The payment went through twice. I haven’t been refunded for it more than a month later. And then the money’s just sort of sitting there in the banking system. You’ve got no idea where it is. You are just at the mercy of call centers, which can hold you on the line for an hour or more or whatever. And with Bitcoin, you know exactly where the funds are, whether they’re in the mempool, whether they haven’t left the account, whether they’ve been received. And so you can just go and look at these things yourself, if you’ve got the technical knowhow, I guess, and you can work out where the payment is. Or people could provide that service for you. So there are also the permissioned aspects of Bitcoin which I expect to become more and more important as people start to say like, There are these things to prevent fraud, et cetera, et cetera. But these things could develop on the market—like wallet providers could potentially provide services like this on top of Bitcoin—if they are truly valued. But my suspicion, really, is that lots of these things, these fraud prevention, regulatory things are really just ways of protecting vested interests and protecting the legacy system and pushing people towards it, rather than because they’re really valued as highly as the price would suggest on the market.

Stephan Livera:

Yeah. Really interesting and valuable insights there in terms of how things are on the ground. And of course, I’m sure things will develop and become better and better over time as more and more people learn about the benefits of using Bitcoin—the interoperable open system—as opposed to everyone trying to get into the same walled garden so they can transact with each other more easily. So, that’s the hope longer term, certainly. I wanted to also chat about your visit to Honduras. I know you are, as you said, you’re working with the Free Private Cities organization. And I just find that very interesting. Obviously I’m a big fan of citadels as an idea. And I wanted to get your views on that also. So perhaps you could just tell us a little bit about what you’re doing with Free Private Cities, and what’s the association with Honduras there?

Peter Young:

Sure. The reason that I became passionate about Bitcoin, and there are people that are passionate about Bitcoin for a number of reasons, because it’s such a multifaceted technology, and it’s implications—if you fully understand them, and if it continues to do what it’s already doing into the future—I think are pretty profound. People get into it from the technical side, people get into it from the transaction side, the merchant side. But for me, from my teenage years, I’ve always been interested in moral, socio-economic questions. I got really into philosophy. I did it at A-level and had some really inspiring teachers. And I went on to study that as part of my university degree. So I’m more interested in these bigger socio-economic kind of questions. And the big Aha moment for me with Bitcoin was understanding how it could transform society. And so the reason that I’m interested in Free Private Cities is because I’m interested in how society functions today, and how society could be better. And I see Bitcoin as a really practical, existing technology through which people that disagree with some of the ways in which the existing financial political system works can peacefully opt out and peacefully start to cooperate with other people that also share their ideas. But at the same time, the reality is that we live in a physical world, and we still need to have organizations that protect physical rivalrous property within the economy. And so whilst Bitcoin is helping to change many aspects of the world. I think there’s also a need for innovation in the realm of governance. And that’s the focus of the Free Private Cities Foundation. Free private cities are contract-based societies that are based on purely voluntary interactions between the people that are living in them, and the people that operate them. So they run like companies—that’s why the word private is in the title. And what they are essentially is—well the way that they would work is that an operating company buys a piece of land and offers a contract. So we’re not talking like Jean-Jacques Rousseau’s hypothetical social contract. We’re talking about a real business contract, like the contracts that exist in the real world for services like your house rental. If we go to a hotel, it might be contracted. We have some kind of mobile phone carrier, we might have a contract with them. There is a real written contract saying, These are the rules of our city, our community. This is what it costs to pay for protecting this community and giving you basic access and services that you might need to run it, such as maintaining the basic infrastructure and maintaining the security. This is what it costs every month. If you want this service, you can come and pay for it. If you don’t want this service, you’re free to go elsewhere. And of course, you’re free to leave anytime you want as long as your contractual obligations that you agreed to are fulfilled. So this is the model that we have, and it’s a model that was invented by Titus Gebel, who is a German entrepreneur. And he’s written a book Free Private Cities: Making Governments Compete For You, which I would really recommend to your listeners. So this is the theoretical model, but there are already some projects that are starting to implement parts of this model. And that’s one of the reasons I was in Honduras last month, because I wanted to go and visit for myself some of the projects that are implementing free private cities-type principles. And I found that to be a really interesting experience, and something that I certainly learned a lot from.

