The draw of creating small crypto-backed utopias in Latin America is the freedom from both taxes and regulations. At the forefront of this movement is the Free Private Cities Foundation, a company that promotes the idea of “voluntary, contract based societies,” and supports the development of private cities all over the globe. Their slogan is “the future of governance is private.” 

Founded by Dr. Titus Gebel, the Free Private Cities Foundation has encouraged the Salvadoran government to place its impending Bitcoin City in corporate hands, allowing the city to be governed by the private sector, as reported by MIT Tech Review.

El Salvador’s plan for a geothermally powered Bitcoin city at the base of a volcano is just the tip of the iceberg for special tax-free economic zones that are being pitched to various countries abroad. 

Expanding outside El Salvador

In Brazil, the idea of privatized cities that would be overseen by corporations is also being floated around by Gebel’s company, which hopes to create multiple international “prosperity zones.” In addition, the Free Private Cities Foundation has set its sights on Honduras.

Following an amendment to their constitution in 2013 that allowed special zones managed by companies, Honduras has three main ZEDEs—Zones of Economic Development and Employment—called Ciudad Morazán, Orquídea and Próspera, according to the Peace Brigades International Honduras. ZEDEs are economic zones that are independently governed by corporations and are commonly referred to as “free private cities,” citing Nacla.org. 

Jamilia Grier, founder and CEO of ByteBao, a legal consulting firm in the Web3 industry, has a healthy level of skepticism on how the ZEDEs would function as private cities. 

“This is sort of like the perfect storm between political, economic, and really just your physical infrastructure as far as building a city. The question is: how are those governed?” Grier said in an interview with Fortune. 

So what does it mean for a ZEDE to be privately governed?

Private governance means just that. The privatized city-states “exist independently from the legal, administrative and social systems of the Honduran state,” according to a report from the National Lawyers Guild (NLG) Delegation Investigation of ZEDEs in Honduras.

This means that the ZEDEs don’t have to pay import or export taxes and are free to set up their own forms of governments, schools, courts, and social security systems, as reported by the Federal News Network. With such a complete lack of regulation, some critics fear that ZEDEs could become private havens for criminal activity. 

“If you were to create one of these cities within a country, what is the agreement that you have with the country that this particular area is not subject to tax?” Grier questioned. “There would have to be a relinquishing of rights from the sovereign nation to be able to create this particular tax-free zone that they’re proposing.” 

How do ZEDEs benefit local people?

Even if ZEDEs surrender 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, according to Statista and the country also has the highest femicide rate in the world.

The Free Private Cities Foundation announced on March 15 the ongoing development of their private city, Morazán, which the website described as a “blue collar ZEDE,” where residents can avoid the structural issues that plague Hondurans in everyday life such as “exorbitant violence.” Additionally, Morazán will have housing zones that can house 9,000 residents, commercial spaces, schools, parks and “an industrial zone.” 

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

In exchange for living in safer communities, citizens of ZEDEs enter into contracts with the private corporations and ideally speaking, have a secure refuge from high crime rates.

Possible displacement of locals

While the creators of ZEDEs tout ideas about higher standards of living for the locals, the benefits may be overestimated. Despite ZEDEs being marketed as sources of employment in Honduras—where over 60% of the country lives in poverty—when one of the country’s three main ZEDEs, Próspera, was built on Honduran island of Roatán, the majority of those construction jobs were outsourced rather than being offered to the native Hondurans. 

Far from bringing prosperity to the local citizens, the ZEDEs’ tax benefits will widen Honduras’ already stark income inequality and benefit only a select few, citing economist Carlos Urbizo Solis. 

As the government accepts foreign investments for the creation of ZEDEs, locals watch as corporations encroach upon their lands. Critics have pointed out that the areas mapped out for ZEDE construction are ancestral lands in the Garifuna region which has been inhabited by the indigenous people for thousands of years. As a result, the construction of ZEDEs would lead to the mass displacement of the native population. 

Many of the citizens of Honduras oppose the existence of ZEDEs, citing issues such as the sale of private territories and lands, and an increase in poverty rates. And because ZEDEs are independent jurisdictions with their own laws, they hold complete 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 to enable further growth. I think crypto cities are too early to tell, but I do love the entrepreneurial spirit and innovation this movement represents.”