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How Can Local Governments Use Crypto?

Published
October 17, 2022
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    Miami Mayor Francis Suarez set out to make his city the world's cryptocurrency capital in 2021. After experiencing an influx of talent from tech and finance during COVID-19, he sought to accept Bitcoin payments and praised projects like MiamiCoin. FTX even secured naming rights to the city's NBA stadium.

    Of course, the ensuing crypto winter threw cold water on some of these plans. While the Miami Heat plays at the FTX Arena, MiamiCoin's 95% drop in value dashed the mayor's belief that it could one day replace municipal taxes as the government's primary funding source. And crypto startups have seen funding quickly dry up.

    A handful of early failures shouldn't deter cities from adopting new technologies. Cryptocurrencies and blockchain technologies already have real use cases and could significantly impact future municipalities' operations. The key is understanding the technology and taking a measured approach to ensure a positive outcome.

    Let's look at how crypto can go beyond the hype to solve real problems for local governments.

    Cryptocurrencies and blockchain technologies may have over-hyped attributes, but the underlying technology could reshape future cities' operations. Here's how local governments can use crypto.

    Municipal Use Cases

    Satoshi Nakamoto invented the first cryptocurrency – Bitcoin – in 2009. While Bitcoin is purely a digital currency, the underlying blockchain technology has yielded many other innovations. The crypto ecosystem encompasses everything from decentralized lending to digital artwork, making it a diverse tool capable of solving numerous challenges.

    Local Government Crypto
    Cities where crypto is on the rise. Source: Bloomberg

    #1. Proof of Ownership

    Land transactions and other proof-of-ownership requests involve significant administrative overhead for government agencies. Using blockchain technologies, governments could store land titles, vehicle registrations, and ownership records on a public ledger to cut overhead and reduce potential mistakes or corruption.

    Non-fungible tokens, or NFTs, could also be helpful for tokenizing public-private investments. For example, cities could crowdfund affordable housing development or other public works. And NFTs could make it easy to record the ownership of these assets and distribute income or interest payments to their stakeholders.

    #2. Benefits Administration

    Municipal governments often have thousands or tens of thousands of employees, making pensions and benefits administration challenging. By using smart contracts, cities could automatically calculate pension accruals, significantly reducing administrative overhead. The open blockchain would also enable easy switching between sponsors.

    In addition, blockchain technology could help improve record management for distributed social benefits, eliminating problems like unemployment fraud. The technology would make it easy to accurately identify residents while storing information on an immutable ledger, making it impossible for criminals to forge requests.

    #3. Document Validation

    Governments are responsible for securing, verifying, and transferring numerous legal documents with their citizens. Blockchain technology makes it much easier to validate time-stamped electronic records and ensure the data is secure. These requests could span everything from validating drivers' licenses to university degrees.

    For instance, MIT's Blockcerts is an open standard for issuing academic certificates and other documents. The standard could help cities give licenses to contractors or other parties so that anyone can easily verify on a public blockchain. Again, it could significantly reduce administrative overhead and ensure transparency for everyone.

    Reno, Nevada is already moving its historic registry records system onto the blockchain, creating a public and verified record of historic property requests. City residents can also file for Certificates of Appropriateness to modify these properties through the web, making everything much more secure and accessible than legacy recordkeeping systems.

    #4 Tax Payments

    Governments are starting to accept tax payments in cryptocurrency, giving businesses and consumers more options. For instance, starting on September 1, 2022, the Colorado Department of Revenue began accepting cryptocurrency as an additional form of payment for all state taxpayers, including individual income, business income, and other taxes.

    In the future, crypto payments could help governments and taxpayers reduce their transaction costs. Standard merchant accounts charge upwards of 2.9% plus a 30 cent fee for each transaction. With crypto gas prices falling and new proof-of-stake algorithms coming into existence, crypto transactions could offer far lower costs in the future.

    How Cities Can Adopt Crypto

    Many local politicians have turned to cryptocurrency for the same reason short-term traders do – to make quick money. They see a new technological trend like cryptocurrencies and look for areas to apply it. However, it would be more effective to start with a problem and then look to see if cryptocurrencies might be an apt solution.

    It's better to take a measured approach:

    1. Identify a problem the city needs to solve, such as a costly administrative process, and determine if blockchain technology is the simplest and best solution.
    2. Develop a proof of concept before jumping head-first into a solution. And establish key performance indicators (KPIs) to determine if the PoC results in a desirable outcome.
    3. Scale successful proofs of concept and look at applying the same approach to horizontal problems. For instance, document validation technology could be helpful in many departments.

    Cities should keep in mind that they serve all types of individuals. Blockchain technologies, for example, must be equitable and accessible for everyone to build trust and ensure positive outcomes. Often, that means using them behind the scenes or introducing them as an optional feature at the onset of a project.

    Finally, cities should consider the legal implications of adding crypto capabilities to their operations. For instance, the SEC is increasingly pursuing cryptocurrencies that it believes act as securities. Meanwhile, the IRS taxes cryptocurrencies as property, meaning taxpayers owe capital gains tax even if they're using it for a purchase.

    The Bottom Line

    The crypto ecosystem includes more than just volatile cryptocurrencies. Blockchain technology, non-fungible tokens (NFTs), and even decentralized finance (DeFi) could play a significant role in tomorrow's local governments. Therefore, forward-thinking cities may want to continue prudently exploring potential use cases.

    Of course, the crypto ecosystem could also impact the federal government or international institutions. For instance, blockchain-based voting could enable anyone to send and track verified ballots securely. At the same time, central bank-issued stablecoins could simplify international payments and reduce friction in the banking system.

    If you trade cryptocurrencies, ZenLedger can help aggregate transactions across wallets and exchanges, compute your capital gain or loss, and populate the IRS forms you need. In addition, our platform helps track your entire portfolio while identifying ways to reduce your tax liabilities through tax loss harvesting.

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