Cities and Crypto
An exploration of the relationship & its potential for hyperlocal impact
Authors:
Pablo Pejlatowicz
Jordan Cooley
Tricia Wang
Lauren Serota
Kyle Becker
Direct link to this report:�https://cradl.org/cities-and-crypto
CC BY-SA 4.0�Except where otherwise noted, content on this site is licensed under a Creative Commons Attribution - ShareAlike 4.0 International license. Icons by The Noun Project.
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Welcome
Reviewers:�Kalin Bracken, David Bray, Michael Casey, Shari Davis, Mike Fraietta, Mohan Kanungo, Brynly Llyr, Rebecca Mqamelo, Cassondra Puls, Matt Prewitt, Ortal Tevel, Renée Barton, Katherine Paseman, Chris Rogers
CRADL would like to extend their gratitude to all the unnamed people who went above and beyond to guide the research team in this report. Thank you for the weekly meetings, the introductions to other research participants, the extra time you put into the review, and the phone calls. Your guidance has greatly contributed to our end product.
Report Design: Eduardo Caudillo
Copy Editing: Sterling Schuyler
This report was funded by the World Economic Forum’s Crypto Impact and Sustainability Accelerator (CISA) which included organizations such as Ethereum Foundation, Celo, Algorand, Stellar, CoinDesk, a16z, Ripple, Grayscale, Goldman Sachs, Chainalysis, Ernst & Young.
The Crypto Research and Design Lab (CRADL)’s vision is to champion a humanity-centric Web3 for everyone. Our mission is to clear a path for an equitable Web3 where people and communities are at its center.
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Welcome
CC BY-SA 4.0�Except where otherwise noted, content on this site is licensed under a Creative Commons Attribution - ShareAlike 4.0 International license. Icons by The Noun Project.
Share the report
Our primary goal is impact. We encourage readers to share, iterate on, and apply our research findings.
All of our reports are available as Googles Slides and PDFs so that you can easily copy and paste content from the slide deck into your materials. Be sure to attribute CRADL as the source.
All of our research is under a Creative Commons BY-SA 4.0 license.
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Welcome
Executive Summary
This report explores the relationship between crypto and cities in the United States.
The potential and the pain points�Web3 is attempting to address issues that have existed since the dawn of modern civilization: how societies should be organized, who makes those organizational decisions, how power should be distributed among stakeholders, and who actually qualifies as a stakeholder.
Spend any time in Web3 and you’ll notice palpable excitement around the potential of blockchain and crypto tools to support cities and communities in addressing these long standing issues.��As the CRADL team started to assess efforts at the intersection of crypto and cities, we realized that we needed to onboard the Web3 industry into the pain points that cities face. We identified generating funds for city services as one of the biggest issues that city leaders face and an area that crypto solutions are purporting to address. As such, city funding is the primary focus of this report.
The goals of this report
Related CRADL reports: UX in Cryptocurrency, Generational Wealth
Key Takeaways
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De-jargoning how we refer to public finance and economic concepts
The terms we use to refer to public financial or economic concepts that will be covered in this report.
Municipal bond�A bond issued by a local government on behalf of any municipality or corporation owned by a municipality.
Public goods�A commodity or service that is non-rivalrous and non-excludable. It is provided to all members of a group or society, either by the government or a private individual or organization.
Non-excludable�It is costly or impossible for a person to prevent others from using the good.
Non-rivalrous�The use of a good or service does not prevent others from using it.
General obligation bond�Bonds backed by the “full faith and credit” of the municipality or jurisdiction. Often there are no limitations on the funds that have to be raised to pay for these bonds. Subject to constitutional or statutory limits and normally requires voter approval.
Bond�A fixed-income instrument that represents a loan made by an investor to a corporation or a government.
Revenue bonds
The credit depends on the quality of the underlying project that provides the revenue. Usually not subject to voter approval or constitutional limits.
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Welcome
De-jargoning how we refer to people
The terms we use to refer to people depict actual political or economic differences for people living in the same city.
Eligible voter�A person who has the right and capacity to register as a voter (if needed) and vote.
Crypto buyer�An individual person who buys cryptocurrency or tokens.
Resident�A person who has the permission to lawfully reside in a place.
Citizen�A person, born or naturalized in the country, who is guaranteed the full set of political rights and protections in that country.
Token holder�In this report, how we refer to a person who has bought and kept tokens from a Web3 project to use as intended by the issuer.
Registered voter�An eligible voter who has registered to be able to vote.
Inhabitant�A person living in a place.
Voter
A person who has voted in an election.
Crypto builder�In this report, how we refer to a person who develops projects in Web3.
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Welcome
De-jargoning before the deep dive
These are some terms we use throughout the report when talking about governments, cities, and democracy.
Representative democracy�A form of government in which people elect officials to enact laws and implement policies. The United States and 60% of countries in the world employ it.
City�For the purpose of this report, a city refers to either an urban cluster or an urban area. The 2020 U.S. census found 2313 urban clusters of 10,000 to 50,000 inhabitants. There are 780 urban areas in the country with a population of more than 50,000 inhabitants. There may be more than one urban cluster or urban area within a metropolitan statistical area.
Municipality�In this report, the term is used exchangeably with cities. A single administrative division having corporate status and powers of self-government or jurisdiction as granted by national and regional laws to which it is subordinate.
County�Counties are the primary legal divisions of most states in the United States. A county can contain one city or multiple cities, or a city can expand over more than one county.
Local government�Applies to cities, towns, villages, counties, school districts, and entities that serve public purposes and are owned by a level of government lower than state government.
Direct democracy�A form of government in which people decide laws and policies themselves.
Democracy�Government by the people, exercised directly or through representatives. Its principles include egalitarianism, liberalism, electoralism. Not every democracy applies every principle to the same extent.
Liquid democracy
Combines direct democracy with representatives chosen for specific topics based on their expertise. Used sometimes in crypto, not typically used in government.
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Welcome
Do cities need crypto?
If so, why?
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Section 1: Context
Why do cities matter?
People’s lives are shaped by their municipalities
Where someone lives directly impacts how their life is shaped, including their education quality, job opportunities, health and socialization. Municipal action has a large enough scale to produce meaningful policy results while remaining at a manageable distance to address conflicting quality of life concerns for inhabitants and enterprises.
Hyperlocal solutions come from cities
The social cohesion of a city allows its community to explore new ways of organizing and financing itself. Place-based policies let people integrate their values with their daily lives. Hyperlocality can arise from these conditions. We define hyperlocality as collaboration around matters concerning a small community or geographical area.
In implementing hyperlocal solutions through current civic institutions, there is a real opportunity to mitigate many of the institutionalized harms that have affected communities of color and those who are low-income.
Cities are large economic systems
Cities are powerful entities, drivers of economic growth. Some of the largest cities in the United States have economies that are larger than entire nations. Only a few cities in the United States are responsible for the country’s total economic output. Cities with more robust funding sources are able to provide better services to their inhabitants. Cities are also drivers of wealth concentration.
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Section 1: Context
Why study crypto within cities?
Crypto is being presented by builders as a tool to revamp various municipal processes.
There is optimism within the Web3 industry that blockchain technology can improve upon city-level systems to better serve their inhabitants. Many believe the tech could create opportunities for greater transparency and efficiency in allocating tax benefits or registering expenditures. In order for the tech to effectively meet any of these goals, Web3 builders and crypto buyers would need to cultivate a deeper understanding of the fundraising mechanisms that cities can use.
Crypto builders need a comprehensive understanding of the obstacles that cities face.
To avoid reinventing the wheel, addressing non-problematic issues, or introducing ineffective or harmful interventions, crypto organizations need to collaborate with municipal governments, community leaders, and people impacted by large-scale decisions to understand why certain inefficiencies exist, and how the implementation of their projects could alleviate these frustrations.
Web3 builders need to learn from experienced policymakers who understand the successes, inefficiencies, and challenges that are present in government or democratic processes.
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Section 1: Context
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What are we here to answer?
Organization Question:�What are the problems affecting cities in terms of financing?
And how can crypto alleviate or solve those problems?
Reframed, Human-centric Question:�How can the city I live in better serve me?
How can I see my values more clearly reflected in how my city grows and what it funds?
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This report addresses:
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1. A review of the technology behind the solutions
This is not an analysis of the tradeoffs or advantages of any given technology, nor is it a comparison between multiple technologies.
2. International examples and implementations
This report does not include the multitude of innovative projects addressing the variety of challenges outside of the United States.
3. A comprehensive review of every project
This report does not intend to cover every project at the intersection of Web3 and cities or municipalities. There are many other topics that could be discussed such as smart cities or city infrastructure.
