Falling revenues is a concern for governments all over the world. This, along with the demand from the public for more governmental services has put great strain on public planners. There are two common solutions; raise taxes and cut spending, but most politicians who want to get reelected are unwilling to do both, which results in an unsustainable situation where the spending keeps growing but the revenue doesn’t keep up. Many politicians now see an opportunity in crypto to raise funds for projects directly from the population. For them, it is a perfect opportunity.
The love towards crypto, in general, is varied in nature. This is the same with politicians and cities too. For Dubai, the ability to migrate their administration to the blockchain means efficiency, both in terms of cost and reduced time to handle administrative tasks. For the Marshall Islands, the aspiration to have their own sovereign currency and undoing their dependence on the US through the dollar, was the motivation behind the move towards crypto. (For countries like Iran and Venezuela, it was to circumvent sanctions, but it is out of the scope of this piece.)
And even further, some city officials are exploring the possibility of issuing cryptos/tokens, in order to collect funds for projects. Usually, bonds are issued in such cases. For example, let us assume a city needs to build a new walkway. The problem with bonds in many cases is that minimum investment is too high, sometimes as high as $1000, plus they are sold as batches. This makes the cost of entry too high. Money raised with bonds has to be paid back with interest. But issuing an ICO for the project solves a lot of the problem, it is easier to issue and any small amount can be invested by even the most common of people.
While ICO for projects seems like a good idea, there are some fundamental challenges. First of all, the reason why the city couldn’t fund the project is because of the lack of revenue to cover the cost of the project. Issuing the bond just kicks the can down the road since the raised amount has to be returned with interest. ICOs could be drawn up in such a manner that the money need not be returned, yet have the project be completed for the sake of the community. While citizens who are directly or indirectly benefited from the project might be interested in buying such an ICO, unfortunately, the vast majority of government-issued bonds are not bought by concerned citizens. Rather they are bought by banks and other financial institutions. This raises the question if such ICOs can actually raise money for local governments.
But the idea of a city or a tiny country issuing a crypto/ICO is interesting, and could very well be possible. Unlike other grand ideas in crypto this one, due to its unique niche, has the potential of being implemented in the real world. The size of the population and small geographic expanse of cities and small countries means that infrastructure can be built on time and with little investment. Also, such geographies tend to have higher concentrations of people which can bring in higher Return On Investment(ROI) to such infrastructure. Also, such projects can be viewed as a controlled experiment for the rest of the world. Finally, such radical changes can be done in a speedy manner due to the smaller size of bureaucracy these places have.
Trust the politicians!
It’s easy for a politician to jump on to an idea for the sake of more spending as we have always seen. But there are always unintended consequences and a lot of unanswered questions. A city, if allowed to issue its own tokens to raise money and that token is allowed to be freely traded, it essentially means that each city can act as a central banker. Which will not go well with federal governments. Also, there is no limit to which such tokens can be issued, and typically in such a situation the supply increases exponentially reducing its value to zero.
Even if cities are allowed to issue ICOs and let’s assume that these tokens find buyers, it means that they have solved the funding problem and will be able to fund unlimited welfare programs. Sounds really good, right? Well actually, it’s not a good thing. See, there is a reason money and resources are limited. This is because excess liquidity always creates bad consequences, like the ghost malls/tons in China, or the NPA loan problem in India. Limited funding makes decision-makers think deeply and choose on which spending brings in the greatest return. Excess liquidity makes reckless spending possible which could, in the long run, hurt everyone.
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