Crypto fiscal federalism

By Mikayla Novak

In fiscal federalism as in any other area of policy there is commonly a difference between intention and results. The management of intergovernmental grant programs is no exception to this rule.

Taking the case of Australia, there are decades of official reports and studies outlining problems with the management of grants from the central (federal) government to lower-level state governments (and, in some cases, from federal “through” the states to local council authorities). The maladministration of grant programs over a long period, which these days total well over $100 billion per annum, can cumulate into sizeable economic and social costs.

Consider the management of tied intergovernmental grants, with mandated conditions imposed by the grantor federal government onto the grantee states. Selective official reports, and other investigations, about tied grants management over the years had found:

• Incomplete or inaccurate data collection, and with some data collected without subsequent (or sufficient) analysis.

• Inadequate consultation over the dissemination of information relevant to determining the impacts of tied grant programs.

• Conditions varying significantly across tied grant programs, with different rules and processes of administration adding to the complexity of payment administration and public reporting.

Similar issues appear to be arising with regard to present-day National Partnership Payment programs, as indicated recently by the Australian National Audit Office.

Research Data Management | janneke staaks

Fiscal federalism as a technology problem

The fundamental institutional cryptoeconomics insight is that the problems of grants management are quintessentially technology problems that may be resolvable under conditions of innovation.

In our political system, we maintain elaborate storehouses of data and information about activities and relationships, which are expensive to keep. Within the fiscal federalism space grantors and grantees maintain information about tied grants funding flows, as well as economic, financial, social and other data necessary to check that grantees are meeting funding conditions.

Much of the information transferral taking place is oftentimes conducted through databases lacking interoperability, and to a lesser extent different kinds of paperwork. The governments also tend to duplicate cross-monitoring, labour-intensive inspectorate functions. But why can’t the intergovernmental grant system become more effective, and more fool proof, by applying the innovation of distributed ledger technology?

It is at this juncture that crypto fiscal federalism enters the scene. The generic working features of crypto fiscal federalism are posited to come in two parts.

First, the grantor issues and transfers a native (coloured) crypto-token (say, “GrantCoin”) to grantees within (initially) a permissioned blockchain. The colouration of GrantCoin varies depending upon the purpose of the transfer payment. In addition, GrantCoin is a stablecoin whose value is pegged to the conventional fiat currency (say, the Australian dollar). The grantor may enjoy the privilege of validating new blocks of intergovernmentally-generated data using a proof-of-stake consensus mechanism.

Second, crypto fiscal federalism consists of smart contracts agreed upon by grantor and grantee. To be more precise, the conditional use of GrantCoin is to accord with the preferences of the grantor (reflected in the colouration of given GrantCoins) which is, thus, enumerated in the terms of the conditions of the smart contracts. Such contracts may specify that GrantCoin disbursements to grantees are conditional upon the grantees having achieved the economic and social impacts, as mutually agreed in an ex-ante sense.

Cryptodemocracy + crypto fiscal federalism = epistemic crypto fiscal federalism

The outline sketched above is not the only possibility for crypto fiscal federalism.

A more radical reform model centres upon a permissionless blockchain, allowing for the open-market purchase and sale of GrantCoin. Citizen-voters may allocate GrantCoins to their preferred intergovernmental grant opportunity, and effectively withhold GrantCoins from grants not closely aligning with their preferences.

This process may be interpreted as the intersection of crypto fiscal federalism with a much broader “cryptodemocracy” project, the latter aiming to discover citizen-voter preferences through new (technological) structures of democratic decision making.

The “revealed preferences” rendered by citizen-voters on the permissionless grant-funding blockchain would furnish policymakers lessons regarding the perceived desirability and feasibility of grant arrangements within the federal system. Furthermore, public demands over the amount, and kinds, of information provided through the blockchain could unleash competitive pressures amongst governments surrounding transparency of public budgeting.

Crypto fiscal federalism aligns with another broad-scale agenda to radically enhance public transparency, known in the U.S. and elsewhere as the “online public transparency” agenda. According to the proponents of this agenda, citizens should be able to track reasonably detailed information about government spending, procurement and revenue collections, preferably in real time. Such initiatives are touted to improve public comprehension of governmental activities, help eliminate fiscal waste, and assist in the prevention of corruption and fraud.

Injured Piggy Bank | Ken Teegardin

Blockchain makes it apparent that the major problem with online public transparency, thus far, is the centralised management of such tools, which could be manipulated to withhold sensitive information from the public. That government itself decides when the public should have online fiscal records unsurprisingly almost perfectly explains the practical lack of momentum for the online public transparency agenda. Crypto fiscal federalism could well be the key that opens the books of public accounts to all, using blockchain’s in-built transparency protocols to leverage accountabilities off the growth of data.

Technology and the future of federalism

The potential advantages of crypto fiscal federalism appear manifold.

The blockchain may be used to facilitate much-improved intergovernmental fiscal coordination, cutting the administrative, coordination and governance costs associated with managing multiple grant programs.

The introduction of a GrantCoin and related smart contract infrastructure could assist in creating better alignment between the preferences, interests and motives of grantor and grantee governments.

Crypto fiscal federalism should also enhance public sector efficiency, by suppressing opportunism costs arising from the use of (inconsistent and tamper-prone) paper and spreadsheet grant flow records.

Even more ambitiously, adapting blockchain technology into arguably one of the most centralised and hierarchalist aspects of governmental operations — fiscal federalism — just might give the citizenry that rare opportunity to rethink the potential of how we organise ourselves politically, making government more accountable to the people.

Mikayla Novak is from the RMIT Blockchain Innovation Hub, the world’s first social science research centre into the economics, politics, sociology, and law of blockchain technology.