(photo via the Governor's office)

One of the most powerful financial tools in the United States federal government’s financial toolbox is its relationship to the Federal Reserve Bank, which can create money “out of thin air” and then use it to buy the federal government’s debt: treasury bills, bonds, and notes. While the primary purpose of these “open market operations” is to manage U.S. money supply, a convenient side effect is that that the Federal Reserve can, in the words of the Economist magazine, “buy up trillions of government debt, pushing down the cost of borrowing even as governments run up historic peacetime deficits.“

This monetary flexibility allows the federal government to spend more than it earns, and go into massive debt (over $20 trillion!), and still retain the confidence of investors, governments, and its citizens. Per capita, the federal government has over $60,000 of debt per citizen, the second highest debt per capita in the world, for anyone interested in keeping score.

U.S. state and local governments still carry tremendous debt, but since they don’t have their own central banks to bail them out, they have to maintain some semblance of a balanced budget. In practical terms, this means states and city governments can go into debt to pay for capital expenses like bridges and infrastructure, but not operational expenses like social and basic service provision.

In the words of the National Conference of State Legislatures: “unlike the federal government, states are not able to issue debt routinely. Issues of general obligation debt require at least the approval of the legislature and in many states, voter approval. The issue of revenue bonds requires legislation to create an agency to issue bonds and the creation of a revenue stream to repay the debt.”

Blockchain technology can change this dynamic.

First, by enabling sub-national governments to issues bonds faster, better, cheaper, and more regularly than ever before, and then by allowing these entities to create their own local currencies and “central banks” to manage them.

Ultimately, this technology will enables cities, states, and networks thereof to develop similar capabilities as national central banks, launching a whole new era of municipal finance and create new sources of local wealth.

You might have heard of Bitcoin -- a speculative “cryptocurrency” that emerged mysteriously as a quirky open source software project in 2009. At the time of its launch, the value of a bitcoin was, basically, one cent. Now its value hovers around $10,000.

That massive increase in value has prompted lots of coverage of Bitcoin as a phenomenon -- but only recently has media attention shifted to the unique type of database that was first introduced to the world via bitcoin -- and that database technology is called blockchain.

Lots of people explain blockchain well, so here, just the bottomline: blockchain database technologies are extremely good at producing “digital cash,” executing financial transactions and digitizing complex multiparty financial contracts like stocks and bonds.

Five years ago, blockchain technology was only familiar to cypher punks, open source aficionados, libertarians and fin-tech geeks. Today, the technology is being used by big banks to speed up their SWIFT international fund transfer systems, by countries to create new national digital currency systems, and by entrepreneurs and online communities to create their own currency systems outside the purview of the nation-state.

The first hints at how subnational governments within the U.S. could leverage this technology are coming into focus.

Berkeley, California, in partnership with municipal crowdfunding platform Neighborly and the Berkeley Blockchain Lab, is exploring how to issue municipal bonds on the blockchain, and then to pay interest on those bonds with tokens that can be used at local businesses.

There are many potential benefits to this approach. Cities can save money on the costs of issuing bonds, they can offer smaller bonds that were, in the past, prohibitively expensive to issue, and they can use the blockchain’s native ability to document transaction histories to create radically transparent bond offerings -- allowing bond holders to see a precise log of how the bond they purchased resulted in a piece of city infrastructure. By offering interest payments in tokens, the city can establish a technically sophisticated local currency system that can keep incentivizing people to spend their money locally, creating a local multiplier effect.

Unlike past “local money” systems such as Berkeley Bucks, Ithaca Hours, or the much more modern Local Exchange Trading Systems (LETS) emerging in towns around the United Kingdom, blockchain-based token systems can actually function within the framework for modern finance. Token prices can float in international markets, they can be sent anywhere in the world, saved, loaned, invested, used in contracts, and more. They truly are an alternative currency, and as such, municipal token systems could be managed by a new type of municipal central bank that, like the Federal Reserve, could create tokens “out of thin air” and use them to buy municipal debt -- and back the entire system with municipal assets like real estate, tax rebates, tolls, and more.

The political implications of increased municipal financial autonomy powered by blockchain-based technology could be extremely significant, particularly in the United States, where tremendous anxiety is generated by federally-funded, locally-implemented programs like public housing, abortion clinics, and immigration enforcement policies.

If municipalities had the type of monetary powers that are currently exclusively controlled by the federal government, then it’s very possible more resources will be available for programs popular at local levels but not national ones.

Berkeley City Council Member Ben Bartlett explains in Forbes:

“We decide to explore new forms of finance in response to the cuts from DC and corporate tax cuts that took away our ability to fund affordable housing. There are more than one-thousand homeless people living in Berkeley, which is projected to increase by a factor of five in the coming years. Many cities, just like Berkeley, are under a funding assault – we have to think outside of the box in order to solve this problem.“

As the Trump Administration advances federal programs and policies that push cities away, he is also pushing them towards new financial models and technologies that have the potential to transform the relationship between cities, states and nations.

Buckle up -- it’s likely to be a bumpy ride.

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Devin Balkind is a technologist and nonprofit executive who works on civic technology projects in New York City through Sarapis Foundation and on humanitarian projects around the world through Sahana Software Foundation. He was a candidate for New York City Public Advocate in 2017. On Twitter @DevinBalkind.