3. A detailed history of cities
Cities are incredibly nuanced and each has their own history, shaping the political, economic, and social issues that exist there. This document is not intended to provide an exhaustive history, but instead to provide a tactical understanding of common issues within U.S. cities today.
4. An up-to-date summary of the organizations we studied
The crypto organizations covered in this report are continually evolving “at the speed of crypto,” making encapsulating recent developments challenging. We acknowledge that at the time of publication, some of the issues highlighted may already be addressed or have shifted. The goal of this document is not to be hypercritical of young organizations, but rather to serve as a mirror for their development.
This report does NOT address:
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How we acquired the data
124 articles.
60 papers, reports and white papers.
17 other sources.
Read more on this in our additional resources section.
We chose these people using purposive sampling to select informants who were familiar with CityCoins or with the research topic.
Steven Pedigo - Economic and Urban Development
Shari Davis - Participatory Budgeting Project / Leader
Krista Weatherford - Community Engagement Expert
DAWA Fund - Financial Support of Community Frontline Workers
We chose these experts using purposive sampling from CRADL’s network to select informants who were familiar with CityCoins or the topic of research.
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Bottom-up approach
(e.g. community driven)
Top-down approach
(e.g. same solution for different places)
NON-CRYPTO/WEB3 SOLUTION
Projects we surveyed
We selected 5 city-related projects from our existing network based on two factors:
CRYPTO/WEB3 SOLUTION
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Participatory Budgeting Project
Implementation of participatory budgeting—a process of allocating funds directly based on inhabitants’ decisions—in cities and other local governments.
Offering a digital, non-fiat currency that replaces cash for transactions within a community.
Profiles on the organizational case studies
Primary Case Study: CityCoins
CityCoins is the most well-funded and publicly visible crypto project with the originally stated vision of rethinking and ultimately replacing all city functions.
CityCoins is an investment vehicle that purports to include a governance system in which individuals can decide where to invest “voluntary taxes” in the cities of their choice.
We spent seven months conducting ethnographic work.
CRADL has no official affiliation with CityCoins or with any organization researched for secondary case studies. For the purpose of our research, our team engaged community members in the CityCoins Discord and acted as an observer in their governance calls.
Secondary Case Studies
When appropriate, we bring in examples of other crypto and non-crypto efforts that are addressing city topics.
We spent anywhere from two to five hours interviewing and studying each organization.
See our case studies on CityCoins, Participatory Budgeting Project, City3, Humanity Cash, and Urban Change.
Community empowerment through coordination tools powered by Web3. Includes onboarding of inhabitants and non-profits into Web3, and grant distribution to community-focused non-profits through Gitcoin and quadratic funding.
Incentive-based community behavior. Their mission is to positively impact everyday life within communities and bolster civic engagement.
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Our insights are grouped around the struggle for cities to obtain funding and determine how to spend it.
In each insight, we note how crypto can potentially solve the issue and what we’ve observed from CityCoins and other efforts.
City funding, economic development, and financial indicators
Crypto as a solution: Crypto projects are trying to modify the relationships between investors, cities, and inhabitants
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Insight 1
Funding mechanisms influence how cities spend.
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Sources
1. Annual Comprehensive Financial Report of the Comptroller, City of New York, October, 2021.
2. (Image above) NYC Executive Financial Plan Report, City of New York, 2022.
Towns and cities across the United States use diverse combinations of funding sources for the same reason as businesses: to reduce the risk of losing all income. Cities may hedge trade-offs of each funding source due to term-to-maturity, reporting requirements, political and economic capacity, and funding criteria. Funding sources can include:
It is difficult to determine the size of bond issuance as budgeted revenue for most cities. However, based on bond issuance in 2021,1 we know that bonds themselves accounted for ~6% of New York City’s budget for the year.
Insight 1 Funding mechanisms influence how cities spend.
The above breakdown of projected revenue for New York City FY22 does not explicitly call out bonds—our belief (based on the stat to the left) is it’s accounted for in “Other Revenues.”2
Cities try to diversify their sources of funding
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Source Unpacking the State and Local Tax Toolkit. Loughead, Walczak, Koranyi, Taxfoundation.org, August, 2022.
Tax sources offer different ways for cities to plan their yearly revenue.
Tax source characteristics for local governments tax systems | |||
Characteristic | Property Tax | Sales Tax | Personal Income Tax |
Household tax burden or % change in after-tax income rises with income | Somewhat regressive | Most regressive | Very progressive |
Tax responsiveness to variation in income | Low (Very stable revenue) | High (Unreliable revenue) | Very high (very unreliable revenue) |
Challenges Policy or technical issues arising from the characteristics of the tax | Difficult to assess the valuation of property Elder and low-income households struggle to pay increases in property taxes | Taxes on consumption often fall more heavily on low-income households | If the tax has too many loopholes, exemptions, and deductions, people find it harder to file their taxes If there are too few deductions, system might be deemed unjust |
Insight 1 Funding mechanisms influence how cities spend.
Sources (Right) Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics, Bruce, Fox and Tuttle, October 2006. Fiscal Administration: Analysis and Applications for the Public Sector, John Mikesell, 8th edition.
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Mechanism | Description | Benefits | Downsides | Influence / Role |
Bonds | Cities raise capital by issuing these obligations of future repayment. | Indirect federal oversight �People obtain more information on city debt thanks to a disclosure requirement that the MSRB imposes on financial intermediaries. Access to capital�A city can access a diversified pool of capital for investing in its infrastructure. | Regressive benefit �The tax exemption for municipal bonds favors those with substantial income flow and excludes non-profit entities. | Underwriters, rating agencies, and financial advisors can influence which projects a city can raise money for, or the cost of raising the capital needed. |
Loans | A sum of money granted to the municipality by a bank. | Direct access Cities can borrow directly from banks. | Prejudicial loan terms�Banks can impose prejudicial terms onto borrowing cities. No public disclosure�There is no requirement to disclose the city’s financial health to the public. | The process doesn't allow people to access information about their city's debt or financial well-being. |
Tax Increment Financing | Specific bond type guaranteed by the increase in tax base generated by a concentrated investment in a given zone (e.g. development of a mixed use neighborhood). | New revenue stream Cities obtain fresh funds on an expected increase of tax base to develop a zone. | Predetermined concentration of benefits�As developers request the assistance, the major beneficiaries of the development are the developers of the zone. | Cities determine areas of TIF after developers request assistance for a private investment that needs urban infrastructure, which makes the requesting developers the predetermined beneficiaries. |
Funding mechanisms can influence city spending through different means
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Source Bondbuyer.com
A limited number of firms underwrite bonds, and may affect what gets funded and implemented.
In a concentrated underwriter market, cities would have to accept any conditions the underwriter demands as covenant, making some city projects more “economically attractive” to funders than others.
Top 10 Ranking of Bond Underwriters in 3Q of 2021 | ||
Underwriter | Bonds in $ billions | Market Share (%) |
Bank of America | 48.85 | 14.3 |
Citibank | 33.91 | 9.9 |
Morgan Stanley | 27.08 | 7.9 |
JP Morgan | 25.47 | 7.5 |
Goldman Sachs | 19.52 | 5.7 |
RBC Capital Markets | 18.79 | 5.5 |
Stifel Nicolaus & Co | 17.85 | 5.2 |
Wells Fargo | 15.85 | 4.64 |
Jefferies | 14.77 | 4.32 |
Piper Sandler | 13.52 | 3.96 |
Insight 1 Funding mechanisms influence how cities spend.
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What are prospective Web3 forms of city financing, what do they enable, and what are their tradeoffs?
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Issues that Web3 must overcome to fund cities:
1. Work within existing city funding gaps
When implementing solutions to produce funds, it's important for Web3 projects to identify the funding gaps and challenges that cities face so they can offer alternatives that complement the current tax structure.
2. Acknowledge the democratic needs of local governments
U.S. cities have intentionally created systems that prevent investors from influencing exactly how their money will be used.
While cities combine their economic and financial needs with their political preferences, investors are moved by economic and financial calculations. Web3 projects must state in clear terms their priorities vis-a-vis cities, inhabitants, and investors.
3. Provide a stable revenue source
Cities have several funding sources.
For Web3 to be a successful addition, it needs to be reliable and efficient enough so cities can plan its use accordingly.
How can Web3 add value?
Insight 1 Funding mechanisms influence how cities spend.
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The cities considering auxiliary funding from crypto groups have high concentrations of crypto workers and strong economies.
Unsurprisingly, the cities that garnered the most support to develop city-related crypto investment are Miami and New York, two cities with some of the highest concentrations of the crypto workforce.
So far, the crypto initiatives have not provided a reliable, stable source of revenue for these cities.
