Web3 Network States & Subscriber Citizens: Learning from Charter Cities, SEZs, and the ZEDEs of Honduras

Cloud communities will eventually be looking to link up at Web3 strongholds around the world, but what about simply making our own cities?

Introduction

The Web3 sector and digital assets more broadly are looking for safe places that they can call home. They need places which foster innovation with things like regulatory sandboxes, friendly tax and business incentives, and the infrastructure that can accommodate a wave of subscriber citizens arriving. There are millions of individuals scattered across the globe, yet their use of digital assets and interpersonal connections to each other online are undeniably strong. 

Balaji Srinivasan calls these “Network States” in his new book of the same name: they’re digital, cloud-based archipelagos of individuals with pooled capital and shared interests. Think of a DAO-based network dedicated to a meditative lifestyle and ketogenic diet, for instance. These individuals will first gather online, perhaps even forming their own functioning P2P economies which rival the GDPs of small nation states. Why wouldn’t they also wish to live in a common area in which their shared values and lifestyles could manifest in the physical realm as well, if it were possible? 

Balaji’s abstraction of these network states, combined with our knowledge of history, may offer us insights regarding where to look for new opportunities to establish global Web3 strongholds. El Salvador is trying out its own experiments by making its whole country into a sort of special economic zone, rolling out Bitcoin ATMs, and rebranding itself as a haven for digital assets and foreign investors. The Central African Republic has also reportedly legalized the use of cryptocurrencies in the financial markets, allowing individuals and businesses to even pay taxes via authorized entities.

While these situations are certainly interesting, it can hardly be expected that others will replicate their models without good reason to do so. For example, both El Salvador and the CAR have citizens in need of cheaper and more efficient remittance payments. Instead of focusing on countries or even major cities, we’ll consider smaller, more applicable analogies with lessons to be learned regarding the founding of network states or charter cities, if they are possible at all. 

After a high-level summary of what charter cities are and several recent attempts at adopting the charter city models, we’ll discuss Balaji’s network states and how this all applies to Web3 and potentially geopolitics. Finally, we’ll discuss alternatives to charter cities, and the feasibility of creating smaller versions of them by applying lessons learned from the past.

What Defines a Charter City?

In 2009, Nobel Prize laureate and former Chief Economist of the World Bank Paul Romer proposed the concept of charter cities in a TED Talk. Charter cities are semi-autonomous municipalities with significant legal jurisdiction over their own economic, social, taxation schemes, or legal tender laws. Charter cities are effectively given a blank slate upon which to attract and allocate resources and capital, with perhaps the most promising yet being Próspera on the island of Roatán, Honduras; but more on that below.

A charter city is one in which a host nation agrees to receive external investments in efforts to build a new municipality from the ground up. It may be easier to start with the conceptualization that a charter city is actually a company with a board of directors and supporting staff to run it efficiently before extrapolating the details.

According to Romer, establishing charter cities requires that the host country should be willing and receptive. Obviously, this can get into murky territory because discussions of charter cities almost always generate controversy in some form, which we’ll get into later. The host country will also provide guarantees that it will govern the charter city’s land with some kind of leniency towards free markets and the safeguarding of property rights. The charter city and residents agree to remain under the administration of the host country without seeking independent sovereignty. 

Charter cities are thus expected to differ in many ways from the nations that host them, though this poses one of the main problems with bringing such proposals forward. Charter cities would likely involve foreign investors or corporate bodies approaching local governments to tell them that their policies are not conducive to doing business without the importation of new courts, international schools, and different legal protections for residents. Without the right diplomatic spin, it could come across as downright insulting. Nevertheless, the potential benefits to the local people and economy are noble enough, but they need to be properly communicated.

The value proposition of charter cities hinges on three selling points. First, the host country benefits directly from an influx of capital investment, and an engine of economic growth for local residents and incoming expats. Second, that the economic dynamism and increase in disposable incomes can be scaled across the host nation after successful pilot programs are implemented by the charter cities. Third, the charter cities enjoy military protection, a more laissez-faire regulatory and tax treatment, and somewhat more flexible governance structures within the overarching structure of the host’s constitutions.

A charter city is not an easy sell to the local governments or to investors. Attempts at establishing charter cities have since made progress in places like Honduras and Madagascar, with the latter ending with a government overthrown and the charter city losing its favor with the new government. As for the project in Honduras, its success is already being placed in doubt, but it cannot be definitively deemed a success or failure without enough time having passed yet.

Hong Kong as a Model Charter City

The nearest corollary to charter cities is what’s often called a special economic zone (SEZ). SEZs were famously and quite successfully implemented by former Chinese Prime Ministers, granting more free market-oriented economic policies and flexible governmental measures in four zones, before later expanding the number to twenty. The major difference with SEZs are that charter cities are built more from the ground up, while SEZs made changes to domestic policy to establish tax and business incentives meant to attract foreign capital and technology inflows.

