Blockchain bond proposal nears city council vote in Berkeley

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The Berkeley, California, City Council will vote Tuesday on whether to move ahead on plans to issue a "micro" bond using blockchain technology.

Vice Mayor Ben Bartlett proposed that the city council consider issuing $3 million in a seven-year note to pay for a new fire engine.

The note would help test-drive the financial infrastructure for the new funding method and could set the city on a path of issuing bonds for affordable housing, council members said during an April 24 work session.

Bartlett said in an interview he wants to use blockchain technology to issue micro-bonds, not mini-bonds, because he wants the city to be able to issue bonds in denominations in the $10 to $25 range – not the $1,000 blocks that Cambridge, Massachusetts, employed when broker-dealer Neighborly sold $2 million in mini-bonds for the city in February 2017. Neighborly won the Bond Buyer’s Deal of the Year award for the non-traditional category last year for that transaction.

“We want to go further than what Cambridge and Denver did, by making the units even more accessible to more people, because they would be cheaper,” Bartlett said.

More people could afford $10 than $1,000, making investing in city projects an option for more people, which Bartlett said would be a wealth builder for residents.

“It’s an exciting course to be expanding the market; and also to be creating new asset classes and opportunities for our people to own new assets, particularly in light of what is happening with creeping poverty,” Bartlett said.

The work session, orchestrated by Bartlett to better explain the concept to the council members, broke down the pieces of what the council is trying to do. The deal involves several new concepts, and the city could decide to move ahead on all or parts of the proposal.

“The idea is to issue micro-bonds via the blockchain,” Bartlett said. “If the process allows it, we could go a step further and drive resources via a tokenized currency.”

The city announced in February it was working with Neighborly Corp. on a plan to head to market as soon as May with a public initial coin offering that would be backed by municipal bonds. Neighborly would act as the underwriter and the UC Berkeley Blockchain Lab would help develop the code. Bartlett and Mayor Jesse Arreguín brought the concept to the city.

The city had talked about investors being able to purchase the bonds using cryptocurrencies like bitcoin. Investors could also choose to receive interest payments in dollars or from a tokenized denomination.

The city also discussed at its work session creating a tokenized monetary system that would be more like a voucher system to purchase goods and services from Berkeley residents. Under that system, investors in the city bonds could receive interest payments using the Berkeley money.

Scott Morris, founder and chief executive officer of AmeriQoin, who created Ithacash, explained during the work session how the city could set up a system that has been used in cities like Ithaca, New York, to create Berkeley’s own tokenized money. The money would be more like a voucher system or coupons than an actual currency and could be used to purchase items from Berkeley businesses. Such systems have typically been used to incentivize spending at local businesses and bolster local economies. Berkeley already has a system in which senior citizens can use vouchers to take a taxi.

If the city moves ahead, it would be the first in the country to hold an ICO, the process through which cryptocurrency tokens are distributed in exchange for investments. The claim is that marrying blockchain technology with municipal bonds would make transactions more efficient and transparent.

Putting the bonds on a blockchain would not only create transparency, but could save the city money by cutting out some of the intermediaries involved in bond transactions, Boris Reznikov, director of partnerships at Stellar, said during the presentation.

Under the proposal, the shares are like regular municipal bond creation and distribution, but would be done in systems that record to a blockchain, a public, encrypted ledger that keeps track of transactions, Reznikov said.

The city’s presentation pointed to a 2015 study by the University of California, Berkeley’s Haas Institute that reported it costs issuers $3 billion to $4 billion annually to sell municipal bonds.

The efficiencies created by using blockchain would also make it economically feasible to issue bonds in amounts as small as $25, Reznikov said. Investors would be able to purchase municipal bonds in a tokenized form denominated in U.S. dollars, or they could purchase the city’s bonds with dollars or crypto assets. If investors sell the bonds, they would be paid in dollars or crypto assets.

The council was largely enthusiastic about the concepts at the work session. But the cryptocurrency aspect might be a harder sell.

“The part I have a problem with is using cryptocurrency,” Councilwoman Susan Wengraf said during the work session. “I don’t know much about it, but I know it’s very unstable. The examples used by other communities successfully [issuing mini-bonds] was based on dollars - cash, not cryptocurrency. I would be very happy to support the first part of the proposal and more skeptical about cryptocurrency.”

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