Municipal Cryptocurrency

One type of institution that seems poised to use crypto-finance the transform the economy are sub-national governments such as states, provinces and municipalities. These governments constantly need to turn their assets into income they can use to fund projects and programs. Increasingly, they also need to insulate themselves from right-wing national governments that use the financial power of the nation-state to impose reactionary policies on urban residents that do not want them. Indeed, we can see throughout the world an emergence of a city-network tying to reformulate the relationship between the nation and the city, and finding that their lack of financial sovereignty stands in the way.

In 2008, for the first time in human history, more human beings are living in urban areas than rural ones. The world's top 40 “mega-cities” now account for over 25% of global GDP, roughly equivalent to the entire GDP of the United States. And while the growth of urban centers accelerates, their political power within the framework of the nation-states does not. In the United States, there is a direct, inverse correlation between the population of a state and the amount of people a state’s electoral votes represents. For example, “one Wyoming voter has roughly the same vote power as four New York voters.” While cities are growing throughout the world and gaining massive amounts of economic and cultural power, their residents are being politically disenfranchised by the architecture of the nation-state and the international political system nation-states have created. The implications of this dynamic have become dire over the last few years as a wave of seemingly irrational, right-wing populism based in rural areas that aren’t benefiting from their integration into the global economy is seizing control of national politics throughout the world.

In the United States, President-elect Trump threatens to cut off funding to cities if they continue to act as sanctuary cities for the “illegal immigrants.” In response, big-city mayors from New York City to Los Angeles, Milwaukee to Miami declare they won’t comply. In England, the rural areas and de-industrialized cities voted to leave the EU while London voted to remain. Now London is being pulled out of the EU against its will, and exploring alternative strategies to remain in it. In Spain, the national politicians haven’t been able to form a national government for over a year. This ineffectiveness is making succession of Catalonia, a major Spanish region, more popular. It’s also propelling a generation of politicians coming out of 2011’s 15M social movement into local political office. Social movement activists are now running Spain’s two largest cities - Madrid and Barcelona - and implementing a political platform of radical government transparency and the enfranchisement of local participatory governance practices. The contrast between the effectiveness of local politics and the failure of national politics couldn’t be more clear. Now, the leadership of Spanish cities has begun to collaborate with other “rebel cities” in Europe to form new political networks with post-national objectives.

The state of city/national relationships in Asia isn’t much different. Hong Kong is 20 years into a 50 year grace period before it’s entirely subsumed into the Chinese nation-state, and Hong Kong’s youthful urban population seems increasingly determined to keep their economic political sovereignty (#hongkongisnotchina). Taipei continues to resist absorption into China, and in the process, is producing one of the world’s most participatory and transparent governments in the world. Meanwhile, Singapore, a legitimate city-state with its own money and political autonomy, is the envy of Asia with a higher per-capita GDP than the United States. In fact, the success of Hong Kong and Singapore are what originally motivated China to create special economic zones in the 1970s which, by allowing its cities to engage in the market activities, has propelled the Chinese economy into its increasingly dominant global position.

As national-governments push cities away through policies that infringe on their municipal sovereignty, cities pull each other closer to collaborate on everything from how to manage mass transit systems to fighting climate change.

When will cities, individually and collectively, engage in the type of financial practices that have enabled the central banks, commercial banks, and multinational corporations to dominate economic systems throughout the globe? When they create their own blockchain-powered financial system and network those systems together to create a new global finance. As this takes place, sub-national governments will develop the capacity to turn their economic activity into a new sources of wealth, more economic independence and more political sovereignty.

The main instrument subnational governments such as states, cities and counties in the United States currently use to raise money is the municipal bond. Many of these bonds are organized through state governments, making them extremely low risk because the US federal government hasn’t allowed a state to default on bonds for nearly 100 years. Additionally, income from municipal bonds are often exempt from federal income taxes - thereby artificially inflating the return investors can receive from these bonds. The securitization and marketing of these bonds is done by large financial institutions with lots of experience. The whole process is quite efficient, secure and relatively low cost. At least for now.

