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April 27, 2022

Is crypto good for cities?

Municipalities across the world are embracing crypto. Critics say they’re endangering public finances.

By greg noone

It seemed too good to be true. In July 2021, Mayor Francis X Suarez of Miami announced a new initiative intended to provide external funding for the city budget. ‘MiamiCoin’, organised and funded by a start-up called CityCoin, would be a new cryptocurrency for the Floridian metropolis. “We could use it for roads, parks, regional resilience,” explained Michael Sarasti, the city’s chief information officer. More excitingly, 30% of all income raised through mining MiamiCoin, also known as MIA, would feed back into the city’s coffers – at no cost to Miami residents. 

Some commentators struck a note of caution: MIA didn’t yet have a use case yet beyond speculation, they said, and could be vulnerable to fraud. For the mayor, however, the project was laying the groundwork for a grand future. “When you think about the possibility of being able to run a government without the citizens having to pay taxes – that’s incredible,” said Suarez. By February, that promise seemed to be coming true, when the mayor proudly announced the scheme’s first disbursement of $5.25m, which was promptly spent on a rental assistance program.

In embracing its own branded coin, Miami may be the most enterprising city when it comes to crypto – but it’s hardly alone. New York City Mayor Eric Adams has repeatedly stated his intention to make the city a global centre for crypto, while cities from Philadelphia to Austin, Rio de Janeiro to Lugano have announced their willingness to explore new ventures with crypto organisations. This interest is driven, explains National League of Cities’ director Brooks Rainwater, “by leading-edge cities looking for ways to differentiate themselves and demonstrate their leadership at the forefront of new technologies.”

Miami Mayor Francis Suarez speaks at the Bitcoin 2021 Convention, in Miami, Florida. Suarez has been one of the leading proponents of weaving crypto into municipal governance among American mayors. (Photo by Joe Raedle/Getty Images)

Even so, risks abound. Some US municipalities, like Portsmouth, New Hampshire, allow citizens to pay their bills in cryptocurrencies, but critics say their notorious volatility makes this problematic. Other cities such as Plattsburgh, New York, have succeeded in attracting crypto miners only to see local energy bills spike. Crypto also remains largely unregulated, adds Brookings Institution fellow Tonantzin Carmona, a vitally important point for municipalities to remember given how the space is “rife with either scams, fraud or hacks.”

Can cities that embark on crypto ventures uphold transparency and financial accountability? For some municipalities, the sheer potential of tapping into a global market estimated, by some, to be worth trillions of dollars is reason enough to find out. Others, however, will likely hesitate at such partnerships. After all, “a city’s journey with cryptocurrency and support for those businesses must align with residents’ values and needs,” says Rainwater. “While the popularity of cryptocurrency will likely grow with time, there’s still a lot of anxiety around it today for many people.”

City cryptocurrencies: the case of MiamiCoin

An ambition to appear tech-savvy is not the only driver for cities’ embrace of crypto over the past year, explains Michael Bloomberg, a fellow at the New Cities Foundation. At least among US municipalities, it also stems from a much deeper disenchantment with another wave of enthusiasm around so-called ‘smart cities’ throughout the last decade.

“They were being pitched left and right by folks saying, ‘Hey, give us access to your data,’” says Bloomberg, with tech companies making vague promises that crunching these numbers would result in more responsive municipal services. “Cities eventually caught onto that [after] a number of failed projects and hundreds of millions of dollars out the door.”

The attraction of crypto, by contrast, lies in its promise of digital transformation at minimal cost. Not only is the sector bursting with mining and trading businesses that can provide new employment opportunities for citizens, but the possibility of engaging with cryptocurrency operators like CityCoin can even allow cities to benefit directly from the mining process itself. In this view, digital innovation no longer requires “worrisome expenditure,” argues Bloomberg. “It’s now something you’re going to make money off of.”

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That isn’t the only advantage of a project like MiamiCoin, say advocates. “At a deeper level, CityCoins serve as a platform for the members of a community to interact with their government and with one another,” a spokesperson told Tech Monitor, in responses crowdsourced from the CityCoins community. Soon, though, the CityCoins community hopes to expand beyond helping fundraising for city governments to setting up new civic participation platforms, co-working spaces, rental support programs and data governance initiatives.

Most of these ideas have yet to be realised, however, leaving the disbursement project as CityCoin’s main contribution to Miami. This in itself is a source of controversy. The mining process funding those donations relies on individuals consistently investing a cryptocurrency called Stacks (STX) into a collective pot. After a certain period, the consensus mechanism chooses a miner at random to reward with a block of new MiamiCoin. Thirty per cent of the STX that was initially invested, meanwhile, is automatically diverted to the City of Miami’s crypto-wallet, while the rest is awarded to those miners who have chosen not to sell their MiamiCoin holdings (so-called ‘HODLers.’)

This results in essentially free money for the city, Bloomberg claims, provided that individuals continue to buy into the process using STX. Many seemed to be doing just that when Mayor Suarez embarked on a media blitz to promote MIA last autumn, coinciding with the cryptocurrency’s highest price on 19 September. Since then, however, the value of MiamiCoin has tanked by 92.76%, a fall that Bloomberg argues has fleeced investors and puts the lie to the idea that similar schemes form a reliable source of funding for city budgets.

