Cities and local governments nationwide are starting to test blockchain’s capacity and are using cryptocurrencies to improve flexibility, efficiency, transparency, and service delivery and revenue sources. For example, Austin, Texas, piloted a record-keeping app for people experiencing homelessness, Chandler, Arizona, is testing blockchain technology for mobile voting, and Fort Worth Texas is mining bitcoin for the city.
These initiatives present opportunities for local governments to tackle a variety of long-standing barriers. But they also present unique risks if not accompanied by adequate regulatory oversight. Blockchain technology is new, and its scalability and security in local applications are still being investigated. Cryptocurrencies are volatile, with extreme price fluctuations; are not universally accepted; and have been associated with technical issues that make them more susceptible to fraud. They are also largely unregulated, and their risks aren’t shared equally.
In a new report, we analyzed how local policymakers and stakeholders in cities that have piloted and passed blockchain and crypto initiatives use and regulate these technologies. Here are three lessons we identified in our research, which can inform local officials considering similar initiatives:
- Blockchain and crypto policies vary widely from place to place
We found local blockchain and crypto initiatives take numerous forms and seek many different goals, including using blockchain technology to store records of people experiencing homelessness and mayors taking their salary in crypto.
The technology behind cryptocurrencies relies on computers to verifiably record information with transparency, and some initiatives focus on this technology. The technology is especially promising for record-keeping applications, such as recording deeds and all types of licenses, including business licenses and building permits. Though these pilots show some potential, there are concerns around the security and scalability of this use.
Initiatives we classify as having a financial focus are those involving the use or investment of cryptocurrencies, which are digital currencies that rely on distributed ledger technology and are not controlled by any government or authority. For example, some states and localities are allowing citizens to pay taxes or public fees with crypto. These projects also include cities that accepted proceeds from City Coin, a token launched by a private company for individual cities, including Miami, which accepted $7.1 million from Miami Coin. A potential risk with crypto initiatives is that by adopting them politicians may be signaling support for the industry without acknowledging the many underlying risks.
Local Blockchain and Crypto Initiatives Have Technological or Financial Focuses
Source: Authors' evaluation.
The variety of applications and goals of local blockchain and crypto highlights the importance for policymakers and the public alike to understand and define objectives and analyze potential consequences of the implementation of blockchain and crypto projects.
- Ongoing local pilots offer valuable insights about how to draft, evaluate, and implement these projects
We found local governments face common challenges when implementing these initiatives, even when there is a high variety of projects currently being tested. We heard the regulatory landscape under which local governments operate is still too vague, and there’s no clear guidance regarding how to operate, protect citizens, or scale up projects. Creating more exploratory committees at all levels of government and comparing findings could be beneficial for all parties alike at this stage of development and as more regulation is passed.
Overall, most initiatives are still in their infancy, and it will likely take time until the potential applications of blockchain technology are scalable and can be adopted by many other local governments. In our conversations, some policymakers expressed concerns about the costs of these new technologies and highlighted how alternative technologies can deliver similar outcomes for a lower cost. Therefore, it’s crucial for local policymakers considering using blockchain technologies to learn from existing pilots’ results before implementing new initiatives. For example, several pilots were not scaled up after their initial phase, but there is little explanation answering why.
There is also a lot of confusion from the public and local leaders about how these initiatives relate and differ from each other. The general skepticism around crypto has added to governments’ initial reluctance to adopt certain initiatives and has made the implementation of pilots more complicated. Policymakers should consider disseminating more information to constituents explaining how pilots are succeeding and failing, and how they compare with previous approaches.
- It’s crucial to center equity from the start
As with any new project, cities and local governments should consider the equity implications of new technologies so they can balance innovation with consumer protection. In our conversations, very few local leaders talked about this. Yet, there’s evidence suggesting that people of color invest in crypto more often than white people. Before vouching for crypto investments, local leaders must ensure all communities understand the many risks.
We also heard that policies involving crypto or blockchain are typically devised and developed by private companies, rather than in collaboration with citizens. To make the process inclusive and deliver optimal outcomes, local governments should consider establishing competitive processes for selecting developers. Involving relevant communities in the design phase to understand their needs and set desired equity outcomes is also crucial. For example, by determining which communities may be harmed by the environmental effects of mining or whether implementing technological changes may widen already existing digital divides.
Crypto and blockchain technologies may have significant potential for local governments but are still in the pilot phases, and their results have yet to materialize. As localities continue testing, clearly understanding the state and national regulatory landscape will be critical. This includes working with state lawmakers to devise a legal framework that protects consumers—especially communities of color—while setting an environment that pushes innovation, better services, and economic growth. Continuing to study the outcomes of these projects will be crucial to ensuring the technology realizes its potential for communities while mitigating the harmful risks.