You can’t follow the business news nowadays without hearing about Bitcoin. As fears of U.S. dollar inflation mount, the price of this cryptocurrency has, since December, jumped from $19,000 to $57,000 per unit. Bitcoin has attracted prominent companies such as Tesla, and is being accepted by PayPal. Now some cities want in, with Miami considering integration of the cryptocurrency into its monetary system. Is this a good venture for cities to get involved in? Let’s unpack the pros and cons.
First: What is Bitcoin? Understanding it starts with understanding blockchain, an online database that stores information along a chronological “chain” of ledgers. Depending on the system, blockchain data can be viewed and transferred down the chain through a peer-to-peer review process, so that the data is publicly visible in real time. Blockchain has been proposed as an innovation that could bring transparency to voting, legal contracts, financial transactions and more.
Among thousands of cryptocurrencies in existence, Bitcoin is the most famous. It is produced through “miners” who crack mathematical codes, and through “nodes,” people who extend bitcoin transactions along the blockchain ledger (both miners and nodes are awarded Bitcoin units as payment for their work). There are an estimated 83,000 Bitcoin node workers who operate from computers worldwide, making the system very decentralized.
The decentralization is what people like about it. People make purchases with Bitcoin using a personal password. The order is pushed by nodes through the encrypted blockchain network. It cannot be hacked because thousands of nodes are working collaboratively to advance the transaction, meaning bad actors can’t manipulate the information without getting caught. Compare this with traditional banking, where credit and debit card transactions require trust in a single bank, and can be subject to hacking.
The anonymous organization that operates Bitcoin has coded the system to allow only 21 million units to be produced, ever. This makes it more stable than central bank currencies, which often get printed excessively in response to political events, causing inflation.
Miami, seeing these benefits, announced in February that it would study whether to experiment with Bitcoin. Mayor Francis Suarez would like to have city workers paid in it, and let residents pay their taxes using it. More crucially, he wants permission from the state of Florida to let the city invest its treasury funds in Bitcoin.
It’s fitting that Miami in particular would find appeal in a stable alternative currency.
The city is full of expats — from Venezuela, Argentina, Cuba and other countries, who fled their homelands precisely because of currency devaluation or other forms of wealth-sapping government abuse (interestingly, various cryptocurrencies are gaining popularity in socialist Venezuela).
Bitcoin could position Miami as a forward-thinking tech city. Miami missed out somewhat on the tech growth wave of recent decades that hit the San Francisco Bay Area; Austin, Texas; and other U.S. metros. But in 2020, the city suddenly began enjoying triple the venture funding it had attracted in 2019. Suarez, who has promoted Miami as an emerging tech hub, sees becoming a cryptocurrency capital as another way to appeal to the tech industry.
Lastly, Bitcoin is an investment vehicle that, if held in the city’s treasury, could help Miami’s fiscal prospects. After all, a currency whose per-unit value has increased 18,641 percent the last five years is more tempting than a currency that gradually declines in value.
But just as Bitcoin has proven upwardly volatile, that volatility can spike downward (such as when Bitcoin lost one-third of its value in a two-week period in 2017). This means that any money Miami invests in Bitcoin could plummet in value if Bitcoin crashes.
There are also technical issues with Bitcoin. The mining process consumes lots of energy, making it expensive and environmentally hazardous to produce. Bitcoin has an average transaction fee of $23, and relatively long processing times of between 10 minutes and several hours. And there are questions about whether, once all 21 million bitcoins are mined, monetary incentive will exist for the network of nodes to continue maintaining the blockchain.
So Bitcoin is a risky business for cities to get into. Yet Miami isn’t the only one thinking about it. Andrew Yang, who is running for New York City mayor, wants to make that city into a crypto hub. Elon Musk has hinted that Dogecoin, one of Bitcoin’s competitors, might be the currency used for a new city he wants to incorporate in Texas. And there are calls on Twitter for U.S. cities to invest their pension funds into Bitcoin.
But cities should at least recognize the risks involved with cryptocurrency and ensure that taxpayers are onboard with those risks. If they can manage to do that, this could be a positive development. Cities would be making a statement about the pragmatic nature of Bitcoin, given that it is encrypted, transparent and numerically fixed. And they would be making a philosophical statement as well about the failure of governments worldwide to provide similar security with their own currencies.
“For people who invest in Bitcoin,” says Mayor Suarez, “the allure is precisely that: It’s not backed by a central government. So it’s not manipulatable by the central government.”
[This article was originally published by Governing Magazine.]
Scott Beyer owns and manages The Market Urbanist.
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