Another conceptualization of charter cities can be thought of as somewhat similar to the growth and development enjoyed by Hong Kong under British rule. This example works better than Chinese SEZs since HK was being administered externally by the English. Without going too far down the rabbit hole of European colonialism, Hong Kong’s governorship by the Brits from 1841 to 1997 may arguably have been due to its ability to focus primarily on commerce. 

This was mainly since its safety could be guaranteed by the British crown and its navy. Once economic stability and property rights were established and demonstrably protected, the economy boomed. In other words, the government got out of peoples’ way, and stood by to make sure things proceeded smoothly. The same ethos could and should be applied to Web3 and technological developments in the digital space: set some safety guardrails, let capital flow in, and the sky’s the limit.

In 2022, and under a new President (wife of the former ousted President from 2009), the Honduran Congress repealed the constitutional amendments which allowed for ZEDEs. However, the three existing ZEDEs are expected to be grandfathered in for 50 years, as per their international legal stability agreements. If not, the Honduran government would face significant litigation exposure to the tune of hundreds of millions of dollars or more, particularly if ZEDE investors had their land expropriated. 

More than likely, there will be underhanded attempts to apply pressure so as to force investors out. For example, the Honduran government has publicly urged these firms to submit themselves to new economic regimes voluntarily. First comes the carrot, then comes the stick. 

The fate of ZEDEs in Honduras lays bare the riskiest aspect of attempting charter cities in the first place, and informs any of those looking to try again elsewhere. Scalability does not have to only refer to transactions per second or block size. Scalabilityover the course of decades and centuries is what charter cities would require.

Prominent Criticisms of Charter Cities

First of all, charter cities require a host nation that is willing to cede substantial authority to a new jurisdiction, often governed by foreign interests and multinational corporations. Ideally, this would be a low- to middle-income nation with a robust population of young workers, and a relatively stable political climate.

Furthermore, since charter cities are meant to be entirely new developments, the host nation must also have a suitable site for construction, and the resources to accomplish everything in a timely manner, and up to the expected standard of specifications. This is not always easy, and can lead to extremely costly delays.

The sites chosen for charter cities are almost always sparsely populated, undeveloped, but with easy trade access via seaports. Aside from environmental concerns, charter cities also involve private investors partnering with the host nation to help finance the project, with total costs reaching hundreds of millions or even billions of dollars and decades of construction. Since this would take several political cycles to carry out, the risks of instability makes this difficult to finance at the scale needed to make it viable.

In addition, charter cities are controversial in that they so closely resemble the colonization of poorer countries by wealthy benefactors expecting special privileges over the locals. Even broaching the subject can often evoke opposition due to the optics of rich foreigners buying up desirable land in a poorer country, even if no wrongdoing is taking place. Corruption is almost expected, with rich speculators coming in and cutting secret deals which turn out to be exploitative of locals. Not only is this abhorrent to conceive of and morally wrong, but it is unsustainable. 

However, fraud and duplicity can ruin any endeavor, as it is a part of human nature. Corruption must therefore be stymied by transparency, the separation of powers, strong property rights, and a culture which subscribes to these values. This, of course, happens to coincide with the central tenets of Web3’s ethos. For any charter city to take hold might require it to be a grassroots campaign from locals, who then “shop around” for the best fit in terms of investors.

It should, however, be expected that any “Web3 Charter City” would be strong advocates for the decentralization of power, users having a proper stake, transparency, sound money, and the rule of law. It seems far-fetched, but perhaps there is a way to start our own versions of Web3 charter cities, but first we’ll likely need to form them online as Balaji recommended.

Web3 Network States and “Subscriber Citizens” Looking For a Home

As touched on earlier, Balaji’s network states, or cloud communities, could first take shape in the digital world before forming physical strongholds where they are most welcomed. In fact, his book outlines the potential evolutionary processes that are already underway in many ways from the formation of cloud communities up to growing a network state’s physical footprint in strategic locations based on ideal location stacks. This could involve good weather, healthcare services, natural beauty, cost of living, religion, niche lifestyles, and so on. 

Eventually, community members become concentrated enough to form political blocs, and therefore seek political concessions and in extreme cases, even diplomatic recognition. This could be more readily accomplished if the locale is small enough, though political stability must be considered as well in order to find the optimum balance. Once this is achieved, major developments can move forward as wealth accumulates and time horizons lengthen for investors. 

Aside from the already well-known places like Dubai and Singapore, New York City, San Francisco, and Miami also come to mind as obvious Web3 hubs. Some other places have also been seeing the new trend, and are courting investors heavily. However, large places like these definitely carry expensive costs, and large swathes of the population would be either unaware or indifferent to Web3.

That means no Web3 nirvana, and almost no noteworthy or effective footprint as a political bloc. Thus, the infrastructure, luxury amenities, and convenience afforded to large, fancy cities also makes it hard to recreate the breathtaking potential of a bespoke Web3 City.

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