Distribution of crypto workforce across cities and U.S. market share | ||
City | Crypto Hires per 100,000 | % of entire U.S. Crypto Workforce |
San Francisco - Oakland - Berkeley, CA | 4 | 12.2% |
Austin, TX | 3 | 2% |
New York City, NY | 3 | 18.3% |
Miami-Fort Lauderdale, FL | 2 | 4.1% |
Denver, CO | 2 | 2.5% |
Raleigh - Durham - Chapel Hill, NC | 2 | 1.2% |
Salt Lake City, UT | 2 | 1.3% |
Portland, OR | 2 | 1.5% |
Rochester, NY | 2 | 0.5% |
Albany, NY | 2 | 0.5% |
Source (Above, and right) Bloomberg based on LinkedIn data, November, 2021.
Note: Per 100,000 figures are calculated based on LinkedIn members in the metropolitan area (MSA)
Read more on this and the other topics in our Case Study on CityCoins.
Insight 1 Funding mechanisms influence how cities spend.
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Future questions
These are questions we encourage crypto builders to ask when evaluating solutions for city-based issues that involve blockchain or crypto.
For crypto builders:
Insight 1 Funding mechanisms influence how cities spend.
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Insight 2
The dominant belief that economic growth alone equates to financial health for a city is short-sighted, unsustainable, and only favors the wealthy.
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Small and large cities alike have already shifted away from a “business-friendly” only strategy in the past two decades because it is not sustainable.
Example: Minnesota versus Wisconsin
�
Insight 2 The dominant belief that economic growth alone equates to financial health of the city is short-sighted, unsustainable, and only favors the wealthy.
Source The High Road Wins, Markusen, 2015. What does high road mean? Rogers, 1990.
Cities and states grow slower when individual wealth is the only development goal.
Comparison of results from two states that chose different economic development policies in 2011 | ||
Indicator | Minnesota | Wisconsin |
Population growth | +2.9% | +1.4% |
Employment growth | +4.8% | +4.4% |
Median income | $60,900 | $55,300 |
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Source The Planner's Triangle Revisited, Campbell, 2016.
Economic growth alone neglects people’s well-being and the environment.
The trilemma of sustainable urban economic development captures competing interests and conflicts between economic growth, equitable opportunities, and the environment.
Property conflict: Who benefits from most of the wealth generated by a city’s economic growth?
Development conflict: Who gets to enjoy the clean air, water, and parks/nature in a city?
Resource conflict: What is the threshold of negative environmental impact due to economic development?
Insight 2 The dominant belief that economic growth alone equates to financial health of the city is short-sighted, unsustainable, and only favors the wealthy.
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Property conflicts arise from the tension between economic growth and equity-based distributive policies.
As businesses grow or relocate to cities, how many new jobs go to current inhabitants? Does the current population have the skills needed to fill the most coveted positions? What level of wages do those positions receive? How does that wage rate affect the housing market?
Companies and government officials may disregard the potential negative effects on local inhabitants in exchange for short-term financial gain.
Example
As the film industry has grown in Atlanta, Georgia, family homes and apartment complexes have been purchased by film studios, as well as institutional investors. While the move has created hundreds of jobs, it has also made the city less affordable for long-time residents.
Source The Planner's Triangle Revisited, Campbell, 2016.
Insight 2 The dominant belief that economic growth alone equates to financial health of the city is short-sighted, unsustainable, and only favors the wealthy.
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Development conflicts arise between the environmental impact of economic development projects and equity in distributing that impact.
Where should the next municipal park be created? Will all inhabitants be able to visit it easily? Where should the recycling plant or landfill go? Which neighborhoods have the highest asthma rates caused by proximity to trucking routes and warehouses?
Oftentimes, unsightly, pollution-producing, or industrial development happens in neighborhoods with fewer socioeconomic resources, which further drives down the value of houses in those areas.
In contrast, the beautification of areas often happens in wealthier neighborhoods. While these projects may raise a neighborhood’s value, they may also create inequitable access to parks or green areas.
Example
In an effort to eliminate such conflicts, the Environmental Protection Agency has offered an Equitable Development Workshop since 2010 to provide public servants with better education and resources.
Source The Planner's Triangle Revisited, Campbell, 2016.
Insight 2 The dominant belief that economic growth alone equates to financial health of the city is short-sighted, unsustainable, and only favors the wealthy.
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Is the short-term economic gain worth the long-term environmental impact? Are there alternative options that would satisfy both economic and environmental needs?
Similar to the property conflict, companies and government officials might not factor in the environmental costs of economic development.
Example
Ohio is receiving $46.4 million in federal funds in FY 2022 to clean and recover the space of abandoned coal mines. The environmental impact of phased-out economic drivers from decades ago still endures until today.
Resource conflicts arise between economic development projects and their environmental impact.
Source The Planner's Triangle Revisited, Campbell, 2016.
Insight 2 The dominant belief that economic growth alone equates to financial health of the city is short-sighted, unsustainable, and only favors the wealthy.
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Key Takeaway No. 1
Aiming for wealth alone is a return to outdated economic development practices.
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Issues that Web3 must overcome to make a sustainable impact:
A myopic focus on economic growth hides social and political tensions within a community, and preserves the status quo. Recognizing conflict adds visibility to the preferences and priorities of inhabitants and allows policymakers to set realistic goals.
2. Propose a clear investment thesis
A clear thesis allows investors to focus on what really matters to them, and prevents them from being surprised or disappointed if their expectations are not met. If investors’ only priority is to promote the Web3 ecosystem, they should consider whether general municipal funding is the most appropriate investment.
3. Define metrics of success for economic development
Once the goal is clear, the metrics of success must be established. What are the indicators of successful economic development for a community? How are they built? Are they different from those already put in place by the municipality? If so, do they align, complement, or clash?
How can Web3 add value?
See our Case Studies on CityCoins to read more about these three areas.
Insight 2 The dominant belief that economic growth alone equates to financial health of the city is short-sighted, unsustainable, and only favors the wealthy.
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Blockchain alternatives can expand the economic development goals of a city
Humanity Cash�In line with demand-side, redistributive policies, Humanity Cash fosters local trade without requiring fiat cash. For its first pilot, Humanity Cash created a digital version of a non-crypto initiative called Berkshares, which creates local currencies backed by fiat currency deposited in community banks. The project amplifies the multiplier effect of money in local economies when businesses use the local currency instead of fiat money.
CityCoins�CityCoins was originally created to help people support their city by growing its crypto treasury. The project never acknowledged the potential environmental or social impact of their city funding mechanism and, as of summer 2022, has no established strategy to address those possible impacts. Also the project has shifted focus to expanding crypto holdings of individual investors.
Urban Change�Urban Change promotes communal behavior through nudging. It is a Web3 evolution of an initiative called Colu. The project allows a community to offer token payments or discounts for people who perform one of the goals stated by the community sponsor. This is an opportunity for anchor institutions and communities to foster equity or environmentally sound solutions.
See our Case Studies on Humanity Cash, Urban Change, and CityCoins.
Insight 2 The dominant belief that economic growth alone equates to financial health of the city is short-sighted, unsustainable, and only favors the wealthy.
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For crypto builders:
Future questions
These are questions we encourage crypto builders to ask when evaluating solutions for city-based issues that involve blockchain or crypto.
Insight 2 The dominant belief that economic growth alone equates to financial health of the city is short-sighted, unsustainable, and only favors the wealthy.
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Insight 3
Assessing creditworthiness is hard, especially at the scale and complexity of cities.
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Bond buyers and rating agencies use indicators that help measure the financial health of a city. These indicators affect who invests in a city, how much, and on which terms.
These are some of the indicators of a city’s financial health that investors consider:
Bond buyers look for indicators to quickly identify the financial health of a city before investing there.
Insight 3 Assessing creditworthiness is hard, especially at the scale and complexity of cities.
Indicators used to measure the financial health of cities | |
Indicator | Description |
General obligation bond rating or issuer rating | The rating of the bonds backed by “the full faith and credit” of a city indicates how much extra yield cities will have to pay to investors. (More on this on the following slide) |
Debt per full real value of taxable property | How indebted the city is relative to the market value of properties in the city. |
Debt per capita | How much money the city owes divided by how many people live there. |
Debt per capita as a percentage of personal income per capita | How much money the city owes divided by how much income people living there have on average. |
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Institutional and retail investors use the criteria from rating agencies to inform their own research, measure the risk, and assess the underlying value of the rating. They evaluate cities like any other business or opportunity—the end objective is to generate multiple returns on their investment while mitigating the risk involved.
The primary rating agencies in this industry are:
Cities and other local governments participating in the municipal bond will hire one of these rating agencies to grade them.
