Cryptobonds!
A Trump tweet inspired blockchain-based mini muni bonds. This sentence isn't something I ever thought I'd find myself writing, but here we are.
Apparently, when fascy provocateur Milo Yiannopoulous was deplatformed at University of California-Berkeley in 2017, Trump threatened the city's federal funding in one his infamous tweets. The city government got to thinking: um, maybe we should be looking at alternative sources of revenue.
A local politician, city council member Ben Bartlett, is big into crypto and made a proposal: what if the city sells minibonds to our own residents using the blockchain? The city said yeah, okay. So they're actually doing it! Municipal bonds are a key source of revenue for school districts, and everyone's talking about blockchain this and crytpo that, so this Berkeley thing could portend a new frontier in school finance. Let's take this idea apart piece by piece.
This is your minibond
What's a minibond? Remember that 'buying a bond' means lending a city money (it can be other governments or firms, but let's just stick with city for this example). The money you lend to the city comes with a price that the city has to pay: interest. So buying a bond, means lending the city money. The city promises to pay you back with interest later. The city has an obligation to do this. The municipality is bonded to you.
It's mostly really rich people that buy municipal bonds right now because the minimum amount you have to put in is so high. You need to pony up at least $5,000 to get in on the deal and lend the city money. It's worth doing because the interest payments you make when you lend a city money are tax-free and pretty reliable, which is great business for big banks and the ruling class.
The mini-bond, or microbond, is when a city says "you know what, we're gonna get rid of that $5,000 minimum. You can buy our bonds for $100 if you want to!" The basic idea is to let people get in on bond deals in very small amounts. Right now, the minimum amount you need to get in on a bond deal is $5,000. That's a lot of money for basically anyone. This means only super rich people can invest in municipal bonds, one of the most important ways local governments get financing for infrastructure projects they want to do. This includes things like playgrounds, school buildings, bridges, etc. Public infrastructure. With a $100 minimum, you or me could buy a Philly bond (or wherever you are) and then get the money back with interest tax-free.
We should keep in mind that interest rates on bonds are usually somewhere around 4%, which means that if you put in $100 you get back $104. So it's not a massive windfall, but the program can and does make a difference. These bonds last for 25 years sometimes. Little payments over a long time add up and could mean extra income.
One of the most cited minibonds programs started in Denver in the 1990s. Only residents of the state could buy the bonds. In 2014, the city sold $12 million of these bonds in 20 minutes, which was understood as a good thing, indicating the bonds were popular. They could say their city government's financing was coming from Colorado's own people rather than nameless, faceless ruling class investors. It also meant the interest payments might possibly be going into the bank accounts of more middle class (even working class?) people rather than the super rich.
Berkeley's program is like this, except with lasers coming out of its eyes.
This is your minibond on blockchain
When you deposit money in a bank, the bank records the deposit. It adds some numbers into column with your name on it, which means you have money you can withdraw when you want. This list of deposits is its ledger. In our current banking system, banks are largely private institutions regulated and backed up by public government in the form of laws, reserves, and protocols which, in turn, are enforced by the whole repressive state apparatus (police, courts, prisons). The bank's ledger is therefore guaranteed by those things: the private institution and the public apparatus trying to ensure that the little column with your name on it is legitimate, protected, and available to you.
The basic idea behind blockchain is that it's a digital ledger. In terms of banking, rather than being guaranteed by private institutions and public apparatuses, your deposits are guaranteed by computer code on servers. The libertarian fantasy of blockchain is that such a ledger is 'independent' of 'government' and can thus be truly 'free'. Fantasy indeed. But, like the microbond, the blockchain makes a difference. Digital currencies like Bitcoin, which have been all the rage recently, run on the blockchain. Rather than guaranteed by governments, the digital currencies are backed up, protected, and made available by computers.
Berkeley wants to issue microbonds using the blockchain. Rather than using traditional banks, the idea is to sell the bonds using digital tech, servers, and computers. The city would sell bonds to its residents with low minimums using blockchain technology. They want to fund a firetruck, for instance.
Cryptobond revolution?
On a crypto podcast, Bartlett says these crypto micro muni bonds are meant to "fund for equity." He uses the language of social justice to justify the project, talking about infrastructure needs throughout the country. He actually blames Wall Street, saying municipal bond profits go to the ruling class. He sounds like Bernie Sanders sometimes: "we're creating a slave class" with "how much money gets sucked up to the 1%." Barlett talks about families getting micro-returns for decades whlie funding playgrounds using this microbond. "We're solving for poverty and the nation's infrastructure needs."
But that's just microbonds. The thing about blockchain is that, because it's guaranteed by the computers, the bond itself--he says--is less expensive because the fees are lower. Bartlett argues that you don't need as many consultants, lawyers, banks, and investment firms on the deal since the computers do a lot of this work.
The proposal has caused a stir nationally and internationally. No one, it seems, has thought to combine microbonds and blockchain technology. Bartlett sings on about the democratizing power of the new internet. "The promise of web3 is to open things up to the rest of humanity." He's calling it a revolution in money. He wants to bring it around the world, talking about people in Nairobi funding water projects in "other countries in Africa." Etc.
On the face of it, the proposal sounds at least interesting and at most promising. Muni bonds are exclusive and fee-heavy. Everyday people need more income. People need better infrastructure. From a schools perspective, it sounds kinda nice for working class people to make extra income on the side by putting a bit of money towards their schools. Rather than shrouded in secrecy, public finance becomes more open. Rather than a ruling class tax haven, public finance becomes redistributive.
On the best possible reading of the situation, the cryptobonds for municipal finance could threaten the hegemony of ruling class fractions that use public finance to extract profits. To the extent that it actually can weaken this fraction, crytpo micro muni bonds are potentially revolutionary (even though Bartlett doesn't mean that kind of revolution). How far is this reading from reality?
