miami mayor francis suarez wants to make his city the world capital of cryptocurrencies. New York City Mayor Eric Adams’ first paycheck was automatically converted to Bitcoin and Ethereum. And in Jackson, Tenn., Tampa Bay, Fla., Austin, Texas, and other cities across the country, mayors are embracing crypto.
These mayors want to find “digital gold” for their cities and drive economic growth by attracting cryptocurrency and blockchain companies. some even believe that cryptocurrencies can be a way to address income inequality or provide alternative payment methods for unbanked or underbanked residents.
Reading: Is considering its city in bitcoin
however, regardless of how compelling these opportunities seem, it seems that more weight is given to the potential benefits of cryptocurrencies than the risks. Before adopting cryptocurrencies, local leaders should ask themselves:
- what problems are we trying to solve and, more importantly, why?
- can or should cryptocurrencies solve these problems and are the risks greater than the benefits?
- Could these problems be solved without cryptocurrencies?
This is not meant to suggest that mayors should oppose innovation. but the premise that innovation will automatically lead to positive results must be examined. there are downsides to be aware of given the lack of cryptocurrency regulations to ensure adequate consumer protection, as well as potential risks to the financial system in general.
As the federal government tries to develop a regulatory framework for cryptocurrencies, local leaders must be careful before promoting cryptocurrencies or setting policies without properly understanding how they work. as part of their assessments, mayors and other local leaders should examine crypto use cases, how crypto works, how attracting crypto businesses can affect local economies, and how local leaders can improve financial access and opportunity. wealth creation for their communities beyond cryptocurrencies. .
definition of common cryptocurrency terms
The confusion surrounding cryptocurrencies is reasonable given that the terminology is still fluctuating and contested, with many definitions unresolved. Below are working definitions for some common terms; however, this is not an exhaustive or definitive list, as terms will continue to evolve over time.
fintech, or financial services technology, is technology that enables companies, business owners, and consumers to provide or access financial services. the development and use of cryptocurrencies fall under the fintech umbrella. There are many different types of fintech companies that offer various products and services, such as mobile payments, international payments, digital loans, and retail investments.
cryptocurrency is a digital representation of value, the movements of which are tracked in a blockchain ledger. cryptocurrencies are created, traded and stored digitally. there are thousands of cryptocurrencies; bitcoin, ethereum and dogecoin are some examples.
Stablecoins are a subcategory of cryptocurrencies, but these digital assets are distinct in that they are designed to be pegged to fiat currency. however, they are not issued by a central bank, nor are there currently public reporting standards or requirements regarding the reserve assets of a stablecoin. Currently, we federal legislators are evaluating the systemic risks posed by stablecoins and potential legislation to provide safeguards.
Blockchain technology, which uses a particular data structure consisting of a chain of data blocks, is considered by some to be a subset of blockchain technology. broader distributed ledger (dlt) universe. A DLT system is a distributed, rather than a centralized, record-keeping system, and is collectively maintained and updated by multiple nodes. In this case, think of people at different computers seeing the changes made to the ledger at the same time. blockchain is the technology that enables cryptocurrency transactions. A blockchain can be public, which is how most cryptocurrencies work, or it can be private, which is limited to a select group of verified participants.
Bitcoin mining is a resource-intensive process to verify transactions, add them to the ledger, and create new bitcoins. To verify a transaction, “miners” use computer hardware to solve complex mathematical problems, and once solved, “blocks” of verified transactions are added to the ledger, and the miner who manages to solve the problem is rewarded with bitcoin.
Although “cryptocurrency”, “blockchain”, and “bitcoin” are sometimes used interchangeably, they are not the same thing. more importantly, if someone claims that blockchain technology can solve a specific subset of problems, it does not mean that cryptocurrencies can as well.
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cryptocurrencies are inherently risky to treat as a public good
Before promoting cryptocurrencies and treating them as a public good, mayors and other local leaders need to be aware of the technological landscape they intend to adopt. they need to consider the use cases first, as cryptocurrencies have so far shown little utility despite the hype. Furthermore, they should examine the fundamental characteristics of cryptocurrencies and how they work before designing policies based on a poor understanding of the technology.
