1. Introduction

Próspera v. Honduras concerns a privately governed enclave on Roatán Island that had secured rights to set its own laws, taxes and even currency, only for Honduras to revoke that law and prompt a multi-billion-dollar international claim still pending. This dispute raises key questions: can a private project lock in core state functions against political change, and should external tribunals enforce such commitments? In this essay, I will examine whether a private actor can bind sovereign powers against democratic reversal, assess the role of international tribunals in upholding these promises and explore the implications of privatized actors for state sovereignty.

2. Background and Case Facts

2.1. Origins of Próspera ZEDE

A few years ago, in a bid to attract foreign investment, Honduras enacted a constitutional amendment during the presidency of Porfirio Lobo. The amendment established the constitutional framework for ZEDEs (Zones for Employment and Economic Development), institutions that would operate with economic and legal frameworks that are separate from those of the wider Honduran state.

Later, the Organic Law of the ZEDE (Decree 120-2013) granted these zones special autonomy by ensuring that contracts between the state and a ZEDE would remain stable for up to fifty years. Consequently, even if the ZEDE statute were repealed, investors would continue to enjoy the agreed protections. The law also guaranteed most-favoured-nation treatment, meaning any better terms Honduras offered to other foreign investors would automatically extend to ZEDE investors.

Under this framework, a U.S. company called Honduras Próspera Inc. created the Próspera ZEDE on Roatán Island in 2020. Próspera was pitched as a “startup city.” It offered very low taxation, fewer regulations, and a significantly higher minimum wage than the national minimum¹. Those incentives attracted hundreds of citizens and many businesses, even though many Hondurans, or Catrachos, are still oblivious to its existence. In 2019, with the adoption of its Charter, Próspera officially started operating as a “state” within another state.

2.2. Embracing Cryptocurrency

One of ZEDE’s most notable innovations was enabling cryptocurrencies: it declared Bitcoin legal tender, allowed free crypto exchanges, and even issued Bitcoin-backed bonds. Although blockchain ensures these transactions are cryptographically secure, the Central Bank of Honduras refused to include them in the national monetary system: it would not clear, guarantee, or legally treat them as equivalent to lempira payments. Consequently, all crypto commerce relied solely on private platforms and the enclave’s own rules, further distancing it from Honduras’s financial infrastructure. By venturing into monetary policy in this way, the ZEDE assumed a core sovereign function, much like when EU member states transferred currency control to the European Central Bank.

3. The Repeal of the ZEDE Framework

Since its conception, the idea of ZEDEs has been received with vehement opposition from Catrachos. Critics warned from the beginning that the autonomous zones pose an imminent threat to national sovereignty. The contentious history features an event in 2012, when the Honduran Congress controversially removed four Supreme Court magistrates after they rejected an initial proposal for a private city.

Upon assuming the presidency in 2021, Xiomara Castro enacted Decrees 32-2022 and 33-2022 to abolish the ZEDE law, and launched a process to excise its clauses from the nation’s supreme law. Consequently, the Constitutional Court found all ZEDEs to be unconstitutional.

Despite these changes, Próspera’s investors claimed that Honduras was obligated under the guarantees made in the ZEDE law and the 2021 Legal Stability Agreement. The latter specifically promised a transition period of ten to fifty years and ICSID arbitration in the event of disputes. In April 2022, Honduras Próspera Inc. formally reminded President Castro of such commitments. The government dismissed their warnings, paving the way for an international legal conflict.

4. U.S. Involvement and Initial Arbitration Steps

The abolition of the ZEDE law in 2022 soon raised international eyebrows. The United States was one of the critics, pointing out that Honduras’s move could be in breach of its commitments under the CAFTA-DR. The latter is a regional free trade arrangement binding the U.S., the Dominican Republic, and some Central American nations. Under it, governments are obligated to provide legal certainty, even treatment to foreign investors, and access to impartial arbitration mechanisms when conflicts erupt. By canceling the ZEDE regime, the Castro government was undercutting the legal protections due to Próspera and its supporters under both treaty and domestic law.

Among growing tensions, Próspera’s investors wanted to start formal arbitration proceedings. They argued that Honduras had not only breached the protections offered under CAFTA-DR but also violated commitments made in the agreement, which had promised a transition period and binding investor protections for up to fifty years. The investors sought a staggering 11 billion dollars in damages for their claimed losses. This value stems from the claimants’ damages expert’s valuation of the present value of projected cash flows and returns over the 50-year legal-stability period. It is based on assumptions about land-concession revenues, infrastructure projects, and other ZEDE operations discounted at an assumed rate, but has not been tested or awarded by any tribunal.

Faced with the challenges to their operations, Próspera and its international investors, convinced that Honduran courts could not impartially adjudicate a politically charged dispute, opted to proceed directly to international arbitration, triggering the mechanisms provided by CAFTA-DR and the ICSID Convention. Under CAFTA-DR, states must offer legal certainty and fair treatment to foreign investors, including access to neutral arbitration forums when disputes arise. By repealing the ZEDE regime, the Castro administration was accused of undermining the guarantees provided to Próspera and its investors under both treaty and domestic law.

