Reporting from San Salvador, El Salvador

I’ve seen the future of governance.

And it’s good.

Yesterday, we saw the challenges Prospera is facing. Today, let’s look at the potential.

Let's begin with my conclusion:

Próspera could become the most advanced governance system in the world. In many ways, in fact, it already holds the title. And if you’re interested in what good governance can look like, learn everything you can about Próspera.

Consider this article your “Próspera 101” class. Let’s start with the basics.

NOTE: James will be speaking at SXSW and we'll be putting on a live call to talk about all things AI and crypto. This is a completely free event that will take place on Tuesday, March 12th at 2pm ET, so make sure you block that time off on your calendar. Keep them eyes peeled for updates.

What is Próspera?

Próspera operates as a special economic zone (SEZ) within Honduras. Próspera was created through amendments to the Honduran Constitution in 2013 allowing for special zones called ZEDEs (Zonas de Empleo y Desarrollo Económico). It exists under a charter that guarantees a high degree of self-governance.

The whole premise behind Próspera’s creation is to cut red tape and foster business development. For example, starting a new business in Próspera’s zone takes as little as 24 hours in most cases. You simply fill out a few straightforward online forms and approval is typically granted within a day. (Residents can form entities like LLCs, corporations, and trusts for as little as $150 + $250/year registered agent fees.)

The zone runs on a unique system of private governance. The entire legal code is under 2,000 pages in English. (Compared to a million+ pages in most countries.) Every resident and business in Próspera signs a "residency agreement" which commits them to obeying certain rules and regulations.

Options For Residency

There are three main types of residency: limited e-residency (free access up to 120 days), standard e-residency ($130/year for 180 days access), and full physical residency ($130/year for entities, $1300/year for foreign individuals).

Physical residency requires regulatory insurance and offers full political participation rights and year-round access. Physical residency also requires extensive background checks before entering and consenting to privatized dispute resolution through the Próspera Arbitration Center (PAC).

The PAC gives all residents the power to privately enforce laws against anyone doing business in the zone. This "e-resident standing" concept keeps both businesses and public officials on their best behavior at all times. 

When it comes to regulations, Próspera embraces a "freedom of action" principle. The default is yes – you can do it, unless you demonstrably harm others. Instead of burdensome red tape, the zone relies on common law liability guided by a "reasonable person" standard. More on that in a moment. First, taxes.

What About Taxes?

Unlike most countries, capital gains from crypto or real estate investments are completely tax-free inside Próspera.

Taxes are also low across the board. Próspera uses simple, one-page tax returns filed annually. All residents pay the flat 5% income tax rate ($16k individual income tax exemption), regardless of profession or income level. And taxes can even be paid using cryptocurrency, making compliance easy for those operating crypto businesses.

In simple terms:

• 5% personal flat income tax
• 1% business flat income tax
• 5% retail sales tax

There are some exemptions and the ability to reduce tax burdens further through means like tax credits. For example, you can buy marketable tax credits – with future redemption value to help finance Próspera's development – for discounts.

Starting a Business

In Próspera, certain industries like healthcare, finance, construction, mining, etc. are designated as "regulated industries" due to their higher inherent risks. Entities in these industries face stricter compliance rules and elevated liability exposure if they fail to properly govern themselves.

Even so, these businesses can choose from a menu of international standards to govern themselves. Or draft their own tailored regulations if none of the existing ones fit.

Specifically, they have these options to comply:

1. Adopt Existing International Standards: Próspera has pre-approved regulatory standards from nearly 30 countries as options. For example, a clinic can elect to follow US healthcare rules or UK health codes. This makes compliance easy if already fitting into another jurisdiction.

2. Create NEW Customized Regulations: These are called “optimal regulations,” which enable business owners to draft a tailored set of rules for their industry. The onus is on the owner to prove that these rules are equally or more protective than alternatives. This is often based on slight tweaks of base standards (see #1) to remove inefficiencies.

3. Use General Common Law Principles: In this case, there’s no codified regulation, but the trade-off is stricter liability applies. This option requires careful legal analysis of risks. Typically a poor option unless the activity is low-danger.

Próspera has adopted a concept called “regulatory insurance”. Businesses in regulated industries like healthcare and finance must purchase policies to cover potential damages. And the insurance companies then inspect for compliance with applicable regulations.

This puts inspection power in the hands of private companies instead of politicians or bureaucrats. The idea is that insurers will hit the optimal level of oversight – not over or under-regulating – in order to maximize profits.

The Governance Structure

Próspera's charter guarantees certain rights around security, justice, education, and infrastructure.

In terms of real estate investment, Próspera offers very strong protections against expropriation without compensation compared to Honduras generally – on par with U.S. standards. Initiation of eminent domain powers requires substantial hurdles and 2x+ market valuations as restitution.