It’s also debatable how accountable a project like MIA can be to city governments and their constituents when it remains unclear how many token holders are actually Miami residents. “We do not collect addresses of individuals holding CityCoins in their wallets,” says the organisation, although “opt-in on-chain KYC controls could always be implemented for any specific applications requiring only a city’s citizens to participate.”

Another point of contention is the usefulness of many of the envisioned use cases for coins like MIA. While CityCoins argues that their coins “fill a gap in existing centralised and decentralised platforms” by giving residents an increased say in how their municipality is run through on-chain voting, many of the solutions devised by the community strike Bloomberg as needlessly financialising existing city services. “Either you’re going to find yourself paying for something you didn’t previously have to pay for,” he says, “or you’re going to find the value of your dollar diminished by the fact that someone else can pay for this in a coin that they won in a raffle.”

On the CityCoins Discord server, several members have recently registered their dissatisfaction at MIA’s crash in value and diminishing STX rewards for HODLing. “I bought a bunch like right below 1¢," said one user on April 2nd. "[M]an I wish I wouldn't have sold my car for it at this point.” A recent investigation by StateScoop, meanwhile, discovered that Miami commissioners had only a limited understanding of MiamiCoin and the municipality’s relationship with CityCoin. Mayor Suarez himself also seems to have doubts. “I don’t know whether it’s going to work or not,” he told the Miami Herald in February. “Innovation doesn’t always work.”

A crypto currency exchange shop in Zagreb, Croatia. Multiple cities have initiated, or have explored, projects allowing their residents to pay bills using cryptocurrencies. (Photo by Beata Zawrzel/NurPhoto via Getty Images)

Crypto cities: blockchain for community projects

The fate of MiamiCoin hasn’t stopped its creators from developing new cryptocurrencies for New York and Austin, which CityCoins says were activated in response to enthusiasm expressed by the mayors of both. Despite this, neither city has yet embarked on an official partnership with CityCoins to further develop these. Philadelphia, meanwhile, recently ruled it out.

Other cities around the world, meanwhile, continue to flirt with investing their assets in cryptocurrencies or partnering with organisations in the sector. These officials should consider whether collaboration is in the interests of the city government and its constituents, argues Carmona. “Rather than focus on cryptocurrencies which, again, are incredibly risky and volatile and have limited utility,” she says, “why not put that time, energy and those resources into improving the city's technological infrastructure, or addressing the real concerns of poverty or the needs of the unbanked or underbanked with policies that we actually do know work, and that have been experimented with elsewhere?”

Not all aspects of crypto are as controversial as cryptocurrencies. Integrating blockchain into specific tendering processes where transparency is desirable is a practical – if less exciting – way of marrying city government with Web 3.0, argues John Forrer, professor of strategic management and public policy at George Washington University. “It has a lot of promise, because you can see the pay-off,” he says. Even so, Forrer argues, questions would still have to be answered about the management and responsibility for blockchain at a municipal level, particularly if it’s built by a third party.

Another potential role for blockchain in cities lies in supporting local, digital currencies – albeit ones that cannot be traded as assets in their own right.

‘BerkShares’ are an alternative legal tender for the Berkshires region of western Massachusetts pegged to the US dollar. These notes, emblazoned with the portraits of local historical figures, have been circulating in the local area since 2006, with the intention of fostering civic engagement and encouraging local people to shop with local businesses. Last year, start-up Humanity Cash created a mobile app facilitating contactless payment in BerkShares. The blockchain network it uses to settle payments, argues its CEO Fennie Wang, is a faster and cheaper alternative to established card payment networks.

“When you use a credit card, 3% to 4% off the top is taken in these card processing interchange fees,” explains Wang, money that might otherwise stay in the local community. Meanwhile, “it's a fraction of a penny to be settled on the blockchain network. So, that allows us to help solve a pain point there. And then, if the merchants need to cash out, they can continue to do that through the app and switch that back to US dollars to their bank accounts.”

Blockchain also adds an element of control, says Wang. In time, Humanity Cash envisions using the BerkShares app to support a guaranteed income program for deprived residents that directly benefits the local community. “As a data point…80 cents of every SNAP dollar is spent with a large corporation, and specifically 53 cents is spent with superstores like Walmart," says Wang. It would be relatively straightforward, she adds, to use the BerkShares blockchain network to not only make targeted transfers to deprived residents, but also write smart contracts that limit their spending to local stores.

Wang concedes that such a framework might be perceived as paternalistic in encouraging, perhaps, a recipient to buy a meal from their locally-run burger joint rather than their nearby McDonald's. She insists, however, that the functionality of the network will always derive from its goal to keep money generated in the community benefiting the people who actually live there.

“It just says, ‘Hey, if we’ve got this money, let’s share that wealth together, spent it with your neighbours,’” says Wang. “It helps strengthen the whole community.”

This article originally appeared on Tech Monitor.

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