The cities are motivated to hire them to offer a third-party assessment of their governments’ creditworthiness.
Bondbuyers assess the rating agencies’ criteria to make deeper analysis on cities’ creditworthiness
Sources U.S. Local Government General Obligation Debt, Moody’s, January 2021; Credit Rating Model: U.S. Local Governments General Obligation Credit Scoring, S&P, April 2021; U.S. Public Finance Tax-Supported Rating Criteria, Fitch, May, 2021. Municipal Bond Ratings, Munibondadvisor.com.
Agencies criteria to determine cities’ ratings | |||
| Moody's | S&P | Fitch |
Criteria | Finances | Institutional framework | Sector risk profile |
Economy / Tax base | Economy | Economic and demographic analysis | |
Management | Management | Outlying managerial and economic issues | |
Debt / Pensions | Debt and contingent liabilities | Long-term liability burden | |
| Budgetary flexibility | Revenue framework | |
Budgetary performance | Expenditure framework | ||
Liquidity | Operating performance | ||
Insight 3 Assessing creditworthiness is hard, especially at the scale and complexity of cities.
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Agencies play a delicate role between cities and investors when rating the financial health of a city
A scene from the film “The Big Short.” A hedge fund manager (played by Steve Carrell) questions a rating agency on the AAA rating of collateralized debt obligations (CDOs) after the underlying asset had shown an increase in default rates. The rating agency employee answers that banks would have gone to other rating agencies if they did not keep the rating artificially high.
Source (Above) ‘The Big Short’ Rating Agency scene.
The relationship between cities, rating agencies, and investors is complex. Agencies gather information from cities to offer their judgment to investors.
A harsh rating implies a higher cost of capital for cities.
On the other hand, since bond issuers pay for their ratings, cities can retaliate and hire another agency for their next issuance.
A lenient rating jeopardizes the credibility of agencies with investors.
In 2008, the agencies took a hit on their credibility after they manipulated ratings on mortgage-backed securities.
Insight 3 Assessing creditworthiness is hard, especially at the scale and complexity of cities.
Click the button or the image above to view the video.
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Different risk profiles can result in significantly higher costs for cities to continue their operations.
Sources San Francisco Rating Bond, EMMA, MSRB, Chicago Rating bond, EMMA, MSRB.
A downgrade on a city’s rating will increase the costs for that city and lower the price of bonds currently trading in secondary markets. ��With a rating ranging between AA+ to AAA, San Francisco issued a bond in August 2021 for a principal amount of $5.18 million due in 2028, and obtained $6.75 million in funding for it. It’s part of a series of $487 million in bonds to invest in housing and health, as approved by more than ⅔ of voters in San Francisco.
If the city had the rating of Chicago, IL (BBB- to A), it would have raised $6.31 million, which is $438,000 less than what it actually obtained for this bond.
Chicago, on the other hand, issued a bond in December 2021 for a principal amount of $9.7 million due in 2028, as part of a series of $447 million in bonds to refinance debt. The city obtained $11.8 million, but if it had San Francisco’s rating, Chicago would have raised $12.63 million—more than $820,000 in additional capital.
Impact of agency rating in cities’ bond revenue | ||
Category | San Francisco, CA | Chicago, IL |
Agency rating (Fitch / Moody’s / S&P) | AA+ / AAA / AAA | BBB- / A / BBB+ |
Price of 7yr GO bond per $100 | $130.156 | $121.698 |
Yield for investors | 0.52 | 1.25 |
Comparison of outcomes for the cities with the other city’s rating | ||
Money raised with own rating | $ 6.75 million | $ 11.8 million |
Money that WOULD have been raised if the city had the other city’s rating | $ 6.31 million | $ 12.63 million |
Difference in $ based on the other city’s rating | ($438,547) | $ 820,426 |
Insight 3 Assessing creditworthiness is hard, especially at the scale and complexity of cities.
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Crypto investments are currently not rated by agencies. The first advice people give to newcomers to Decentralized Finance (DeFi) is Do Your Own Research (DYOR) to avoid scams and unwanted risk.
DYOR comes both as backlash from the credibility loss that agencies suffered during the Great Recession of 2008, and as a corollary of decentralized Web3 projects in a global, unregulated environment.
Why would people look for a creditworthiness assessment in crypto?
Source (Above) 2008 crisis still hangs over credit-rating firms, Krantz, USA Today, Sep 2013. How to DYOR, Treehouse, May 2022.
Insight 3 Assessing creditworthiness is hard, especially at the scale and complexity of cities.
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Key Takeaway No. 2
For crypto tokens to reflect cities’ economic value, they need to minimize volatility and anchor themselves with underlying city assets.
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Issues that Web3 must overcome to offer better indicators of financial health:
1. Token volatility
Markets can offer signals through the price of tokens. However, volatility often prevents actors from considering a token’s price as a reliable indicator of financial health of a city.
If a token is worth 1 dollar today, 3 cents tomorrow, and 2 dollars the day after, then the price is not a useful metric to measure the value of an underlying asset such as the financial situation of a city.
2. Link between indicator and financial health
For an indicator to work, it must have some sort of link to the object it measures. The price of a token can only be a meaningful indicator of an object outside Web3 if it is somehow linked to said object.
If a token claims a link to another asset, it needs to either be backed by those assets in the treasury’s reserve, or invest in them. With the latter option, the token must be tied directly to ownership of businesses, infrastructure, or other assets that reflect the activity of the city.
3. Intrinsic use of the token
The token must have intrinsic use to have an anchor of value that relates to other assets.
What is the token good for? To buy goods or services? To store value?
Even if the project is currently building the future use case, it still needs to manifest what the token is going to do.
How can Web3 add value?
See our Case Study on CityCoins to read more about these three areas.
Insight 3 Assessing creditworthiness is hard, especially at the scale and complexity of cities.
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2. To avoid ratings altogether and focus on the price of tokens in crypto markets, unaffected by any rating, as CityCoins proposes to do.
Here are two use cases for leveraging crypto in the assessment of creditworthiness
1. To obtain decentralized ratings of Web3 DeFi projects, as Credmark attempts to do. They allow for people to build their own financial models to assess the value of the raw data they gather from other Web3 sites. There are also initiatives that focus on rating DeFi, Metaverse, and Regenerative Finance projects, such as Prime Rating.
See our Case Study on CityCoins for more information on this topic.
Insight 3 Assessing creditworthiness is hard, especially at the scale and complexity of cities.
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Future questions
These are questions we encourage crypto builders to ask when evaluating solutions for city-based issues that involve blockchain or crypto.
For crypto builders:
Insight 3 Assessing creditworthiness is hard, especially at the scale and complexity of cities.
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1
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Contents
November 2022 | cradl.org
Featured Case Study
CityCoins
What’s inside
Why CityCoins?
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CityCoins’ current mission is:
Given that CityCoins is the most well-funded and publicly visible crypto project with an originally stated goal to replace the functions of the city, CRADL applied ethnographic methods to offer a much more in-depth take on CityCoins.
In our study, CRADL:
CityCoins: supporting cities through crypto
Case Study Introduction:
Source (Image) CityCoins pitch deck, CityCoins, December 2021.
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Overview of CityCoins
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CityCoins funds cities via a 30% “voluntary tax,” though this is slated to change
Previous funding mechanism for cities:
The “voluntary tax” is a funding mechanism where 30% of the value locked in the protocol goes to fund a multisignature wallet owned by the city, linked to a city-related treasury.
Proposed funding mechanism for cities:
As of the writing of this report, CityCoins increased the city-related treasury’s share of STX that miners spend to obtain Citycoins to 100%.
Then, the city’s treasury would stake STX to obtain wrapped bitcoin and give a portion of the rewards to CityCoins stackers.
Sources Wrapped BTC (xBTC) is Headed to Stacks, Mason, January, 2021. (Image) Stabilize Protocol for Future Development - RFC. Whoabuddy, August, 2022. CCIP-013 Protocol Upgrade Vote Update, CityCoins Community Blog, November 2022.
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Case Study
Sources Mayor of Miami Francis Suarez Twitter @FrancisSuarez, June, 2021.
CityCoins started by fundraising for Miami and New York tokens in 2021
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Case Study
Sources “MiamiCoin disbursement to fund a rental assistance program, says Mayor Suarez.”, Hernández, O, 2022, CoinTelegraph. (Image) Mayor of Florida Francis Suarez Twitter @FrancisSuarez, February 2022.
In February 2022, Mayor Suarez withdrew $5.25 million from Miami’s wallet to fund a rental assistance program.
Soon, community members of CityCoins began to air their frustrations:
Neither CityCoins leadership nor token holders had expressed their expectation that disbursed funds be used in any specific way. Only once they had been spent on the rental assistance program did community members voice concerns.
