Bitcoin and Free Cities

One argument applied to two goods

Hayek made the case for monetary competition in 1976, arguing in The Denationalisation of Money that the state monopoly on issue should be broken and rival currencies left to discipline one another. Free cities make the same argument about governance. The two fit together: an operator that denominates its citizen fee in a money it cannot print gives up seigniorage and buys credibility in return, because it can no longer quietly reduce what it owes residents. States resist for the mirror reason. A currency monopoly funds deficits through inflation, underwrites capital controls and makes financial sanctions possible.

What has actually been tried

El Salvador went first, making bitcoin legal tender in September 2021 and announcing Bitcoin City at the foot of the Conchagua volcano, to be powered by geothermal mining; the law was amended in January 2025 to make private acceptance voluntary. Próspera adopted bitcoin as legal tender in 2022 and then went further in a quieter way. In January 2024 it became the first jurisdiction anywhere to recognise bitcoin as a unit of account, so that a business can compute its tax liability in bitcoin rather than merely settle in it. That is the deeper change, because becoming a unit of account is what separates a currency from a payment rail.

At city scale, Lugano accepts bitcoin and a dollar stablecoin for every municipal invoice, from taxes to parking fines, and the Swiss canton of Zug has taken tax payments in bitcoin since 2021. Below that sit the circular economies, where the aim is a working local market rather than a legal status: El Zonte in El Salvador, where the experiment began in 2019, then Berlín in the same country, Bitcoin Jungle in Costa Rica, Bitcoin Ekasi in South Africa and Bitcoin Lake in Guatemala. These are villages and small towns with merchant networks in the low hundreds, built from the ground up rather than legislated into being.

What a jurisdiction actually has to change

Accepting bitcoin for payments is the easy part and the least consequential. Zug takes tax payments in bitcoin but converts them to francs the same day, so nothing about the canton’s finances changes. Lugano goes further by accepting it for every bill it issues. Próspera goes furthest by letting a business keep its accounts in bitcoin, which is the change that matters, because a money only becomes a currency once people reckon in it.

Three separate decisions follow for a jurisdiction that wants to go beyond gestures. What it will accept is a payments question, and the simplest to answer. What it will denominate, meaning fees, contracts and taxes, is the unit-of-account question and the hard one. What it will hold is a treasury question with real consequences, since an asset that can halve within a year behaves very differently on a city’s balance sheet than in a personal portfolio.

The most durable version of the idea is also the cheapest. A jurisdiction can simply permit people to keep their accounts, price their contracts and settle their obligations in a money of their own choosing, which is close to what Hayek asked for in 1976. That is a change in the law rather than a bet on a price, it costs the treasury nothing, and it obliges nobody to hold anything.