As mentioned, the decentralized self-governance model is also unique to Prospera. All zone residents essentially act as regulators – if you spot a business violating regulations or zoning rules, you can personally sue them through the independent Próspera Arbitration Center (PAC). Lawyers don’t need licenses either, though they can face penalties for unmeritorious suits.

The PAC offers rapid, binding dispute resolution services for legal conflicts falling under Próspera's jurisdiction. It represents an innovative approach to private arbitration. It has an independent structure but remains an affiliate of the General Service Provider (GSP) currently.

For context, the GSP is a private contractor that handles most of the municipal-like government services for Próspera's special zone on behalf of the public management body (ZEDE). So things like utilities, infrastructure, public spaces, business/resident registration, etc. that you would expect a local government to provide – those functions are outsourced on a long-term contract to this GSP entity.

The reasons are mainly increased efficiency, cost savings, access to specialized expertise, and flexible scaling by using an experienced private provider instead of traditional public sector bureaucracy. However, oversight authority, rule-making, and high-level executive roles still sit under the zone's public management through a Technical Secretary, Council of Trustees, etc.

(The GSP is owned 100% by Honduras Prospera Inc. – the lead private organization that bid for and obtained the main contract to supply governance services and operate the zone under Próspera's special charter agreement and legal framework.)

The PAC itself is made up of experienced lawyers and retired judges versed in Próspera law. Ownership and control is currently transitioning to the roster of arbitrators as they gain equity in the PAC through growing caseloads. Strict conflict checks and an ethics board protects impartiality.

Procedural rules fit the complexity of each case. Default settings make proceedings public precedents but privacy options exist. Decisions guarantee rapid timeframes for issues like time-sensitive contract disputes. All substantive rulings receive de novo (Latin term that means "anew," "from the beginning," or "afresh”) judicial review.

The PAC is also responsible for educating claimants on confirming awards in external courts unfamiliar with the ZEDE system. Public cases always oversee hazardous activities impinging on national or international treaty risks.

Governance as a Service (GAAS)

Public officials in Próspera are held to a “fiduciary standard”, meaning they have a legal duty to act solely in the residents’ interests when carrying out governance activities.

This aims to prevent corruption and self-dealing by those in power.

Additional things to note:

→ The promoter and organizer (Honduras Prosper Inc.) retains certain rights and gains 49% of future land sale revenues inside zone areas. So there are still some centralized controls.

→ Street crime historically remains extremely low, backed by consistent private security patrols. However, there are not yet autonomous public police forces able to conduct formal law enforcement activities like warrant issuing or arrests. Visitors and residents thus remain partially dependent on Honduran authorities to counter any emergence of violent or organized crime. Those personnel choices introduce risks of politicization and spillover from national issues.

→ For employment needs, 90% of hires must be Honduran citizens if qualified candidates are available. As a special jurisdiction, Próspera also has unique payroll statutes including: Higher minimum wages compared to national levels (10-25% premium) and mandatory employee savings funds in lieu of social security taxes.

→ Optimal regulation frameworks have been passed for both general financial services as well as more specialized "FinTech" activity specifically focused on innovations like crypto. These lay ground rules tailored to crypto finance.

→ There are longer-term visions around tokenizing property rights and titles into location-based, decentralized crypto systems that can trade on open markets. This would integrate crypto deeply into real estate and land governance.

→ There is a "Prosper Tax Credit" (PTC) cryptocurrency token issued when residents purchase tax credits that offer future discounts on taxes and fees. The PTCs trade on Ethereum, Solana, and Rootstock and can be seamlessly used to pay taxes in ePróspera.

→ Capital gains from crypto sales by either individuals or entities are fully excluded from the income tax calculations. The law explicitly clarifies that crypto sales qualify as non-taxable capital gains.

→ The overall ePróspera governance system links identity and reputation to blockchain verification regimes. Residency status and permissions connect to crypto wallets and credentials.

The unique model of Próspera offers businesses far greater autonomy and flexibility than virtually any other country in the world. Just don't forget – with great freedom comes great accountability if you step out of line.

In just a few short years, Próspera has already attracted legions of capital-heavy entrepreneurs with its bold vision. Could this be the blueprint for cities of the future?

I’m betting yes.

Keep in mind, though: It’s still in the early stages. The zone's governance model will require years to fully stabilize institutions, social services and community growth that help proactively deter unlawful behavior and (internal and external) chaos.

Realistically anticipating this maturing environment before committing substantial on-the-ground interests is prudent.

Those exploring opportunities need a thorough understanding of the zone's unprecedented framework, cost-benefit trade-offs and the managed risks still inherent while it further evolves.

But Próspera undeniably deserves the attention of anyone who believes in a future of good governance for all.