Stephan Livera:

So going further into the Honduras example, what’s going on there? What kind of projects are there that are operating in this fashion?

Peter Young:

So in Honduras, a new law was passed in 2012 that allowed for the creation of something called zones for economic development and employment. The shorthand for that is ZEDE. And this was quite a unique piece of legislation to be passed within Honduras, because it allowed for the creation of special zones within the country of Honduras—that not only operate like the free trade zones that are so common around the world, places like Shenzhen, where the governments have a high degree of autonomy and can exercise their own fiscal decisions, and they can lower taxes for their businesses and they can change their own labor policies for their businesses—but in addition to that administrative freedom, what the Honduran law allowed for is a high degree of legal freedom as well. So this is probably the most, I guess in a Libertarian sense, the most forward-thinking piece of legislation that’s been adopted in terms of what it would, in theory, allow to happen with city or community autonomy. So when this happened, there were a number of people who were more aligned to the idea of voluntary communities who took notice of this, and I was chatting to some people yesterday actually who have come up with a concept for a ZEDE they’ve called Mariposa. And they undertook this epic journey over land from Canada down to Honduras in order to try and implement a project, because people started to notice, Okay, this actually does mean that we can create something that is more aligned to the Libertarian voluntarist mindset. And at the moment, there are three projects that own land within Honduras that are set up on the ZEDE legislation. And those are at different stages of development. They’re call Próspera, Morazán, and Orquídea, and there are additional concepts whereby there’s a framework for setting up a ZEDE, like Mariposa that I just mentioned, but haven’t yet been implemented in practice for a number of practical reasons, which I could talk a bit more about if that’s of interest. So when I went to Honduras, I visited two of these projects, Morazán first, and Próspera. And these are very different kinds of projects, but what was great about them was the fact that I was seeing, Hey, this idea that I’ve read about in Titus Gebel’s book and find very attractive is actually being implemented to a large extent. And I was able to learn what was going well there and what the challenges were, and come away with some fresh perspectives about the idea of free private cities.

Stephan Livera:

Yeah. So then as there are projects going on, how much autonomy do they really get, because sometimes it’s like the government might say a certain, You’ve got this much freedom, but then what’s it like in practice? Like, do they really have that much freedom in terms of what the laws are, what they can do, and what kind of agreements they can set up?

Peter Young:

Yeah, it’s a good question. So the key thing that they’ve been able to do so far is the stuff that’s more on the traditional SEZ side, special economic side. So for example, they’ve been able to change their pricing structure. Like in Morazán, for example—this isn’t a purely libertarian model—there are certain restrictions that these ZEDEs have, like they have to have some kind of income tax, for example. But within Morazán, they’ve lowered that to I think it’s like 5% income tax for the businesses, so it’s incredibly low. And they’re also able to hire people and operate their business in a way that’s much more cost-effective. So what we’re seeing at this stage is the more traditional liberal, economic side of the change coming in. But then again, that’s part of the reason that the investment is coming into these places, is because of the expectation that they can do more. And there is also a realization of the practical side of this. So it might be possible—if you are a Libertarian, you might think that anything goes as long as it’s not harming other people directly, as long as you’re not, infringing on the rights of other people—but of course there are more controversial things that you could do which aren’t normally allowable in society, which you probably don’t want to do if you are just starting out, because you don’t want to attract too much attention to yourself, and you don’t want negative publicity. And you might not even want those kinds of things going on in your privately-owned community, and that’s totally fine as well. So, so far there have been these things implemented. And the one that I’d say is the most developed in its thinking around what is going to be possible within the ZEDE law, is Próspera, on the island of Roatán. They’ve dedicated a lot of time and resources to developing a very extensive legal framework for how all kinds of interactions will operate. Próspera is a very interesting place to visit, and they’ve got a great team. They’ve got some great buildings. They’ve got great plans for the future. They’ve just made an acquisition of a very nice hotel complex called Pristine Bay. But again, they are at kind of an early stage, and they’ve done a lot of thinking, but the extent to which they can actually implement these things is still pretty early.