In the US, Donald Trump is threatening to punish cities who disobey his immigration orders with any means at his disposal. Reducing direct federal funding is one way he can squeeze cities. Another is to reduce the size and scope of federal income tax breaks for municipal bonds. If conflicts between cities, states and the federal government become more acute, federal officials might try to undermine municipal financial systems. Of course, the Federal government is not in the best financial shape with nearly $20 trillion in debt. Disruptions in the flow of finances between city, state and federal governments could impact the federal government’s finances in significant ways. Since the Federal government controls the monopoly on the production of money in the United States, it has lots of tools at its disposal to manipulate currency markets to fill financial gaps, but even that power has its limits. Donald Trump acknowledges that the Federal government can always “print” the money it needs to fulfill its obligations, but even that mechanism is limited by the prospect of rampant inflation. If investors believe the federal government is losing control of its ability to raise tax revenue and needs to rely on monetary expansion to manage its debts, the price of Federal Treasury bonds could drop significantly, which would destabilize global financial systems.

The more conflict emerged between Federal, city and state governments, the more risk there is of financial crisis. In the event of such a crisis, do cities and states want to be comprehensively dependent on the Federal government to implement sensible monetary policies? If the Trump administration, which has proven itself to be extremely vindictive, wants to blame the rebellious actions of city and state governments for a future financial crisis, it’s plausible that they’d weaponize their recovery politics to undermine city and state governments.

For these reasons and more, cities need to look seriously into how they can begin to diversify their finances and explore new technologies that would allow them to become more autonomous financial actors that can reduce, at least to some extent, their dependence on the nation-state.

Let’s imagine, for a moment, what would happen if a municipality chose to experiment with using a blockchain-based cryptocurrency instead of a municipal bond to raise funds.

Bonds generally come in two formats: “general obligation” bonds that are backed by the city’s general funds which often come from property taxes and “revenue bonds,”which are backed by a specific revenue stream such as a toll road or a particular type of tax. On a revenue bond, the city sells the promise of future revenue from the project to the investors who fund the project now. This results in a net loss for the city over the duration of the deal: they’re giving more money than they’re revenue stream is earning. Of course, the bond funds the project which creates the revenue, so even though the city loses money on the deal, they also get to produce the project and earn revenue from it without having to spend any money right now. It’s a good system.

On a revenue-backed cryptocurrency issuance, however, the city is using the promise of future revenue to back the value of new money being issued through a fractional reserve process. The city can then spend this new money as it sees fit. The result is a net gain for the city because, even under the most conservative fractional reserve lending policies, the city would be able to create more new money than the value of the assets it would be securitizing.

Unlike a bond issue, which results in a large sum of money made available almost immediately, an expansion of the money supply of a municipal cryptocurrency would have to be phased in over a period of time so it doesn’t create significant fluctuations in the currency’s value. This makes municipal currency more useful for funding long term programs as opposed to short-term projects like infrastructure building.

One area where municipal cryptocurrency could prove useful is by making it possible for smaller assets to be used to fund new, small-scale projects and programs. Currently, the smallest bonds are issued at around $5 million, so any assets under that price simply aren’t collateralized. Additionally, minimum bond investments are $5,000, so people who want to invest less than that amount can’t do so. This presents an opportunity for cryptocurrencies to make a difference. Municipalities could use assets too small to serve as bond collateral to back their municipal currency program, and then use their growing stream of new currency to fill budgetary gaps or experiment with new programs. If it works - great. If it doesn’t - small loss.

If cities could leverage the blockchain to become their own financial entities, the implications would be massive. Instead of being a consumer of money, and having to pay for it, municipalities could be producers of money, and sell it to others. Their financial stability and strong asset portfolios make them the perfect entities to engage in this type of activity. And the nascent state of blockchain development (and regulation) mean that this is the perfect time to explore the possibilities. The benefits of creating their own “crypto-banks” are many: more revenue for operations, more resilient local economies, less reliance on federal economic policies and monetary mechanisms and more capabilities when it comes to interacting with global finance.