The City of Berkeley has just closed a Request for Proposal (RFP) which seeks to bring together the Ethereum token revolution and the traditional world of municipal finance. The result should revolutionize both worlds.
The $3.7 trillion municipal bond market is currently accessed institutionally. The market has been built by and for institutions. While individual investors can theoretically invest directly, it is not encouraged by the structure of the market. Liquid trades typically involve blocks of at least $250,000 in face value and most of the bonds are allocated at issuance. There is nothing wrong with buying through funds as they will generally offer a higher level of diversification than a typical individual investor can achieve. But, for investors looking to maximize impact by investing some of their portfolio locally, the funds are a blunt instrument.
Before the low cost distribution, holding and transfer model of Bitcoin, Ethereum and others, there was no cost effective alternative to the traditional market structures. This changed dramatically, and controversially, with the Initial Coin Offering (ICO) boom. With the first wave of Cryptokitty excitement behind us, the time is right to adapt modern securities regulation and cryptocurrency methods to create tokens that give retail investors access to the vehicle which funds the daily operation of our local towns, cities, counties and states as well as an estimated three quarters of all public infrastructure investment.
The ability to use the bonding authority of a well respected borrower like the City of Berkeley to create a digital asset is a welcome addition to the current methods of creating stable coins. Currently, stable coins are created in three ways (holding dollars in banks, algorithmic “Central Banking” and crypto hedging). Each have strengths but also significant weaknesses in “Black Swan” periods that seem to happen a lot more often than statistics would predict. The Midwest is not the only place to feel 100 year and 500 year storms on a 5–10 yearly basis.
A municipal security token would be a direct obligation of the City of Berkeley. For residents of Berkeley, the ability to assess that risk that the City will not be able to levy taxes and meet that obligation will be reasonably easy to judge. For the rest of us, we will need to depend on credit ratings and the City’s Continuous Disclosures. Of course, if you think the home of UC Berkeley is going under, you probably want to check for Cal fans in your immediate vicinity before making too many disparaging comments.
So, what will this all mean for the various actors on the stage?
For the City of Berkeley, it means that they will be able to leverage their short term financing operations to meet obligations, match accounts payable with accounts receivable and save money along the way. Obligations are created at payment rather than in batches of bond issues. Payment can come quickly in tax payments, in a year or so through bond conversion, or perhaps much later as the securities take on currency properties.
For the vendors who sell goods and services to the City, it means that their Berkeley business will be effectively funded at Berkeley’s low short term tax free interest rate. That will mean more for small and medium sized providers than for national or multinational suppliers, but politically, encouraging small and medium local businesses to bid more keenly for contracts is probably not a bad thing.
For non-profits who rely on the City for funding, the program allows for an unprecedented level of transparency. Grant funds can be tracked as they are spent and redeemed through the local economy. The data created will improve the non-profit programs as new insights are gleaned.
For tax, fine and fee payers, the existence of these securities will offer opportunities for small discounts on payments owed to the city. The discounts won’t be huge, but who doesn’t want a discount on taxes, fees and fines that you have to pay anyway.
For the traditional market, the convertibility of the tokens into one year bonds will mean a steady and reliable stream of high quality assets to support tax free money market fund offerings.
For the underbanked individuals and businesses who rely heavily on cash transactions, the ability to transact business in a currency with extremely low transaction fees will open up new opportunities with reduced theft and loss risk than cash.
And finally, a stable coin backed by the taxing power of a sovereign government in US dollars will shift the stable coin field from its current early adopter phase. With stable coins that are scalable and not subject to the fractional banking system, the whims of algorithms or the skill of traders, the crypto world can start to deliver on the revolution that was initiated by Satoshi Nakamoto’s 2008 White Paper.