Using cryptocurrencies as a payment option is a possible use case that local leaders have promoted. but there are some disadvantages to be aware of. Cryptocurrencies are notoriously volatile, and their dramatic price fluctuations make them poor payment methods for everyday transactions. a transaction made in bitcoin today could result in a significant loss tomorrow if, for example, the price of bitcoin skyrockets the next day. And unlike cash, cryptocurrencies are not yet universally accepted. Furthermore, as Eswar Prasad of Brookings pointed out, transactions using cryptocurrencies can be slow and expensive: Bitcoin transactions can take around 10 minutes to validate, with an average fee of around $20 for a single transaction. in el salvador, which adopted bitcoin as legal tender in 2021, residents experience high fees on both ends of their transactions, price volatility, and technical issues such as lost transactions, error codes when making payments, and accounts created through identity fraud .
Common criticisms of cryptocurrencies are generally based on how people, companies or organizations use them to conduct illicit transactions or commit cybercrimes, including money laundering. to be fair, cash can also be used in this way. still, local leaders need to be aware that cryptocurrencies are riddled with scams. The Consumer Financial Protection Bureau has reported an increase in complaints about cryptocurrencies, including crypto businesses and exchanges, from 488 complaints in 2019 to 979 in 2020 and more than 1,400 in 2021.
Beyond these concerns about how people use cryptocurrencies, there is a much larger one: local leaders must consider the risks related to the operation of cryptocurrencies and their basic characteristics. Legal scholars such as Angela Walch highlight that the fundamental characteristics of some cryptocurrencies carry operational risks that make them unsuitable for serving as money, due to technological vulnerabilities or basic governance problems. bitcoin, for example, works as money only if the software itself is working, but what if there are software bugs or cyber attacks?
Mayors and local leaders should be aware that many crypto advocates make claims that are perceived as factual, but are actually more aspirational. for example, they may emphasize the “immutability” of the blockchain database as a selling point, arguing that the blockchain cannot be tampered with and is therefore “tamper-proof” or “secure.” “. Walch, who studies the nascent field of cryptocurrency governance structures, notes that the distributed ledger system is not, in fact, “immutable,” and there are developers in these public blockchain spaces who hold a considerable amount of decision-making power. . There have been instances where a small group of developers, some of whom Walch compares to trustees, have called on behalf of the larger group to address bugs or break-ins in the system, sometimes by altering the underlying code. As Walch emphasizes, this kind of decision-making power raises important questions: How will these decisions be made? Will only software experts do them? Is it possible that a small group of investors end up making decisions? if so, who can stop them if there are no accountability systems? These are critical questions that local leaders need to look into before promoting specific cryptocurrencies.
While regulators are still developing a framework to regulate these technologies, some are also urging more thought be given to clarifying the law and governance of blockchain to better understand the roles various actors play in these spaces and create systems of accountability. In the meantime, mayors should proceed with caution: Before romanticizing cryptocurrencies and blockchain technology and making policy decisions based on assumptions about the technology, they should try to better understand it, following a similar approach that Walch suggests regulators take:
- take a critical approach to their educational process and seek diverse perspectives, including across disciplines.
- ask if the capabilities of the technologies are really proven and seek to understand how they achieve what the proponents claim they do.
- Consider the source making claims about that source’s technologies and incentives.
mayors should think about how cryptocurrencies will affect residents
Mayors who want to transform their cities into crypto hubs claim that new jobs would be created and new workers would move in. as a result, local leaders are trying different tactics to attract crypto businesses, including city-branded cryptocurrency projects. Some states are offering tax breaks to attract bitcoin mining companies, and cities like Miami and Austin, Texas are touting their low energy costs and competitive tax rates.