Stephan Livera:

I see. And so the idea would be, Hey, look, it’s a low-tax zone, it might attract capital, it may attract workers, maybe local, or people who are either in that country or in nearby neighboring countries because, Hey, I could get a job here—that kind of thing. So are we seeing the beginnings of that sort of thing, like workers coming in, and businesses coming in to set up?

Peter Young:

Yeah. And that’s a really encouraging aspect of the whole setup. And just before I answer that, another thing I would add as well, Stephan, is that people often look at things like low taxes and they think, Oh, this business is going to move there because it can pay like 21% versus 23% tax and therefore that’s economically viable. But one of the other key advantages with these ZEDEs is that actually, for a lot of people, the whole process of having to go through all of your accounts and reveal them to some uninvolved third party and have to commission expensive lawyers and accountants to make sure everything is kosher within your business—that whole process is something that can be really simplified, potentially even abandoned completely, with the free private cities model, and potentially with the ZEDE model. And that’s something as well that I think is just a key thing to point out, that we do live in this kind of crazy system, whereby there’s a huge amount of resources societally that goes into just accounting and working out what tax you have to pay. And that’s a great dead-weight loss, I would say. But on the job side, yeah, it’s early days and it’s small-scale. But when I went to Morazán, I was able to meet a lady called Rosa who had initially set up a small shack near to the initial construction site of Morazán. And she’s quite a low income worker within that area, Choloma, which is not a particularly affluent area near to San Pedro Sula over in the Northwest of Honduras. And so she had a very basic setup, a corrugated iron hearth that she was using, no electrical equipment, but she was kind of entrepreneurial and she saw, Oh, look, there’s some stuff going on there. I’m going to go over there and sell some food to the workers there. And so she started to do that. And then the people that were running Morazán said, Hey, we noticed that you’re selling stuff near to our property—would you be interested in becoming a resident of our city? And of course this comes with some fees. They offered a very, very low fee for this, because they wanted to have her, but they also wanted to make it clear that this is a place where we offer you a service and you pay something for it. And in return you can do business here. And so she said, Yes, I’d love to become a resident of this place. And I was able to visit her in November, and I saw pictures of her corrugated iron shack, and now she’s got her own standalone business space that she’s renting. She’s got a restaurant, she’s employing staff, she’s got electrical equipment like a fridge that she can use for selling ice creams to people, and she’s actually got this aura of confidence. It’s like, Yeah, I’ve done this in the last six months and it’s me. No one has come in, no one from the government has come and said, Hey, here’s a training course on how to be an entrepreneur. Here’s some money to help you get started. She’s done that all by herself by just interacting purely voluntarily with people. That’s just one small example, Stephan, but I like to use that because it’s not about the wealthy international section of Honduras who went and studied in the US and has come back and now they’ve got a great job working on something big that they might be doing in America, but they’re doing it in Honduras. This is simple, low-level, bottom-up economic development. And it’s really cool to see this happening. I could also give you examples, like higher level stuff, which is going on within these cities which is also really exciting and cool, like Próspera employing like tens of people—I think they’ve got 70 to 80 people employed there now. And these are really good high-end jobs as well. So they are providing those high-end jobs. But yeah, it’s cool to see the ZEDEs have been providing jobs across the entire socioeconomic spectrum.

Stephan Livera:

What about this idea of infrastructure provision? So I suppose, obviously, as these are early projects, now obviously as an Austrian, you understand the concept of capital accumulation, and these are societies who might not have had enough time to really build up a big capital stock. What does it look like in terms of infrastructure and things like Internet, hot water, and all these other aspects around those, ZEDEs. What’s the story there so far?