The Mayor of Miami announces the reception of fiat money from CityCoins.
Miami’s use of the funds gifted by CityCoins spurred complaints from CityCoins members
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Case Study
“Is our plan to let them deplete the wallet on useless things like that? So we can continue to mine and lose our money?”
On the project’s Discord Server in February 2022, a member of CityCoins criticized the city of Miami for using the $5.25M that CityCoins gifted to Miami.
The backlash of the gift with no strings attached generated the creation of a DAO to oversee allocation of raised funds in CityCoins cities.
“How would you stop mayors spending that money on political stunts like miami mayor did on rental assistance programs? Well you can’t. The city coin contract needs to be changed.”
Miami’s fund withdrawal led calls for governance of funds, resulting in a DAO
Source CityCoins members discussion in Discord, February 15, 2022.
The usernames of users who do not have an active building or leadership role have been blurred from the image.
CityCoins community member
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Case Study
The token-based voting system that CityCoins created is not equitable.
Terrible for inhabitants
There is no link between CityCoins token-holding voters and city inhabitants.
It is not easy or accessible to vote on CityCoins. Whoever wants to invest in a city through CityCoins must buy Stacks tokens to participate in the governance of the DAO that would administer the funds given to the city.
�This system excludes people who:
Terrible for token holders
Token holders must trust the decisions made by the DAO, and accept the risk of a collective investment decision that may not reflect the actual needs of the city.
The DAO is at risk of group think by people not suited to evaluate the city or make investment decisions, leading to sub-optimal decisions..
Under CityCoins’ revised vision, the people living in a city using CityCoins funding could decide how much to contribute to public goods instead of paying mandatory taxes. They could also replace the city budget allocation through the DAO.
CRADL Take
CityCoins introduced a system where token holders voted on how to allocate their contribution to a city.
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Case Study
1 - Eligibility��Voting eligibility is not constrained by legal requirements; even if you have criminal records, you can vote.
2 - Access
All decisions and transactions are on-chain, which creates a more transparent process.
3 - Turnout
Voting is digital so it could increase turnout of young inhabitants.
The voting system that CityCoins is implementing to govern spending decisions has eligibility and access tradeoffs:
Even though voting in CityCoins does not have any legal requirements or exclusions other than token hodling, the technological barriers to participating in CityCoins disqualify people from participating and enable non-inhabitants to vote in city-related matters.
While tokens give people access to voting and the process itself may be more transparent, monitoring the process in real time becomes difficult. It would also lead to a new form of wealth concentration since only those who are crypto savvy or well-resourced can participate.
While voting via crypto wallets could increase younger inhabitants’ turnout, the high barrier to setting up a digital wallet can create a lower overall turnout and greater levels of exclusion.
CRADL Take
CRADL Take
CRADL Take
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People are not eligible to vote in CityCoins; tokens are.
1 - Eligibility
Voting eligibility across level of governments and CityCoins | ||||
Criteria | Local (cities, towns) | State | Federal | CityCoins DAO |
Must be 18 or older | It varies | | | Doesn’t Matter |
Residency requirements | | | | Doesn’t Matter |
U.S. Citizenship | It varies | | | Doesn’t Matter |
Registered to vote | It varies | | | Doesn’t Matter |
Has not been convicted of a felony or deemed mentally incapacitated by a judge | It varies | It varies | It varies | Doesn’t Matter |
Token holder | Doesn’t Matter | Doesn’t Matter | Doesn’t Matter | |
There is no equality between voters, only tokens are equals.��A participant must hold CityCoins tokens to be able to vote. A voter with five tokens holds five times the power of a voter with one token.
The token-voting system abandons the democratic principle of one vote per person.
Sources Laws permitting noncitizens to vote in the United States Ballotpedia, January, 2022. Town Charter, Riverdale Park, MD, Vote16USA Resources, Vote16USA, 2020. How do voting laws differ by state? USAFacts, August, 2022. Felon Voting Rights, National Conference of State Legislatures, June, 2021.
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Source Moving beyond coin voting governance. Buterin, August 2021.
In token-based voting, wealth concentration increases inequality and alienates inhabitants.
CRADL’s Generational Wealth report has shown that wealthy households can access more accelerants to grow more diversified assets, which leads to greater wealth and increased weight in representation.
The distribution of bitcoin has already begun to resemble the income and wealth distributions of the United States.
Vitalik Buterin, founder of Ethereum, claims coin-based governance increases barriers to bribery, as it is more expensive for people to bribe those with large holdings.
However, when the weight of a person’s vote depends on how many tokens they hold, wealth concentration contributes to voting inequality.
A city-level election within CityCoins fails to include every city inhabitant, and fails to exclude every non-resident. Only token holders vote.
2 - Access
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Source (Image) Do CityCoins bear the risk of wealthy people having a disproportionate influence over a city?, Reddit user, December, 2021
While it is too early to see voter turnout in CityCoins, a Reddit user is already concerned about the disparate voting power of a wealthy individual
2 - Access
3 - Turnout
The proposal to create a DAO to approve spending proposals for each city’s treasury has not been implemented yet.
There is no available data for voter turnout in CityCoins regarding proposals that concern cities.
A Reddit user already proposed in December 2021 the implementation of digital identities to ensure inhabitants have equitable access to voting within CityCoins.
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Case Study
Key Takeaway No. 3
Token-based voting for public goods risks hearkening back to a time in which property (e.g. governance tokens) was the sole determinant of who could vote.
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CityCoins has a limited understanding of the demographics of its membership (by design).
“We know that 60% of our users are based in North America. But little beyond that.”
At Consensus 2022, during Patrick Stanley’s presentation on CityCoins 2.0 at the DAO House, he was asked if CityCoins knew the demographics of their community members or token holders, in respect to who would have voting power.
Patrick Stanley, Community Leader of CityCoins
Patrick Stanley answering questions on CityCoins 2.0 at Consensus 2022, in Austin, TX in June 2022.
Later on, in a governing call on July 2022, Stanley highlighted that network states only require a loose geographic relation between voters and states.
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Case Study
CityCoins intends to make investment decisions on behalf of cities without representation from their “geographic” residents.
Patrick Stanley, a CityCoins Community Lead, recognized the need for an identity layer, either pseudonymous or revealed, within CityCoins so its members can:
However, there is no identification of the inhabitants of a city. Inhabitants in a shared geography do not matter in a Network State, which is an online community agnostic of geography. What matters to CityCoins is belonging to their decentralized, encrypted community. Your social network—not your neighbors or physical proximity—will determine your capacity to participate in the community.
As of summer 2022, CityCoins has not bestowed voting rights based on who lives in a city.
Sources 2040 Vision Presentation, Patrick Stanley, CityCoins, July 2022. The Network State, Srinivasan, July, 2022.
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Case Study
CityCoins tried to abstain from connecting with cities to “move at the speed of crypto.” Now they slow down to listen and include people.
At first, CityCoins tried to disengage from getting input from city officials and community leaders.
They called for a “more efficient” allocation of capital, claiming local bureaucracy would slow them down. Any community buy-in would come from inhabitants participating via the DAO.
It’s the epitome of “build it and they will come.” However, it ends up being: “If they don’t come, it’s on them.”
As of summer 2022, the Discord discussion and the path forward call for slowing down, listening to communities, and empowering people.
Source (Image) Path Forward Proposal, CityCoins, Governance Forum, August, 2022.
(Above) Proposal to slow down CityCoins Raphael Sierra proposed in CityCoins Governance Forum for the project to slow down by August 2022. By then, CityCoins had already received strong criticism and stopped launching new tokens for cities.
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A CityCoins Discord community member
A CityCoins Discord community member expressed their opinion in July 2022 on the purpose and path of the project. The username has been blurred for privacy purposes.
There is a growing disconnect between CityCoins’ current goals and its originally stated goal of helping people in cities.
“I feel like this discord channel and the city coins team isn’t too helpful in helping individuals with the ways to develop a token for their city…
The member’s feedback was welcomed by community leaders, inviting the person to participate in the weekly Zoom town halls and the roadmap forum, in addition to continuing the conversation in Discord.
I see so many [people] who want to figure out how to build a coin for their city and no one has created a roadmap or a pathway to make this a reality on the citycoins team.”
Source (Image) CityCoins Discord Message, July 2022.
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Case Study
Key Takeaway No. 4
Wealthy non-inhabitants could control a city token if the residency or the identity of city inhabitants is not accounted for in a Web3 project related to public goods.
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CityCoins has demonstrated that people are willing to provide funding for cities.
