Revolutionizing Municipal Bonds with Blockchain

by Juan F. Lam

Jul 21, 2021

#blockchain #technology #community

Over the last couple of years, blockchain has revolutionized the space of traditional finance with Decentralized Finance (DeFi) -- opening the door for individuals to displace the institutions we rely on today with cryptocurrencies, automated market makers, and decentralized exchanges. But as the community matures, focus is turning away from finance to new areas prime for innovation in a turbulent time: art, games, business, and governance. NFTs have taken over decentralized gaming, and have given artists a new way to take control over their creations. Meanwhile, DAOs are the hot new thing for people who’d rather work in a cooperative than a Big Tech company -- but how about governance?

The road to changing how governance is done is bound to be slow, but cities all around the world are starting to pick up on the benefits of blockchain and even introducing it as part of their municipal programs (see MiamiDAO for an example). One particular way that blockchain can help your local community directly stands out above others: evolving the municipal bond.

Municipal bonds are simple, but very powerful tools for community building. If the city wants to build a new school in the community, for example, but they don’t have enough money at-hand to do it, they might put out a municipal bond. What this means is that you can pitch in with an investment to get the school funded and built, and in return the municipality that put out the bond will pay you back your original investment + Y percent of interest earned over X period of time. Pretty sweet right?

This is a vital part of community-building. It helps the city take more immediate action on making improvements to the community’s infrastructure or amenities while also allowing community members to get directly involved and make some money for participating. Often, schools, transportation infrastructure, electrical infrastructure, sewage, hospitals, low-income housing, etc… are products of municipal bonds. Moreover, it empowers the citizen -- with municipal bonds, citizens can invest in, and enjoy the fruits of, their community.

There’s a catch, however, and it’s pretty big. How do you even buy one? Chances are that you, like me, have no clue. In fact, you might not even have heard about municipal bonds until now. Municipal bonds are the reason the Golden Gate Bridge exists, so how could such a powerful investing and community-building tool escape our awareness?

Traditionally, municipal bonds are pretty hard to access. The first factor is price: they’re usually priced at a minimum of $5,000 and bond denominations sometimes reach a price as high as $100,000. Moreover, the process for getting one out to the public is overtaxed by bureaucracy and middlemen. In other words -- they’re reserved for people in the know, and that’s not you and me.

Cities have tried to assuage this problem by making efforts to directly sell bonds to the public, and they’ve even sold bonds for smaller projects in lower denominations. These are called mini bonds (muni bonds sold in denominations of $1,000 or less). In fact, some cities have taken this down to denominations of $100 or less, which are called micro bonds. These are certainly more accessible, but they present problems for the city that issues them. Namely, they need a way to track who owns what bonds, and they need an easy way to distribute bond ownership as well as payments (municipal bonds are sometimes done with good ol’ fashioned pen and paper certificates) without getting overburdened with administrative costs.

Blockchain is a solution that can help solve precisely both of those problems. Using a blockchain with smart contracts and a stablecoin or municipal cryptocurrency can solve the problems of tracking and disbursing municipal bonds and municipal bond payments. The benefits are clear: the city saves money on administration, and the blockchain reduces the need for middlemen which saves more money, and reduces the opaqueness of the municipal bond issuance process. The idea isn’t novel -- City of Berkeley Councilmember Ben Bartlett proposed exactly this a few years ago with his “Berkeley Microbond Blockchain Initiative.”

While municipal bonds help build communities, micro bonds connect communities. The traditional structure of a municipal bond, like much of the financial and legal systems of the United States, are antiquated and not conducive to allowing the individual man to contribute to his community or even make investments. This results in lack of diversity in critical places of influence, and a sense of helplessness within a community. Community members might feel they are subject to the whims of community managers and have no input. Using blockchain to solve these issues by reducing friction at points of difficulty for involvement is impactful because it creates an environment where everyone in the community has equal opportunity to make a difference.

And ultimately, I believe that if we can improve the communities that we live in and the infrastructure that upholds them -- we might be on our way to solving some of the biggest issues in the USA.

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