This strategic move launched a legal battle that would be fought not in Honduran courts but instead before the International Centre for Settlement of Investment Disputes (ICSID). It is an arbitration tribunal associated with the World Bank in Washington, D.C. and is not a permanent “court” in the traditional sense. Rather, it summons ad hoc panels of arbitrators to decide disputes between sovereign states and foreign investors, and its decisions are enforceable in the domestic courts of more than 150 member countries. Because an ICSID decision can be executed against a state’s assets virtually worldwide and often influences future treaty practice, the Próspera claim carries implications well beyond Honduras’s borders.

The details of how this arbitration was launched, who filed in, how the tribunal was formed, and what procedural obstacles emerged are explored in the next section.

5. Procedure

Understanding the documents of the Próspera v. Honduras case can clarify many key elements of investor-state disputes. When investors initiated the case under the CAFTA-DR agreement, they first submitted a Notice of Intent to the host state. This action triggered a 90-day consultation period. During this timeframe, both parties were invited to negotiate to avoid a possible arbitration process. On September 16, 2022, the three claimants (Próspera Inc., St. John’s Bay Development Company LLC, and Próspera Arbitration Centre LLC) delivered their Notice of Intent directly to the Honduran Ministry of Foreign Affairs. Once those 90 days elapsed without settling, these claimants went on to submit their Request for Arbitration to the International Centre for Settlement of Investment Disputes (ICSID). ICSID then formally registered the dispute as Case No. ARB/23/2.

In ICSID arbitration, the tribunal consists of three arbitrators. One arbitrator is appointed by the claimant, another by the respondent, and a third arbitrator, who serves as the president of the tribunal, is chosen by mutual agreement between both parties. If the parties cannot reach consensus on the presiding arbitrator, the Chair of ICSID’s Administrative Council intervenes to appoint someone suitable. Here, Honduras opposed to the claimants’ nominee, Dr. David Rivkin, for two main reasons. Firstly, they raised concerns about his nationality because Dr. Rivkin is American, citing Article 39 of the ICSID Convention, which can prohibit arbitrators from sharing nationality with any party without explicit consent. Secondly, Honduras objected because Rivkin’s law firm, Debevoise & Plimpton LLP, had previously represented entities closely affiliated with Próspera, which raised impartiality concerns under ICSID Rule 9.

After scrutiny, ICSID’s Secretary-General was not convinced by the evidence to question the impartiality or independence of Dr. Rivkin. Honduras’s challenge was thus rejected, and Dr. Rivkin could continue to serve with Honduras’s nominated arbitrator, Professor Raúl Vinuesa, and the chairman arbitrator, Professor Juan Fernández-Armesto. Had the challenge succeeded, a new arbitrator would have had to be appointed by the claimants.

In addition, ICSID tribunals often face preliminary objections before addressing substantive treaty issues, such as Fair and Equitable Treatment or expropriation. For instance, Honduras filed a preliminary objection under CAFTA-DR Article 10.20, arguing that the claimants had failed to fulfil one of the treaty’s procedural requirements. However, the tribunal dismissed Honduras’s objection, and it proceeded to determine whether Honduras’s repeal of the ZEDE (Zones for Employment and Economic Development) framework violated the CAFTA-DR protections, especially if it constituted uncompensated expropriation.

Throughout arbitration, ICSID tribunals issue Procedural Orders, which are binding instructions stating the form and timing under which parties must submit their pleadings, exchange documents and present witness or expert evidence. Próspera tribunal issued five such Procedural Orders. Each applies to specific phases of arbitration proceedings, covering aspects from scheduling written submissions to handling document production. They also guide the inclusion of third-party submissions, known as “amicus curiae” briefs. These orders ensure an orderly progression of arbitration, setting clear expectations and timelines for each phase of the dispute.

Procedural Order Number One is the most interesting because it decides whether the tribunal can even hear the case. If the tribunal had denied Próspera access, the entire arbitration would have been dismissed. Próspera would then have been compelled to exhaust remedies in Honduran courts before any potential return to ICSID, a course of action made exceptionally difficult by the recent government’s decision to repeal its status.

6. Why Próspera Matters to Global Law

6.1. An Era of Corporate Sovereignty

The circumstances of this case challenge the conventional understanding of sovereignty, suggesting that its exclusive anchoring in the nation-state is becoming obsolete. It is assumed that only states can legitimately enact laws, run courts, or control money. Yet, the case in question involves a private firm doing all of this, not just for the sake of profit. Decades ago, experts warned that globalization would shift power toward private actors. While big tech companies now rival states in economic and cultural influence, they still largely operate within existing national legal frameworks. Próspera, however, represents an even deeper transformation: it is a project that not only influences policy but directly replaces core state functions. This marks a more profound shift than the rise of large technology firms, signaling a future where a few corporations may stand in for governments rather than simply challenge them.