CityCoins raised $21.15 million for the city of Miami, and $20 million for the city of New York. Clearly, the platform’s user base was willing and able to raise money.
Miami withdrew $5.25 million in February 2022 and has not withdrawn from the fund since then. New York rejected the funds altogether.
CityCoins had plans to launch a coin in Austin, Texas, but has not raised any funds yet.
Comparison between cities’ financial needs and CityCoins’ funding capabilities | |||
City | Miami, FL | New York City, NY | Austin, TX |
City general fund latest budget total ($ billion) | 0.88 | 98.6 | 1.67* |
Amount raised from mandatory taxes, fees, and services ($ billion) | 0.69 | 67.32 | 1.49* |
CityCoins funds raised ($ billion) | 0.02115 | 0.02 | 0 |
CityCoins funds as percentage of mandatory taxes, fees, and services (%) | 3.07 | 0.03 | 0 |
Sources Adopted Budget in Brief FY 2021-2022, City of Miami. FL. Approved Budget 2021-22, City of Austin, TX. NYC Executive Financial Plan Report, NYC.
* Includes the budget for the city’s Special Revenue Fund
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Case Study
CityCoins’ “voluntary tax” would replace mandatory taxes, according to their initial vision
CRADL Take
If CityCoins aims to replace mandatory taxes in the future, their fund should be able to cover all of the services and public goods that cities provide.
Accordingly, it should also provide for a representative governance structure that decides which services and public goods the city will provide.
Source (Image) How [CityCoins] works, CityCoins Homepage. CCIP-013 Protocol Upgrade Vote Update, CityCoins Community Blog, November 2022.
(Above) Graph explaining how CityCoins works CityCoins’ homepage shows how mining for tokens worked until October 2022. On November 1st, the community passed the proposal 13 which changed the mining flow. For more information, see our slide in this report on the “voluntary tax”.
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Case Study
Crypto buyers of CityCoins tokens obtain Stacks tokens in return. There is no linkage between the funds that cities could use and the value of the tokens that remain under control of crypto buyers.
For the token to be a valid investment, it needs to have intrinsic value or use.
In the absence of clear value behind the tokens, crypto buyers and CityCoins leadership have requested to link certain benefits provided by a city to the tokens in order to define their value and incentivize token holding.
Sources CitiyCoins Discord server message 1, August 2021. Message 2, CityCoins, August, 2021. Message 3, July 2022. Message 4 December, 2021. Message 5, February 2022.
Crypto buyers also look for tax breaks and tax discounts for holders of city-specific CityCoins tokens.
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Case Study
As the return on investment is unclear, CityCoins buyers increase their claims.
“I could be rewarded for hodling MIA. Maybe I get free admission into museums or public transportation …”
Community members of CityCoins discussed the value of the token and possible perks that the city could provide.
Since there is no clear return on investment, community members proposed differentiated access to goods and services to promote the token.
Democratic governments attempt to prevent influence on spending from funding providers. Lenders either provide funding or they do not. With the CityCoins model, the investor also acts as a decision maker.
Source CityCoins Discord server message, CityCoins, August, 2021.
A CityCoins Discord community member
A member of the CityCoins Discord server discusses possible benefits to token holders provided by cities in August, 2021.
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Case Study
As CityCoins tokens do not have a current use, they tanked shortly after they were issued.
CityCoins argues that investors should use the market capitalization of city tokens as an indicator of the value of cities.
However, the tokens are volatile, with no intrinsic use or value.
The market value of the NYC and MIA tokens tanked shortly after issuance. MIA is down 98.78% since its all-time high of six cents of a dollar, and NYC Coin is down 94.1% since its all-time high of six thousandths of a dollar.
Source (Above) Miami Coin Historical Price, NYC Coin Historical price, Coinmarketcap.com.
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Case Study
After launching MIA and NYC as CityCoins’ tokens for Miami and New York, respectively, CityCoins founder Patrick Stanley suggested that the price of each city token within the CityCoins environment could reflect the valuation of cities, as well as people’s sentiment on the city.
Under this CityCoins vision, as the token price goes up, so does people’s approval of a city. Likewise, as the token price of a city goes down, fewer and fewer people would hold a city in high regard.
CityCoins is not a reliable indicator of the value of cities.
See our insight in this report on the objective indicators of financial health to read more about this topic.
CRADL Take
CityCoins wants the price of a city's token to reflect the city's economic value.
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Case Study
CityCoins doesn’t offer an efficient fundraising plan for cities interested in crypto.
After the city of Miami used the funds gifted by CityCoins, members of the CityCoins community proposed that, subsequently, 50% of CityCoins-raised funds must be used to support projects that contribute to the Web3 ecosystem.
If the goal of CityCoins is to develop cities, this mandate is inefficient. Had CityCoins worked as a non-profit for city development, it would have been subject to the fund management standards of a non-profit. Non-profits ideally do not allocate more than 35% of their incoming cash to sustain overhead costs, such as administration and marketing, or in this case general promotion of the Web3 ecosystem.
It is still risky for a city to treat crypto as a public good to be promoted.
CRADL Take
It would be preferable for CityCoins to act as a non-profit that works to develop the Web3 ecosystem without straining cities for resources or demanding execution of specific policies.
Imagery
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Case Study
CityCoins conflates the role of investor and voter.
With token-voting, CityCoins crypto buyers would end up deciding on proposals that impact how cities get developed, even if they are not inhabitants in those cities.
Right now, without CityCoins, city officials choose their projects and funding sources. There are financing alternatives that enable cities to decide how to use funds without input from investors.
Currently, city inhabitants can vote on the city’s issuance of general obligation bonds to finance projects, but not participate in the budget creation process. Participatory budgeting allows people to be involved in the entire budgeting process of a small fraction of a city’s budget. CityCoins would require people to buy a city token prior to participating in the budgeting process.
For more information on participatory budgeting, see our case study on Participatory Budgeting Project.
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Case Study
Key Takeaway No. 5
Web3 projects working with cities need to avoid conflating the role of investors and voters.
See our insight in this report on the influence of funding mechanisms to read more about this topic.
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…it is not enough to prove that you can raise millions of dollars, you have to prove that the people that are holding these tokens are actually going to want to participate in the economies that you create.”
Following Lewis’ argument, in order for CityCoins to avoid speculative uses and have an actual connection between cities and token holders, the latter should want to participate in the economy of CityCoins and the city they want to invest in.
Projects need to differentiate token holders from investors.
Jonathan Lewis, Strategy & Innovation Leader
Jonathan Lewis presenting at IxDA’s Interaction 18 conference on how to design a cryptocurrency and how to foster network utilization without fueling speculation or contributing to wealth concentration.
“How do you get tokens into the hands of people who want to participate not just speculate?
Source (Image) 35 Million Dollars in 30 Seconds: Designing a Cryptocurrency. Jonathan Lewis. Interaction 18, February, 2018.
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Case Study
Key Takeaway No. 6
A Web3 project for public goods without clear returns for investors could convert cities into pay-to-play spaces.
It could lead to the creation of second-class inhabitants with limited or null access to the Web3 project. These people would enjoy fewer goods and services than token holders.
Token holders would be granted higher priority than inhabitants.
See our insight in this report on the influence of funding mechanisms to read more about this topic.
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These goals end up being either insufficient, unclear, or unattainable.
Wealth
Whose wealth? At the individual or household level? For whom? Would it perpetuate existing inequality?
Health
Is it the overall health of inhabitants? Preventative health? Lowering the cost of healthcare?
Truth
What is the role of cities in growing the truth? Can a city develop more truth?
Happiness
How will this be measured? How can its achievement be separated from other goals?
Every indicator proposed by CityCoins hides biases.
Patrick Stanley presents key questions for CityCoins to address in his presentation of the entity's 2040 vision, in July 2022. He mentioned that they should focus on wealth at first to gain traction.
CRADL Take
CityCoins states that their goals for cities are wealth, health, happiness and truth.
CityCoins aims to increase adoption of the token by focusing on building wealth first, through the disproven economic development theory of trickle-down economics.
See our insight in this report on the goals of economic development to read more about this topic.
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Case Study
Sources (Above) Crypto or not, Successful Financial Inclusion Projects Share These Two Factors, Wang and Serota, CRADL April, 2022. Assessing Proof of Impact, CRADL. CityCoins Mission and Strategy, CityCoins.
I | II |
III | IV |
Product Metrics
(e.g. accounts opened, MAU)
Social Impact
Metrics
(e.g. overall debt reduction, higher income generation)
One-Off
Model
Traditional CSR & Aide
Sustained Financing
Model�Core Business Strategy
The project focuses on product metrics such as:
The funding of city initiatives is a one-off model that is not aligned with Citycoins’ core strategy, and deploys capital without the intent to create a value cycle. There is no clear fundraising strategy sustained over time.