Okay bro
Pretty far. The interview Bartlett gave is almost pure techno-optimism. In the parlance of our times, it's cringe. The tech-bros are really digging it. In their "like wow this is like amazing" rhetoric and Barlett's just-so story, you start to get a whiff of the bullshit hovering around this proposal. Right off the bat, it turns out that Bartlett is a crypto lawyer that represents crypto firms. He obviously stands to benefit from this deal no matter what happens. Ew.
There's so much more that's wrong with this proposal. There's been some local pushback. One critique has been accessibility: people don't really know how to do this crypto micro bond buying, is it really available for everyone? Indeed, it's complicated. It's hard to imagine a domestic worker taking some time after a long shift, going to a public library, and buying a crytpobond while checking email. Another critique is about the environmental impact of the computing needed for blockchain. Bitcoin's carbon footprint alone is equal to New Zealand's. Both of these critiques were launched at a public comment session in the city.
In financial terms, there's been some sobering research on microbonds. Analyzing Denver's five minibond projects, Ely and Martell found in 2016 that the minibonds were actually more expensive to issue than traditional bonds. In terms of cost as a share of the principal, these minibonds cost the city up to 7.8 times more money than traditional bonds. That's not cheaper at all! They found that minibonds got higher interest rates than traditional bonds too. In general, they found minibonds were on average 21% more expensive than traditional bonds.
Okay, so maybe they're more expensive. But at least regular everyday local people were buying them right? No. In 2007 and 2014, less than 35% of purchasers were from Denver. Oh and the average price people paid was way higher than the small denomination made available.
Despite lower denominations ($333 to $500) for mini-bonds, the average purchase amount exceeded the standard $5,000 municipal bond denomination in four of the five issuances. In 2007 and 2014, mini-bond purchases averaged $11,506 and $14,118, respectively, suggesting that much of the mini-bond principal was purchased by relatively large buyers that may be able to access the traditional municipal bond market in other ways.
Even though the denomination was lower, the average amount purchased was above the traditional $5k minimum. In the latter cases, it was much higher. So at least in Denver, the democratizing dream of microbonds was just that--a dream, not reality. (It could be that the averages are hiding a democratic reality. Maybe there were a ton of small purchases and a few really big ones? I just don't think that happened.)
I can't imagine the crytpo angle on microbonds helps the exclusivity. If anything, the tech element will make it harder to understand. If Denver is any indication, people who already have access to muni bond markets and/or have an interest in crypto will buy these bonds. As David Golumbia says in no uncertain terms: blockchain is garbage. It doesn't do any of the things its advocates say it does, including this democratic promise.
So it's not as democratic as Bartlett says. Will the crypto bond be less expensive? The Denver experience says no, but remember that Denver wasn't doing crypto--just regular bonding. Will the interest rates and fees be lower for a crypto muni bond?
The answer is no one really knows, but probably not. Imagine the patrician, stuffy, and bloated municipal bond market trying to price a crypto municipal microbond. They're not going to be like "by golly, that's innovative and it sure sounds like a good bet that isn't risky at all, we'll rate it high!" Nope. Muni bonds are already punitively rated. A newbie on the scene will most definitely be viewed as risky, which means a higher interest rate, which means it's more expensive (and ultimately raises taxes!). What interest rate will Berkeley get on this bond? A distant precedent is when the government of El Salvador issued a government bond in Bitcoin. It was priced at 6.5%. Forbes notes that there's no real guarantee the rate is reliable. (Another case to look at is in France.)
The fees part is questionable too. Berkeley just hired a crypto firm to do the bond deal. I can't imagine the cost of that contract is going to be less than typical bond contracts. If anything, there'll be more legal oversight, more consultants necessary, and more labor needed generally to roll out the deal (again, this is something Ely and Martell found in Denver.)
The Bond Buyer, a capitalist rag, is optimistic about the streamlining of muni bond contracts. This feels right: all the information will be in one place, it'll be easier to verify tons of stuff about lenders and borrowers, and there won't be a fragmented cloud of legal languages, styles, and data. The French government said it reduced the wait time to issue their crytpo bond from five days to one day. Okay. But even the efficiency-loving capitalists in Bond Buyer are careful to point out that this will complex and take a long time to really figure out and scale up. And Golumbia dispatches most of the premises they rely on as garbage. So...not democratic, not less expensive, not more efficient, not revolutionary.
New neoliberals
Ivana Nedyalkova at McGill wrote a master's thesis on urban blockchain projects looking at Berkeley, Denver, and Miami. She's got a good critical take. Crypto municipal finance, like Barlett's plan in Berkeley, is yet another attempt by capital to automate, alienate, and exploit. There's no real plan for redistribution in the crytpo microbond vision, just a vague promise of democratization. Research like Ely and Martell's supports her reading. She points out that techno-libertarianism has been around for a long time and very little of its dreams have come true.
Generally, Nedyalkova sees the crypto turn in muni finance as a new chapter in the neoliberal story. It might entail some changes, like which lawyers and consultants are the ones advising cities on the deals, but ultimately it's just an addition of a zero in terms of justice.
Under this light, endorsing urban blockchain initiatives seem like less of a political decision than a marketing one...The proliferation of these technologies can only serve to accelerate the dispossessive processes.
Right. Neoliberalism with another code. A more compelling use of technology in the municipal bond market would be to automate the credit ratings agencies out of existence, like Marc Joffe proposes. To the extent that blockchain could be good at all, it's in furthering this kind of project. But I haven't seen evidence that blockchain could do this yet and it doesn't seem promising.