Peter Young:

So there’s definitely an argument to be made for there being services which are managed in a more centralized way within a purely property rights based system. And that’s what they have at the moment, really, in places like in Morazán and in Próspera. When you go into Morazán, there’s a very nice road that you—the gates will open. There’s a company managing the security, so this is one of the most secure parts of Honduras, or certainly this area, Choloma, the city that neighbors—Morazán—is notorious for having very bad, violent crime. And one of the key things that workers find attractive about working in Morazán is that they’ve got a private company that manages the security. So when you show your pass, you go in and there’s a nice road that takes you to the center of the activity, which is in very stark contrast to the area outside, where the roads are just potholed dirt tracks. There’s really not a lot going on there. So part of what the fees go to when businesses are there is maintaining those roads. And the same—like when you’re in Próspera, you can see around that it’s a very nice area, but also there are challenges, public areas which aren’t owned by Próspera. There’s really bad infrastructure. So those kinds of things are provided, but where possible, they’re just using the private approach. So I believe that like WiFi in Morazán, for example, that’s provided purely privately and they had a private company come in to provide WiFi to the residents that wanted it. And they’re people that are practical, business-minded. They want market solutions. They’ve got limited time. Of course they don’t want to have to manage people’s WiFi if there’s a private solution for it. So that tends to be what’s happening. But I do think that when you’ve people living together in an area, there is a case to be made for a private property owner within a voluntary system managing things like rights of way. And that’s what’s happening at the moment in those two projects.

Stephan Livera:

Excellent. And so also the question around security: you touched on this earlier, that there’s essentially private security operating. What’s the story there in terms of—if there were to be more serious security threats there, is that something that’s been explored or spoken about? What’s the planning there, if the idea is that this is going to grow and become bigger?

Peter Young:

I think in practical terms, it hasn’t really been a big problem—maintaining the security. One of the issues that they do have the existing today is that they are politically controversial. And I think as we’re having this discussion, it is important to mention that there have been some political changes in Honduras. A socialist leader, Xiomara Castro, was elected in November, and is due to take office towards the end of this month. And one of the key pledges she made was to shut down ZEDEs, or to at least limit the ZEDEs in some way. And so this has been one of key topics in the minds of the people that are running them in the past couple of months, because one of the things that the foundation tries to do, and that Tipolis, a commercial association or organization attempts to do, is to set up legal structures that allow for these new kinds of economic zones to be protected as far as possible in the existing system. So basically it acknowledges that we live in the real world, where there are dominant powers that back their claims to property through violence. And that’s the reality of the world in which we live. So we have to operate within a legal system and there are ways in which the legal system can be used in order to create protections. In the case of the ZEDEs, there’s a constitutional protection that sits behind the basic rules, which means that technically they’re supposed to be a two-thirds majority in parliament to overturn the ZEDE legislation, which Xiomara Castro’s government is not going to quite have, but that’s a theoretical legal argument. There’s also an international treaty with the country of Kuwait, which backs some of the protections in the ZEDEs for investment reasons, but that’s the theoretical way it should work. And obviously when you have got a country like Honduras where rule of law is perceived [to be] and is less strong than in Western countries, say, there is a practical reality that you have a president now who is hostile to ZEDEs, and who can make it very difficult for these projects to operate successfully if she wants to. And the thing is, although the story to me of what they’ve achieved so far is really inspiring, they’re still small, and there have been very large movements in Honduras—unfortunately, Stephan, that have spread a huge amount of just really malicious misinformation about the ZEDEs and what they do, like claims that they’re expropriating land from people—all kinds of claims about their founders and the unethical activities that they’re doing. Like there were even some claims that I was hearing about that, Oh, the ZEDE owners want to set up these ZEDEs so that they can harvest organs and sell them internationally through some pretend hospital they’re going to create there—just really out there, crazy stuff. And there’s been this campaign, and there is a small but enthusiastic movement within Honduras that is really trying to just throw mud at the ZEDEs and say, Well, this is undermining Honduran sovereignty. And this is not something that our—this is neocolonialism or whatever. There are all these kinds of claims being made about the ZEDEs. And so this is the political reality. This is the world in which we live. And setting up free communities and doing things that are running parallel and posing a kind of competitive challenge, I guess, to the existing system, is never going to be something that’s easy to do. And I say it is the case that within Honduras, there are big challenges, there are those concerns, but this kind of stuff is to be expected, and it’s part of the reason why we all need to keep making the case for why these kinds of things are great for everyone across the socioeconomic spectrum. Because ultimately, people’s minds will need to change in a system in order for these things not to be overthrown or impeded in some way. But I think that can happen probably most practically through the practical demonstration of the benefits they bring, such as jobs to these communities.