CityCoins measures itself, but doesn’t measure its impact on cities.
CRADL Take
The CityCoins model is not sustainable. It relies only on token purchasing made by community members, without reinvesting returns from past investments in cities with CityCoins’ funds.
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Topic | CITIES | CITYCOINS (CRYPTO BASED SOLUTION) | Read more in this insight | ||
What cities offer | What local government looks like in practice | What CityCoins says it does | What the project looks like in practice | ||
Influence from funding | The inhabitants are represented by different political groups on the city council, and the funding mechanism does not influence the city budget. | Outside political influences can drown out local community voices. In more diverse towns, a lack of active incorporation of voices often leaves people out. | People have direct influence and monetary investment in their own cities. | CityCoins could convert cities into pay-to-play spaces, as they seek to merge investors and voters. Token holders would have as much influence as a voter usually has. | Insight # 1: Funding mechanisms influence how cities spend. |
Economic development goals | Traditional economic development goals are centered on nurturing export economies, where cities sell goods and services abroad to bring in added value and growth. | Traditional policies have struggled to solve the greater wealth and income inequality that affects both the cities and the country. | CityCoins’ declared goal is to bring “wealth, health, happiness, truth” to individuals in cities. | Aiming for wealth alone is a return to outdated economic development practices. CityCoins fails to offer any innovative goal, and even states goals that cannot be addressed by city policy. | Insight #2: The dominant belief that economic growth alone equates to financial health of a city is short-sighted, unsustainable, and only favors the wealthy. |
Objective parameters to compare cities | Rating agencies are private, independent, and offer objective ratings of the financial health of cities. Investors can compare the risks and the yield of cities’ bonds. | As cities focus only on what agencies measure, they may overlook needed social or economic policies to focus on improving their debt ratings. | The market capitalization / value of each city’s token would be an objective measure of a city’s financial health compared to other “crypto cities.” | Crypto tokens need to minimize volatility and anchor themselves with cities before they can reflect those cities’ economic value. | Insight #3: Assessing creditworthiness is hard, especially at the scale and complexity of cities. |
Overview of CityCoins as a solution for cities
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Case Study
Organizations Featured
Why these organizations?
Other Case Studies
Examples �of Innovation �in Civic Engagement �& Funding
These organizations have made efforts within Web3 and outside of Web3 to address city topics with varied approaches and focuses. In contrast to CityCoins, these projects focus on the community first and foremost.
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Participatory budgeting is a democratic process in which community members decide how to spend part of a public budget, rather than via a representative.
Cities that do participatory budgeting allocate a portion of the budget for inhabitants to directly decide how it will be used instead of the City Council. This direct involvement in the budgeting process is an increased participation in government systems, thereby reducing problems of access and turnout.
The Participatory Budgeting Project—one of many groups that promotes this style of budgeting around the world—has provided technical assistance and full implementation of participatory budgeting for cities in the United States since 2009.
Participatory budgeting taps into community engagement and activism.
Source Participatory Budgeting Project.
Case Study Introduction:
People engage with participatory budgeting. Local inhabitants ask themselves human centered questions on how to improve their communities.
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How the Participatory Budgeting Project impacts North America.
Sources Participatory Budgeting Project.
Since 2009, Participatory Budgeting Project (PBP)worked with more than:
Success metrics:
$300 M public funding allocated through PB
402,000 participants in the United States and Canada
1,630 projects generated within the communities served
Community-led ideas. In the lower picture, Sharri Davis, Co-Executive Director of PBP, leads a brainstorming workshop, where community members craft solutions for their surroundings.
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The Participatory Budgeting Project recognizes the gap between representatives and inhabitants, and reaches out to every person or group of persons that might be affected by proposals. �
The community designs the process from scratch: they decide the voting mechanism most suitable for the community to use, how to evaluate the winning projects, and then brainstorm ideas. Volunteer “budget delegates” from the community engage with city officials and agencies to grow the ideas into feasible proposals.
Finally, the community votes, and then the city funds and implements the winning projects.
The Participatory Budgeting Project engages communities to co-design civic decision-making processes.
Source (Left, Above) Participatory Budgeting Project
Although it is highly engaging for community members, the process of participatory budgeting is time-consuming. It takes between six to nine months to develop a single participatory experience from scratch. However, as a result, the gap between inhabitants and voters is reduced to a minimum.
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Participatory budgeting does not apply to every public budget allocation.
Tradeoffs in Participatory Budgeting | ||
Criteria | Inhabitants | Local government officials |
Advantages | Reduces governmental discretionary budget | Builds trust between citizens and government |
Participant control of policy | Strategic community alliances and legitimacy building | |
Disadvantages | Pointless participation if projects are not implemented | Reduces governmental discretionary budget |
| Risk of executing a bad decision or alienating constituents | |
Long process, time consuming | ||
Source Citizen Participation in Decision Making: Is it Worth the Effort? Renée Irvin and John Stansbury, Public Administration Review, Jan / Feb 2004. Vol. 64, No. 1. Page 58.
Cities have processes in place where the executive branch of local government proposes a budget with expected revenues and expenditures. Then, the legislative branch approves or modifies the projected budget.
It is a very technical and time-consuming process in which the community is not involved.
Participatory budgeting is a complementary process that increases participation but does not replace the traditional budget.
Either way, inhabitants and local government officials experience advantages and disadvantages of the participatory budgeting process.
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Who can vote in participatory budgeting?
Voting eligibility across levels of governments in the U.S., compared with CityCoins and the Participatory Budgeting Project | |||||
Criteria | Local (cities, towns) | State | Federal | CityCoins DAO | PB |
Must be 18 or older | It varies | | | Doesn’t matter | Doesn’t matter |
Residency requirements | | | | Doesn’t matter | |
U.S. Citizenship | It varies | | | Doesn’t matter | Doesn’t matter |
Registered to vote | It varies | | | Doesn’t matter | Doesn’t matter |
Has not been convicted of a felony or deemed mentally incapacitated by a judge | It varies | It varies | It varies | Doesn’t matter | Doesn’t matter |
Token holder | Does not apply | Does not apply | Does not apply | | Does not apply |
Sources Laws permitting noncitizens to vote in the United States Ballotpedia, January, 2022. Town Charter, Riverdale Park, MD, Vote16USA Resources, Vote16USA, 2020. How do voting laws differ by state? USAFacts, August, 2022. Felon Voting Rights, National Conference of State Legislatures, June, 2021.
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Of the several voting mechanisms that participatory budgeting can use, quadratic funding creates the most clarity around what voters prefer among different options and the level of funding they want to see for each preference.
City3 began in 2022, and aims to create more just financial and governance institutions or cities through an open source Web3 platform that is community-led. City3 demonstrates the Web3 use case for a community to directly access funding, as opposed to using Web3 tools for funding governments.
As an example, their governance programming in Oakland connects local non-profits and city residents with tokenized voting platforms like Gitcoin Grant rounds, which implements quadratic funding in order to support community-driven needs with crypto.
Sources City 3, WTFISQF, An Introduction to Quadratic Voting.
Cities meet Web3: City3
Case Study Introduction:
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City3 helps people use Web3 to achieve tangible outcomes for their cities
Sources City3, WTFISQF, An Introduction to Quadratic Voting.
As part of their work on governance, City3 aims to onboard 5,000 inhabitants of Oakland, California, so they can select community organizations to receive philanthropic funding through the Gitcoin Grants Rounds. Their goal is to empower the existing community with new coordination tools powered by Web3.
As a result of the work of City3 in 2022:
7 non-profits raised $3,799.07—comprised of 454 contributions from 249 unique contributors—and received $15,000 in matching grants from City3 and Oakland Fund for Public Innovation.
Darrell Jones III (DJ), City3 Co-Founder and CEO, in one of the project’s onboarding sessions for inhabitants and community organizations.
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The community-driven approach of City3 shapes their actions.
“We try to go inside out, find those that are closer to the pain.”
The differential is that this Web3 project is genuinely community-driven. The goal is onboarding inhabitants and community organizations into Web3 to identify new funding opportunities to expand their impact in cities through technology.
DJ co-created City3, answering the call to create more compassionate communities. The co-founders decided to build a fully crypto-native governance model experience that onboards people already working within a community.
DJ, Co-Founder of City3
Darrell Jones III (DJ) introduced small business owners in Oakland, CA, to a community currency and looked for local owners to shape the crypto community.
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Sources (Left, Above) Humanity Cash. (Left) New old idea, Andreas Adriano, Finance and Development, IMF, March 2021. The Economics of Community Currencies: a Theoretical Perspective, Jorim Schraven, 2001. Residual Barter Networks and Macro-Economic Stability: Switzerland’s Wirtschaftsring. James Stodder, 2009.