Still, local leaders need to weigh how crypto companies might affect their current residents and workers. potential environmental effects (including energy use) and how the promotion of specific cryptocurrencies may encourage residents to engage in speculation should be considered. they should also assess whether there are ways to ensure that residents are not displaced and can benefit from economic development efforts.
Cryptocurrency deals would undoubtedly affect cities’ energy use and climate goals, as well as residents’ energy bills. cryptocurrencies that use a “proof-of-work” protocol, such as bitcoin, require power-intensive verification processes. One analysis found that bitcoin mining consumes more electricity than the entire country of Argentina. It is important to note that several cryptocurrencies were designed to minimize energy consumption and not all of them work like bitcoin. Even so, it is crucial to highlight this environmental impact, since many mayors who have promoted cryptocurrencies have particularly embraced bitcoin. Local leaders must consider how their communities will deal with the mining process, its high energy consumption, and the indirect effects on local economies. For example, a working paper found that in upstate new york, where a quarter of all us citizens live. Crypto mining occurs: Energy bills have increased due to increased demand for electricity, with small businesses and households paying an additional $79 million and $165 million, respectively, in annual electricity bill costs.
Furthermore, local leaders need to assess whether the broader economic benefits of cryptocurrencies are overstated. Despite the incentives offered by states to attract crypto mining companies, Eswar Prasad of Brookings noted that some of these mining facilities would require few, if any, workers to operate. Furthermore, the headquarters of a cryptocurrency-related company may be located elsewhere, or nowhere at all, limiting the tax benefits of a locality. Prasad also noted that the environmental impact of cryptocurrency mining, including the diversion of energy from other uses, will remain local.
Local leaders should also consider how city-branded cryptocurrency projects could affect their residents. Despite the seemingly appealing prospect of “raising funds” for a city through city-branded cryptocurrency projects, these initiatives have raised questions that local authorities should consider. Some of these questions include whether the projects encourage speculation among residents or whether adequate due diligence was performed.
See also: Cryptocurrency 2021 Legislation
for example, miamicoin allows people who want to support the city to invest in it, whether or not they live in miami. however, miamicoin currently has no use, so critics say mayor suarez is encouraging speculation, drawing comparisons to gambling and pyramid schemes. The miamicoin fix also raises important questions about liability, as its creator, citycoins, is not a company, but rather a group of unknown individuals registered in delaware as a non-profit organization and communicating via discord. furthermore, although mayor suarez celebrated the $5.25 million he gave miami from the project, the city may need to reconsider the initiative given the volatility of the currency, since its value fell almost 93% recently, and it is not quite clear that city leaders fully understand the project or know how to effectively manage digital assets. local leaders should follow this case study critically before committing to such initiatives.
Finally, mayors and policy staff need to examine how the incentives they use to attract cryptocurrency businesses will affect current residents. In Puerto Rico, for example, tax incentives designed to attract investors in crypto, technology, and finance are driving up housing costs and crowding out low-income Puerto Ricans. And in Miami, the rising cost of living, due to an influx of wealthy newcomers, is outpacing promised tech job growth. local leaders may be tempted to focus on attracting businesses and workers because they receive flashy headlines for such efforts. But instead of focusing on the new workers they hope to attract, mayors should consider investing in their existing workforce.
democratize finance and wealth creation beyond cryptocurrencies
earlier this year miami mayor francisco suarez took office as president of the us. uu. mayors’ conference and, laying out his vision for American cities, he proposed that cities sign a “crypto pact.” mayors at the conference expressed interest in the potential of cryptocurrencies to address the financial needs of low-income communities and the unbanked and underbanked.
Indeed, proponents of cryptocurrencies often cite financial inclusion as one of their main goals. there are a growing number of people of color and the unbanked who are trying their hand at cryptocurrencies, taking huge risks in hopes of gaining something resembling wealth. a harris survey showed that 20% of latino/hispanic americans, 18% of black americans, and 13% of white americans own cryptocurrencies. another survey found that 37% of crypto owns unbanked, versus 10% of fully banked. Historically, these groups have been denied access to traditional financial institutions and their services, so it is understandable that they seek alternative financial service providers to transact and build wealth. They may also be tempted to get involved with cryptocurrencies due to the constant promotion of celebrities, athletes, influencers, and people who are already wealthy, who, by virtue of their wealth and arbitrage ability, face little risk when trading speculative assets.
