A friendly competition is emerging between Miami Mayor Francis Suarez and New York Mayor-Elect Eric Adams to position their cities as hubs for the cryptocurrency industry and Web 3. Both mayors have agreed to transfer their personal paychecks into Bitcoin, and Mayor-Elect Adams has announced his intention for New York City to partner with CityCoins as the second city—after Miami, of course—to issue a local NYCCoin token.
Beyond a handful of mayoral Tweets, no official statements or analysis on these developments are available. CityCoins are a clever way for a city to increase revenues and offer a unique opportunity to implement progressive social policies, but they also present a potentially problematic reliance on an outside private party and an untested asset class. Cities should be cautiously optimistic about CityCoins.
As outlined in our explainer, CityCoins are cryptocurrencies built on top of two blockchain technologies: Bitcoin and Stacks. Under the protocol, 30% is reserved in a digital wallet for the city, essentially a voluntary contribution from the miners. These Stacks will generate Bitcoin, which will presumably be converted to US dollars once the city accesses the wallet.
Neither Miami nor New York is directly involved in the creation or management of their respective CityCoins, nor do they currently hold possession of their assigned digital wallets. It appears that for now, the cities will allow CityCoins, a for-profit Delaware-registered corporation, to operate largely independently, reserving the contribution for the cities to take possession of when the concept has been demonstrated and the logistics and legalities ironed out.
Why would miners voluntarily contribute 30% of their earnings to a digital wallet ascribed to a city that has no jurisdiction over their mining activities? CityCoins are intended not only as tokens but also nexuses for people who care about a particular city—whether they live there, own property there, or simply share an affinity for it. CityCoins will increase in value if they become commercially useful—that is, if more and more people use the currency and build smart contracts and decentralized apps on the platform. CityCoin users, therefore, are betting that this technology will become part of everyday urban life, and potentially reshape governance itself. CityCoins already has some ideas of how its platform could be used and is also creating a 3-month accelerator program and investing $150,000 in teams building other apps and functions.
A Sovereign Crypto Fund?
If managed appropriately, CityCoins could power innovative social policies. Miami has an opportunity to implement a universal basic income-type program, pay for social services, or implement other progressive policies. Revenue from MiamiCoin could render traditional taxes unnecessary, so long as the city can ensure it can rely on those revenues.
Mayor Suarez has already announced an intention to distribute MiamiCoin dividends to digital wallets assigned to Miami residents, making Miami a kind of “oil state” that distributes windfall profits to its residents, much like Norway or Saudi Arabia.
Maricá, a small town an hour east of Rio de Janeiro, is perhaps a more apt comparison: the municipality has used a local currency to turn an oil commodity boom into progressive social and economic policies, including a universal basic income program. The mumbuca is a local currency: all social benefits and city salaries in Maricá are paid in mumbucas, which are backed one-to-one to the Brazilian reais held in reserve at a community bank funded by the city budget. Every store in town accepts the mumbuca. They pay a two percent fee for the privilege—these fees fund no-interest loans for local entrepreneurs and homeowners. Other initiatives include savings accounts for high school students, free public transportation, massive infrastructure investments, and a wealth fund.
The promise of CityCoins is that smart contracts and decentralized apps on the CityCoins blockchain will grow in popularity and usefulness. More innovation, experimentation, and public-private cooperation is needed to fully realize the potential of CityCoins to improve the lives of city residents.
CityCoins Present Unique Risks
However, CityCoins also present unique risks that have not yet been evaluated. Neither Miami nor New York City has released an official statement about the legalities or scope of their involvement, or analysis of the risks.
These include the technical risk that changes to CityCoins – either the protocol or the legal entity that issues them – could impact outcomes for the city and users. Unlike decentralized cryptocurrencies like Bitcoin, the CityCoins protocol is administered by a for-profit company that could change the 30% proportion reserved for the city or even its beneficiary at any time.
In terms of legal risks, the US Constitution explicitly prohibits states from issuing legal tender, which cities may run afoul of if they officially recognize and accept proceeds in CityCoins. Following the recent US infrastructure bill, cities that appropriate and trade cryptocurrencies may need to register as brokers, resulting in a tax reporting obligation each time they receive mining proceeds and convert them to dollars for real world use. Despite cryptocurrency proponents’ promises of frictionless peer-to-peer transactions, cities should beware that the legal, administrative, and financial costs of CityCoin may not exceed their benefits.
Finally, CityCoins are susceptible to many of the same social and financial risks as other cryptocurrencies. As users and speculators decide what this emerging cryptocurrency is worth and how to use it, volatility is a risk—earlier this year, the value of Bitcoin dropped by 30% in a single day before recovering slightly. This price instability compromises CityCoins’ store of value function necessary for its use as a currency. They are also subject to deflationary risks that compromise cryptocurrencies’ use in real world applications: if holders expect the value of their CityCoins to increase exponentially, they are unlikely to spend the tokens on the sundry necessities of quotidian life. And as the proof-of-transfer mining mechanism is tilted heavily towards early adopters, new entrants may not be incentivized to mine and hold CityCoins in 10, 20, or 30 years.
City governments should proceed cautiously but work with CityCoins to deploy local coins while protecting against their risks and planning appropriate and transparent use of proceeds.
This may include establishing new non-profits to receive and disburse proceeds. These administering organizations would partner closely with public sector organizations, akin to “Friends of” organizations that care for public parks and historical sites, or Parent-Teacher Associations that work with public schools to disburse benefits.
Cities should ensure CityCoins proceeds are spent in an accountable and transparent manner. Cities could use the transparency mechanisms of blockchain-based cryptocurrencies to pilot new accountability and transparency structures, providing data on all spending in an easily searchable and downloadable format. Ideally, when determining how to spend this revenue, cities should move beyond transparency and leverage innovative, participatory budgeting models that attempt to better express direct democracy – including the voices of those citizens who choose not to participate. Finally, due to the volatility and technical risks, cities should be sure not to rely on proceeds in budgeting and should clearly communicate these risks to residents.
Despite their promise, city coins are currently most appropriate for large cities with the administrative capacity and expertise to supervise deployment, tailoring the coin, its technical infrastructure and plans for the proceeds to the local context. To do so requires close collaboration between the city’s CTO, data, and finance offices, external research organizations to develop best practices, as well as local non-profits that are well-positioned to engage the community and disseminate both individual wallets and eventual proceeds.
While CityCoins warrant much closer attention, the potential to leverage technological innovations and community efforts to increase the quality of life in our cities is an exciting opportunity.
Miami and New York officials therefore have a delicate balance to strike: harnessing CityCoin users’ civic-mindedness and the local economic activity they may usher in, while reserving the city’s imprimatur in light of the technical, economic, and legal risks—still unresolved—that official city sanction could exacerbate.
Local governments are often laboratories of innovation, and the Miami and New York City Coins represent a decisive step forward in the public digital currency space, even as national governments and central banks are undecided in this area. They represent an unparalleled opportunity to pilot new digital public services, but cities will need to provide social, legal, and technical structure to mitigates risks.