State and local governments across the country are embracing cryptocurrencies and blockchain, the technology behind Bitcoin and other digital assets now referred to as “Web3.” Some leaders believe blockchain will improve equity and foster innovation, but without the right rules, oversight, and milestones to measure progress, these hopes could fall flat.

Because cryptocurrencies and blockchain are relatively new technologies, there are few roadmaps for how state and local governments can harness their potential. To provide policymakers with a blueprint for responsible adoption, we’re studying trends and common misconceptions around Web3. Our research so far suggests governments interested in crypto should develop foundational knowledge on two key aspects: understanding the use cases of blockchain technologies and their effects on equity.

How can local governments use blockchain technologies?

When talking about blockchain, many people think of popular cryptocurrencies, such as Bitcoin. These tokens are a new form of digital asset created with blockchain technology that people can invest in or use as payment. In 2021, Miami and New York worked with developers to issue locality-specific crypto tokens. And this year, Colorado’s governor announced the state would accept cryptocurrencies for tax payments and other transactions. But when governments talk about blockchain, they primarily mean the technology that supports these currencies.

At its core, blockchain technology offers transparent, verifiable transactions on a detailed ledger. Entries in a blockchain ledger are visible to anyone and can’t be changed, which allows all users access to a validated history of transactions. Potential local government blockchain uses include efficient record keeping, monitored data sharing including health care data,  establishing copyrights, and even voting.

We’ve found that at least 15 municipalities in the United States have ongoing blockchain pilots, study groups, or initiatives. Austin, Texas, piloted a record keeping app for people experiencing homelessness, and Chandler, Arizona, is using the technology for mobile voting.

Many states and counties are also experimenting in this space. Santa Cruz County in California is testing a digital wallet pilot to streamline services. The Colorado Council for the Advancement of Blockchain Technology Use took the lead in exploring how to expand the potential of the technology. The West Virginia Mobile Voting Pilot (PDF) offered uniformed and overseas citizens a new way to vote.

Currently, the array of governmental blockchain policies varies greatly in scope, goals, and consequences. Some local governments are experimenting to improve the delivery of public services, while others are promoting blockchain and crypto to attract new businesses. Policymakers should proceed cautiously and understand these nuances before adopting new initiatives.

What are blockchain’s effects on equity?

As with other assets and technologies, the blockchain space in the US remains unequal. Evidence shows people of color heavily invest in crypto, which can pose financial risks given the volatility and uncertainty of crypto tokens’ prices. More and better federal cryptocurrency regulations could protect consumers from these risks.

As cities promote these technologies, they should consider incorporating an equity lens from the beginning and bringing affected communities into all stages of policy design, implementation, and evaluation. A few governments have explored converting crypto coins into dollars to fund equity initiatives, but these initiatives shouldn’t solely depend on crypto funds because of their volatility.

When supporting crypto businesses, local governments should not provide false expectations to citizens. Governments must be clear about the utility of owning city coins as well as the risks involved.

Cities could think about how to introduce blockchain applications into processes that are currently inefficient and unequal. Blockchain technology has the potential to build secure, decentralized financial systems, which could eliminate some institutionalized racial biases, especially in financial services.

Blockchain initiatives need careful risk assessment, not a blind eye

Although some see government use of blockchain as a passing trend, enough jurisdictions are active in this space that we expect to see more state and local governments adopt effective trials. Many of these initiatives are still in their infancy, so community officials have time to carefully think through the potential applications and risks of blockchain.