Despite the belief that cryptocurrencies could “democratize finance” or even wealth, the growing concentration of the wealthy in these spaces demonstrates that not all cryptocurrency holders are created equal. bitcoin ownership is increasingly concentrated in a small group of investors, with 0.01% of bitcoin holders controlling 27% of the currency in circulation. Furthermore, cryptocurrency mining has become so expensive that only a small group of companies and individuals can afford it, with roughly 10% of miners controlling 90% of bitcoin mining capacity. given the concentration of wealthy investors and miners in these areas, can local leaders be sure that the market will not be manipulated to benefit only a few?
Local leaders would do well to contemplate whether cryptocurrencies are an appropriate remedy for highly complex social problems rooted in decades of systemic financial discrimination. Or, if local leaders simply see crypto as just another tool in the toolbox, they should assess whether it is the right tool given the risks. Because of their restricted options, communities of color have a history of using costly, complicated, or risky alternative financial services, many of which are marketed in these communities, including payday loans, check-cashing services, and payday mortgages. high risk. Similar to how cryptocurrencies are currently portrayed, payday loans were once described as promoting the “democratization” of credit, and subprime mortgages were heralded as “innovations” that would open doors for excluded communities, but ultimately harmed them during the 2008 financial crisis. crisis and its aftermath. Mayors need to ask themselves: If the worst-case scenario occurs and the digital bubble bursts, are they prepared to take the blame for promoting digital assets that exposed their most vulnerable constituents to significant financial risk?
Instead of signing a “cryptocompact,” mayors should consider using their energy, influence, and collective action to pressure the federal government to address systemic racism in financial services systems and close the racial wealth gap. in fact, there are many resources and policy proposals available to address the root causes of financial access and wealth disparities. local leaders could advocate for policies that open up payment systems to the unbanked and underbanked.
Recently, the 12 district banks of the Federal Reserve System hosted a “Racism and the Economy” series to examine the impact of structural racism on our economy. the series shared several proposals to improve economic outcomes for all Americans, many of which local leaders could certainly champion. And in terms of closing the racial wealth gap, the Brookings scholars offer a number of recommendations, including supporting less discriminatory credit scoring practices and providing credit and down payment assistance to borrowers affected by practices. discriminatory housing and loan. Mayors can also support national evidence-based efforts to pay off student loan debt, launch baby bonuses, or provide guaranteed income to residents.
Ultimately, if the intention is to advocate for greater economic opportunity for marginalized communities, local leaders should support policies that help them reduce debt and increase wealth rather than promote unregulated digital assets with limited utility .
cryptocurrencies should remind us to take a step back
Of course, there are other practical and tactical considerations that local leaders need to keep in mind regarding cryptocurrencies. for example, once they’ve done the work to understand how people use cryptocurrencies and how they operate, local leaders may need to assess their cities’ technological capabilities, legal hurdles, and even state regulatory barriers to doing things like accept payments or incorporate cryptocurrencies. in their investment strategies. They should also consider the role that city councils will play in making decisions regarding city-branded crypto projects, as these governing bodies are typically responsible for the financial and budgetary affairs of the city government.
On a deeper note, however, mayors and local leaders need to step back and think carefully about the problems they are trying to solve and why. in doing so, they may find that many of the challenges they seek to address are fundamentally social problems that require political solutions rather than technological ones. Or, they may recognize that some of these problems have been around for generations and are deeper than any new tool can solve, particularly one with limited usefulness. in any case, local leaders need to remember that they are accountable to the public, and the public deserves a full assessment of this opaque technology landscape by their local leaders. Given the current risks and drawbacks when it comes to cryptocurrencies, mayors need to be careful.
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