Back-to-back losses totaling more than $1 trillion in the cryptocurrency market have bolstered scrutiny around the efforts of Miami, New York, Austin and other cities to incorporate the digital currency into municipal operations.
“People tend to ask more questions when things aren’t making money,” said Michael Bloomberg, a visiting researcher in the Urban Tech Hub at Cornell Tech. “That’s true both of city governments and also … of the press. … Once you put that scrutiny on there, we’re likely to see more controversy over more [cryptocurrency] projects.” Bloomberg (not to be confused with the billionaire businessman) is the former chief of staff to the mayor of Holyoke, Massachusetts.
As the latest crash deflated the value of the cryptocurrencies MiamiCoin and NewYorkCityCoin to record-low levels, the governments of those cities have not suffered financial losses, as the municipalities do not own or invest in the currency and do not accept it as payment.
But city officials have heavily promoted their namesake currencies in an effort to encourage private and corporate investors to buy or mine it. Mining is the process by which networks of specialized computers generate and release new Bitcoin and verify new transactions.
Demand from investors causes the coins’ value to rise or fall. The cities’ share of that investment—30%—is stored in a digital wallet whose value rises and falls as demand fluctuates.
The MiamiCoin City Wallet, valued at $24 million before a major industry crash in January and at $15 million before the May crash, has fallen to less than $7 million. While that hit did not affect city coffers, residents and others who purchased or mined MiamiCoin lost much of their investment.
“Any resident who has bought MiamiCoin, there’s a 99% chance that they have suffered,” Bloomberg said. He described the reliability of cryptocurrency as a revenue source this way: “It’s like taxing a resident $1,000, keeping $300 for the city and lighting $700 on fire.”
Tonantzin Carmona, a fellow at Brookings Metro, agreed. “At the individual level … this is the big concern [that] a lot of [elected officials] have been promoting cryptocurrency as wealth building,” Carmona said. “But there are a lot of drawbacks. It’s notoriously volatile. … Cryptocurrency can be slow and expensive to use, and it’s not accepted in all locations and can be used only in certain spaces.”
Still, Miami withdrew $5.2 million from its digital wallet in February in what Mayor Francis Suarez called a “historic moment.” Suarez said the money would help renters offset the cost of rent hikes.
Ambitious Plans in Doubt
But the quick decline of the overall cryptocurrency market since January has left some cities’ ambitious plans for potential profits from the speculative funding source in doubt.
Suarez has pitched MiamiCoin as a way for the city to eventually stop collecting taxes from residents. Jackson, Tennessee officials are planning to offer city employees a way to convert their paychecks to cryptocurrencies. Others have considered the potential for their cities to accept cryptocurrency as payment for city services, but none, including Miami, has started accepting digital currency, a move that would require a fairly massive overhaul of city, state and federal financial regulations.
“There is no value for residents at the moment,” Carmona said of city-endorsed cryptocoins. “It’s not like you can use the MiamiCoin to do anything.”
Bloomberg agreed, saying mayors who encourage investment in their cybercoins are “actively encouraging people to participate in a scheme.”
Carmona said she supports regulations that make it difficult for cities to accept digital currency as payments in lieu of cash, noting that the addition of a currency whose value is unpredictable to a government’s bank balance is risky.
She said the officials’ optimism for a future in which cryptocurrency negates the need for taxes or is accepted in city transactions is “a marketing gimmick” and said city officials are hyping their namesake coins to encourage residents to “engage in speculation.”
City officials in Philadelphia last month abandoned talks about a possible PhillyCoin venture. In February, even Suarez admitted to the Miami Herald, “Innovation doesn’t always work.”
Even Patrick Stanley of CityCoins, the organization behind MiamiCoin and other city-endorsed cybercurrency efforts, has acknowledged that the cryptocurrency industry is plagued by scams and hype. But he said it will bounce back.
“One type of person thinks that everything in crypto is a scam,” Stanley told Quartz. “Another type of person thinks 99% of crypto is a scam but 1% is important. I’m in that latter group.”
Suarez or other Miami officials did not respond to Route Fifty’s request for comment.
Carmona and Bloomberg agreed that city officials who are enthusiastic about cryptocurrency seem to be lured by its revenue-generating potential but spent too little time considering its risks.
“You don’t create something, pump it, tell people to buy it and then try to find a use for it,” Bloomberg said. “When you’re solving problems at the city level or with technology, you start with the problem and then build solutions around it.”
Carmona predicted that the downward spiral of the cryptocurrency industry “looks like it won’t be just a short blip. It might last a while.”
And she said it’s possible that more city officials will take the volatile past few months as a sign that it’s time to “move on to the next cutting-edge tech that’s in the headlines.”
In the meantime, she said, “I hope it creates a sense of urgency with federal regulators before we get into a place where it really is a systemic calamity.”