Humanity Cash introduces community currencies for people to use in transactions within a city, by depositing fiat currency in local community banks.
60% of the reserves are kept in cash or cash equivalents in local banks so businesses can redeem fiat whenever they want.
Community currencies have been shown to be useful to create purchasing power, and to be more accepted as a secondary or residual currency when there is a shortage of commonly used money.
Community currencies can grow local economies.
Case Study Introduction:
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Humanity Cash can teach Web3 projects how to provide clear returns for impact investors.
Humanity Cash has a clear fundraising strategy.�To fund the reserves of community currencies, Humanity Cash issues bonds that impact investors’ purchase. Community members and non-profits can also supply the cash needed to back the local currency.
It offers clear cash incentives to investors.�Investors get paid an interest coupon and the principal back.
Investors do not decide how Humanity Cash will repay—they only choose whether to invest or not.�Humanity Cash invests 40% of the funds in environmental, social, and governance opportunities within communities to pay the coupon interest to the investors.
There is an exit strategy in the case of default.�In the case of a default, the principal is converted to a tax-deductible donation.
Source (Left) Humanity Cash
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Sources Urban Change. Lynchburg leaders plan to engage "anchor institutions" for economic growth, McGirl, WDBJ7, June, 2019.
Urban Change proposes to incentivize inhabitants into civic engagement through the distribution of tokens that can be used within the community. It was founded in 2022 as an evolution of Colu, a project that began in 2014 with $35 million in funding to create innovative solutions for cities and communities. Colu developed solutions for municipalities including Boston and San Mateo County, California.
After fulfilling community initiatives, inhabitants obtain the local currency and can later use it to purchase goods and services in local businesses.
This crypto project requires community buy-in from an anchor institution or from anyone within the city that is willing to fund the community initiatives. Urban Change calls these anchors “community launchers.”
Crypto projects can implement communal nudging behavior.
Case Study Introduction:
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Urban Change issues different tokens for diverse audiences and goals.
Urban Change designed a system with a token and two different coins that caters to each of the actors within a community.
The Urban Change Token is useful for launching a community, designed for community launchers.
The Local Coin is the reward for residents that accomplish community initiatives, such as recycling or supporting local projects. They can pay with Local Coins in shops within the community, further strengthening the town economy.
The Impact Coin is the reward for purchasing with Local Coins. It absorbs volatility from the Local Coin, enables residents to gain voting rights for new initiatives, and provides holders higher earning rates for Local Coins.
Source Urban Change Whitepaper, Urban Change, April 2022.
Urban Change laid out the relationship between its different tokens and the way stakeholders relate to the system.
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Key Takeaway No. 1
Aiming for wealth alone is a return to outdated economic development practices.
Go to the Case Study on CityCoins and its development goals, or see our insight in this report on economic development to read more about this topic.
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Key Takeaway No. 2
For crypto tokens to reflect cities’ economic value, they need to minimize volatility and anchor themselves with underlying city assets.
Go to the Case Study on CityCoins and the price of the token as a reflection of economic value, or see our insight in this report on indicators of a city’s financial health to read more about this topic.
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Key Takeaway No. 3
Token-based voting for public goods risks hearkening back to a time in which property (e.g. governance tokens) was the sole determinant of who could vote.
Go to the Case Study on CityCoins and the effects of token-based voting to read more about this topic.
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Key Takeaway No. 4
Wealthy non-inhabitants could control a city token if the residency or the identity of city inhabitants is not accounted for in a Web3 project related to public goods.
Go to the Case Study on CityCoins and wealth overrepresentation to read more about this topic.
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Key Takeaway No. 5
Web3 projects working with cities need to avoid conflating the role of investors and voters.
See our insight in this report on the influence of funding mechanisms to read more about this topic.
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Key Takeaway No. 6
A Web3 project for public goods without clear returns for investors could convert cities into pay-to-play spaces, with potential second-class inhabitants accessing fewer goods and services than token holders.
Go to the Case Study on CityCoins and investor’s influence, or see our insight in this report on the influence of funding mechanisms to read more about this topic.
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Black people have been systematically exploited since the country’s founding. A forthcoming report asks: How has this historic oppression shaped the Black community’s approach to wealth-building? And in particular, why are Black people outpacing every other group in crypto adoption?
A project’s tokenomics produce intended and unintended consequences that affect the communities surrounding a project. Web3 builders navigate the regulatory uncertainty, funding pressure, and complexity of tokenomics in their quest to find product market fit. Our forthcoming work asks: How are Web3 builders designing their organizations and tokenomics system, and what is the impact of that design?
Current approaches within the dominant financial system are clearly failing millions. What are potential alternative approaches? How might Web3 enable new means of income generation? What is the potential for crypto products to create new forms of social networks that facilitate wealth-building? And what are the implications for new crypto alternatives?
Next Steps
This Cities and Crypto report lays the foundation for a set of forthcoming that will be focused on how the crypto industry is (or isn’t) serving people’s financial needs.
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Appendix
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Contents
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Additional Resources
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Contents
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Studies, Books, and Reports
�The Chainalysis 2022 Geography of Cryptocurrency Report
Superstars, rising stars, and the rest: Pandemic trends and shifts in the geography of tech�Understanding the digital divide: Philadelphia’s report on digital access
Remaking Economic Development. The markets and civics of continuous growth and prosperity.
Unpacking the State and Local Tax Toolkit Sources of State and Local Tax Collections
The High Road to Economic Prosperity
Beyond a Liberal Critique of ‘Trickle Down': Urban Planning in the City of Malmö
Articles
Why Do Cities Want Their Own Cryptocurrencies?
Trickle Down Economics Has Failed Its Growth Mission
35 millions in 30 seconds - Designing a Crypto Currency�Mayors: Cryptocurrency won’t solve your cities’ problems
Moving beyond coin voting governance
Hyperlocal collaboration thrives after Covid�Why Your City Matters to Your Business
Additional Resources
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Ethnographic Artifacts: Discord messages
We have left the handles of publicly-known community leadership readable, and have blurred handles of community members with no employment relationship to CityCoins.
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Contents
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A CityCoins Discord community member discussing with leadership
Members of the CityCoins community discuss how mayors are supposed to use the funds raised by CityCoins, and where should the value be captured. People with no leadership role in the community have been blurred for privacy purposes.
Source (Image) CityCoins Discord Messages, February 2022.
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A CityCoins Discord community leader calls for more funds for tech startups
A complaint about the use of CityCoins to fund a rental assistance program instead of funding tech startups .
Source (Image) CityCoins Discord Message, April 2022.
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Discussion on the definition of tax for the city share of Stacks mining through CityCoins
The CityCoins leadership discuss with a community member on the name or definition of the share of the mining that goes to a cryptographic wallet managed by a city. The username of the community member has been blurred for privacy purposes.
Source (Image) CityCoins Discord Messages, August 2021.
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Incentive design and value capture
Two CityCoins Discord community members discussed about the incentives to bring in local government adoption. One user proposes fee reductions or free admission to public services in exchange for holding the token. Another user expressed their concern that government is extremely well funded and inefficient, so there is no reason to provide more funding for the government to control the CityCoins funds. The usernames have been blurred for privacy purposes.
Source (Image) CityCoins Discord Message, August 2021.
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Discussion on the donation of funds to cities and reception of perks in return
Three community members discuss on July 2022 about how governments would receive funds from CityCoins, and how token holders can receive perks from city in return. The usernames have been blurred for privacy purposes.
Source (Image) CityCoins Discord Messages, July 2022.
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Discussion on the value of MIA, the CityCoins token for Miami
Two community members discuss the value of the MIA token, the possible advantages for cities, and the tax benefits for token holders. The usernames have been blurred for privacy purposes.
Source (Image) CityCoins Discord Messages, December 2021.
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A CityCoins Discord community builder
A CityCoins Discord community builder discussed the complexity of tax discounts for mining tokens.
Source (Image) CityCoins Discord Message, February 2022.
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A CityCoins Discord community member
A CityCoins Discord community member expressed their opinion in July 2022 on the purpose and path of the project. The username has been blurred for privacy purposes.
Source (Image) CityCoins Discord Message, July 2022.
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CRADL is a research organization committed to objectively documenting people, organizations, and activities in the crypto ecosystem and their impact on the broader industry.
The views and perspectives of research participants included in this report are their own and not necessarily reflective of CRADL, its partners, funders, and advisors.
We do not provide investment advice nor do we endorse any cryptocurrencies, financial strategies, products, or companies.
Cities and Crypto
November 2022 | cradl.org