Crypto Cities Are On The Rise, Along With Questions For Policymakers

Crypto Cities Are On The Rise, Along With Questions For Policymakers

As cities like Austin, Miami, and New York City have launched – or are planning to launch – cryptocurrencies, the interest and activity in this space has rapidly advanced. Such high profile examples certainly generate quite a bit of buzz surrounding these cryptoassets, but the pace at which these cryptoassets have developed can also lead to some confusion.

Different cities and examples are going to operate uniquely, but there are a few core considerations that investors, regulators, and users of these cryptoassets should keep in mind. Especially given the dramatic increase in institutional interest and investment in an array of cryptoassets during the past year or so, it would be a simple matter to generalize and overlook the factors that differentiate these projects from one another.

No matter what specific example is referenced, however, it is clear that the interest and investment that cryptoassets continue to attract represents a fundamental change in how this sector is viewed by policymakers and regulators alike. Blockchain and crypto have now – inarguably – moved squarely into the mainstream. Leveraging these innovative solutions to improve public finances and local governments is an important step forward to wider adoption and, hopefully, regulatory clarity.

Put another way, if policymakers and governments are active users of crypto that should lead to more flexible frameworks to help encourage further development. Let’s take a look at some key considerations that should be taken into account

Crypto, not bitcoin. First things first it is worth pointing out that the CityCoin (the community of programmers supporting the examples highlighted above) initiatives that have launched do not mean that these jurisdictions are using bitcoin or other cryptocurrencies for transactional or payroll purposes. Rather, these cryptoassets run on the Stacks blockchain and are initially denominated in the STX token, a blockchain that is bitcoin adjacent, but separate from the original bitcoin blockchain.

An oversimplification, but an important point; this trend illustrates the growing diversification of the cryptoasset space. The specifics as to how these tokens can be reinvested or converted into different crypto or USD will vary from project to project, but – to date – has involved a collaboration between the municipality and a third party.

Legal ambiguity remains. Even with the rapid investment and interest that has emerged around the CityCoins idea it is important to note that legal uncertainty remains. For example, as the rewards are accumulated and held, but prior to being returned to the city in question, the city can choose to reinvest these rewards into bitcoin or other crypto (which is what Miami is planning to do). Every transaction, however, comes with the full array of crypto-related financial, legal, and tax questions that arise whenever crypto is involved.

It is important to remember that even if the cryptoasset in question has been developed, issued, and is governed by a governmental entity it is treated the same as bitcoin from a tax and legal perspective. Additional questions, especially as payouts from the reserves generated on these projects begin to happen, will certainly have implications for both the individuals and institutions involved.

Borderless. An interesting aspect surrounding the continued rise of CityCoin actually has two distinct components, both which must be understood prior to any significant investment. First, there is no hard-and-fast rule, as per the Stack blockchain itself, that necessitates any miners reside within the city limits in question. Granted the city itself can institute such restrictions, but as of this writing CityCoin is an open protocol that allows anyone to become a member.

On the other hand, the recently announced and launched NYCCoin is effectively off limits to residents of the city because there is no legal way for residents to purchase STX tokens.

This is directly linked to the BitLicense regulation; in order for residents to legally purchase STX, the tokens would have to be treaded on an exchange that holds this license. This once again highlights the fast-moving nature of cryptoasset regulation and adoption, and further highlights the need for proactive and commonsense rule-making in the marketplace.

CityCoin has rapidly moved on to the front burner for the cryptoasset space, and is another clear sign of how well integrated blockchain and cryptoassets are becoming in the mainstream financial and governmental conversations. That said, and setting aside the excitement and interest that recent announcements have created, it is critical to fully understand just what exactly products and services of this nature actually mean for the sector at large. It is extremely early for further discussions of this topic, but as always, collaborating between policy makers and the private sector is necessary to develop appropriate solutions.

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