Stephan Livera:

So essentially it’s about winning hearts and minds to have some level of defense or some level of not being aggressed on by the government of the country. I’m also curious as well, what’s the story in terms of Bitcoin usage in the ZEDEs? Are there people using it or not really?

Peter Young:

So within Próspera, they have accepted some payments in Bitcoin, and they are open to doing that for various things. And this is more to do with the actual operation of the company itself. And there are some companies that have some transactions happening in Bitcoin within Próspera. I was speaking to the founder of the project, Erick Brimen, while I was there, and he was saying, Actually, there’s all this noise about El Salvador adopting Bitcoin, but actually we adopted Bitcoin first in Honduras here through the ZEDEs. And I suppose that’s technically true because within the ZEDE system, they are able to accept any international currency and use it as a kind of tender. And so that’s something that the guys in Próspera were keen to say: Hey, this is allowed here, and we’re setting up some frameworks through which this could function. So that did happen and Próspera on that small scale. It’s not being used, as far as I’m aware, in—I don’t know a lot about Orquídea yet, which is one of the other projects. It’s not really being used in Morazán. But I just talked to them about it and I said, I’m here. I’d like to pay for my meal. And I didn’t have Honduran lempira at this point—I had US dollars and I was like, I’d like to pay for my meal, and how can I do it? And there was initial problem because I was like, Oh, I couldn’t get to a cash machine. And I’ve just come from El Salvador and I was in the mindset that, Yeah, everything’s easy, because I’ve always got my smartphone so I can just pay in Bitcoin or US dollars—whatever’s easiest. So there was a little discussion around, Why don’t the businesses here just up a Bitcoin wallet? Then they can accept Bitcoin from people like me that might come and visit. And I think in general, people are pretty open to that, but it’s low down their priority list when you’re talking about someone that’s running a small restaurant or whatever. So there’s a little bit there, but yeah, the big story with Bitcoin is certainly El Salvador.

Stephan Livera:

Yeah, sure, sure. In terms of people who want to go to some of these ZEDEs, what’s the story in terms of residence? Is it just basically that you need to be able to get an entry right into Honduras, because it’s inside Honduras and that’s really what it is? And then if you actually wanted to live inside one of these, you would need to get some kind of PR there? Or how does that work?

Peter Young:

Yeah, it’s basically determined by a Honduran immigration law. And if you wanted to become a resident there, it would be pretty similar to becoming a resident somewhere else, but you would just have a contract that you signed with the ZEDE operator, and that would set out the terms of what you can and can’t do while you’re in the ZEDE. And it’s really simple stuff. One of the things that Titus Gebel emphasizes in his writing is that we look at the current legal system that we have, and we see that it’s really, really complicated. And we have people that dedicate their entire lives, like large swathes of the population that dedicate their entire lives to interpreting the law. And so we assume this has to be the norm when new societies are functioning. But one of the things that Titus says a lot, and I agree with, is that actually, reasonable people don’t need thousands, hundreds of laws, even, to interact with each other. They are pretty basic common sense principles about how you should and shouldn’t interact with other people. Like you should respect other people’s property. You shouldn’t infringe on their rights to do as they please, as long as they’re not causing harm to you. And in the ZEDEs, this is basically how it’s working in practice, and there’s not a problem. Like for example, when I was in Morazán, they were telling me about problems with litter. This is again with Rosa—outside her shop, people were leaving litter lying around and they said, Hey, this is a public area. According to your contract, it says that you have to maintain and respect public areas within Morazán, and so we need a solution to this. And obviously a solution—she was like, Okay, right. There’s litter. I need to put a bin out there and I need to make sure that I’m emptying that and I’m telling people like, Please don’t throw litter on the floor—there’s a bin, et cetera. A super simple solution, but they didn’t come in and say, Hey, we need a bin here, as the operator of the city. They just said: in your contract, Rosa, there’s this clause around littering public areas. So you need to come up with a solution. And she came up with a simple solution. That’s basically the way that it’s operating at this scale. When things get more complicated, of course you want to have more complex solutions. But again, that can all be provided on the market, according to my view. And there’s great work being done by Rothbard outlining how that can work. Titus Gebel’s done a lot of work on this. There’s loads of people that have written about free market solutions for legal problems. And so yeah, once we get to the larger scales, that’s what I would hope and expect that we will start to see.

Stephan Livera:

Yeah. And so are there any other projects elsewhere around the world that the Free Private Cities Foundation is looking at at this point? Or is it mostly the Honduran ones?

Peter Young:

So there are various projects in Honduras. We also have some relationships with projects in North America, which are more like intentional communities. So people coming together in order to live in a more Libertarian way within the existing frameworks of those countries’ legal systems. And if you like, I can post a link to the Liberty In Our Lifetime Conference in your show notes, which has got a list of a few projects that appeared at our conference, which took place in Müllheim, Switzerland back in October. And that’ll give people a few examples of projects which aren’t legally quite as able to go as far as the Honduran ZEDEs, but also have strong freedom-minded voluntarist Libertarian elements which are being implemented to varying degrees in North America, Europe, the Middle-East, et cetera.

Stephan Livera:

Fantastic. Well, I think that’s probably a good spot to wrap up there. Peter, where can people find you and your organization online?

Peter Young:

So they can find me on Twitter. That’s probably the best place in terms of the content I post about economics, free private cities, and Bitcoin. My handle there is @petermiyoung. We also have the Free Private Cities website, http://www.freeprivatecities.com. Another thing I’d like to flag, Stephan, is that I mentioned there the Liberty In Our Lifetime Conference that we held in Müllheim last year. We’re planning on holding a bigger and better conference in Prague this October. And so if people are interested in finding out more about that, that conference is going to be a place where people that want to find out more about voluntary communities and this free private cities idea can come together. And they can interact, they can learn more about all of the projects I mentioned today and what the future projects are. I would say follow us and follow the Free Private Cities Foundation, which is @freeprivatecity on Twitter. And we’ll be posting information in the next few weeks about that conference. We’re looking for sponsors for that conference. We had some great sponsors last year, and we want to find more people from the Libertarian community who might want to sponsor that. We’re looking for attendees. We’re probably going to have about 300-400 people there in Prague. It’d be great if you could come along as well, Stephan. And yeah, that’s the key thing that I would say: follow us on Twitter, check out our website—we’ve got some great articles—but also keep an eye out for our Liberty In Our Lifetime Conference which we’re going to be hosting later this year.

Stephan Livera:

Fantastic. Yeah, I’ll definitely have to check my calendar and see if I can make it along. I unfortunately couldn’t make the last one, but maybe this time—maybe this year. So look, thanks very much, Peter, for joining me today.

Peter Young:

Stephan, it’s been an absolute pleasure. I really appreciate you inviting me on. As I’ve said to you before, I’ve been a big fan of your show for years, and it’s one of the shows that I used to listen to when I was just getting into Bitcoin. So it’s a huge honor to be invited on and to have this opportunity to chat to you today. And I’ve really enjoyed it.

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