Próspera invites comparison to the “golden-passport” programmes once run by Malta, Cyprus and Bulgaria, but only insofar as both models commercialise public goods². The EU schemes were politically harmful because a passport issued by one Member State automatically grants the holder full rights of residence, work and investment across the entire Union, off-loading the costs and security risks of vetting onto the other states. The Court of Justice therefore struck Malta’s programme down for eroding the mutual trust on which EU integration depends. By contrast, Próspera is not selling entry to a multi-state market, and is contracting solely with Honduras. Whereas Malta monetised a supranational privilege, Próspera monetises core attributes of national sovereignty. EU citizenship, far more valuable than Honduran nationality precisely because it functions as a “mutual country”, shows how turning a collective public good into a tradable asset corrodes confidence among the wider political community. Próspera threatens the same corrosion within Honduras by fragmenting and commercialising the state’s monopoly on rule-making.

6.2. The Rise of Digital Citizenship

Traditionally, citizenship can be granted based on place of birth (“ius soli”) or through one or both parents who are citizens of a country (“ius sanguinis”). However, Próspera’s e-Residency marks a fundamentally new form of virtual citizenship that is entirely contract-based. Instead of inheriting rights by birth or blood, anyone who meets Próspera’s requirements can claim a digital ID that grants them specific business, property, and judicial rights within the ZEDE. This shift challenges old assumptions: if a digital ID can effectively function as a citizenship, why cling to the idea that nationhood must exclusively derive from birthright?

This concept builds upon earlier innovations. Estonia pioneered the idea in 2014 with its e-Residency program, which has already provided over 100,000 individuals with a secure digital ID. This ID allows them to form EU companies and use online banking without even having to visit the country, creating a form of remote economic participation. To add to this, the EU is also preparing to launch an EU Digital Identity Wallet that will, for example, enable an Italian resident to log into the Portuguese tax or the Dutch health portals, streamlining cross-border digital interactions for citizens.

Web3 developers are pushing the boundaries even further with concepts like “Soulbound Tokens” (SBTs), proposed by Ethereum co-founder Vitalik Buterin³. An SBT is a non-transferable digital badge permanently recorded in a crypto wallet on a public blockchain. This makes it publicly verifiable but impossible to trade or fake. Imagine a university issuing an SBT to prove someone holds a degree or an online community giving members a “resident” badge. In a future cloud-based city, a system could simply check which tokens sit in your wallet: if it verifies a “resident” badge, it could automatically grant voting rights or lower taxes; if it sees a “law-degree” badge, it could instantly allow you to practice law. No paper documents or traditional passports would be required, as all necessary proof is on the blockchain.

As virtual and augmented reality platforms expand, this model hints at a future where individuals might navigate multiple digital jurisdictions, choosing the legal and social environments that best fit their needs, rather than being confined by the accident of birth. These examples show how citizenship is emerging in layers that, rather than replacing, accumulate with each other.

For instance, someone may have Portuguese nationality (physical), an Estonian e-Residency (fiscal), and a blockchain-based badge confirming their membership in a global medical network (virtual). Each layer unlocks different rights and obligations in its domain, yet for these rights to carry real-world weight, legal systems must integrate them coherently.

6.3. Honduras’s ICSID withdrawal

When Honduras left ICSID mid-dispute, it cost it its legitimacy and credibility. When a state abruptly abandons an international arbitration forum, it risks undermining investor confidence. Future companies considering investment may ask: “If this government pulls out of its agreements when inconvenient, can we trust that our contracts will hold up?” In effect, by ending its participation in ICSID before the Próspera case was resolved, Honduras weakened the very safety net that reassures investors their rights will be protected. This can lead to higher borrowing costs, fewer foreign direct investments, and a perception that the country is an unreliable partner. Ultimately, the decision challenges the core idea that a nation’s commitments, even unpopular ones, should be honoured to maintain both domestic legitimacy and international trust. The country faces the seizure of its overseas assets, along with credit downgrades that would increase its borrowing costs. Furthermore, such a judgment would deter future foreign investment. Internationally, Honduras’s reputation as a reliable treaty partner could suffer, leading to strained diplomatic relations and pressure for expensive settlements.

7. Conclusion

To conclude, I believe Próspera v. Honduras is not simply a matter of legalities or investment disputes. It is a basic challenge to our presumptions of statehood and democracy. It raises the following question: Are states willing or even capable of coexisting with private jurisdictions underwritten by international capital? This case will not only influence future investment treaties, but also has the potential to redefine what sovereignty in the 21st century will look like. Can we anticipate a future where citizenship will be less about passports and borders, but more along the lines of virtual identities and corporate governance charters? The outcome of this case at ICSID will likely decide the terms of global governance for generations.