States are integrating cryptocurrency into public finance, but right now, it seems to be a distraction for the muni market, critics said. Municipal market participants and observers believe market modernization efforts should be focused on creating standardized digital infrastructure and improving efficiencies in managing market data.
"I'm all for progress, but real progress, not pet projects and diversions of assets," Spline Data cofounder Matthew Smith said. "If you ask me, right now, the highest priority problem as it pertains to digitalization for local governments is the standardization of documents — making them interoperable with other municipalities."
Smith believes the development of state-backed stablecoins and other public finance crypto initiatives takes away attention from key issues.
"It's kind of a distraction from some of the more straightforward things that we could probably solve, like digital reference data," he said. "That would be an immediate benefit to issuers, buyers, sellers, holders, agents, you name it. But it's not sexy, so nobody wants to focus on that."
Instead of working to standardize filings and disclosures for the municipal market, states and cities are experimenting with cryptocurrency and digital assets, observers said.
Wyoming is the only state with a state-backed stablecoin, which was released at the beginning of this year. North Dakota plans to roll out its this year.
Wyoming's Frontier Stable Token was created as a resource for the state's various "digitally native programs" and to supply a vector by which people could put their money in special-purpose depository institutions. But, the "biggest reason" was to develop revenue diversification, head of Wyoming's Stable Token Commission Anthony Apollo said.
"We take the dollars that we get for the purchase of stable tokens, we invest those into short-duration U.S. Treasuries and repurchase agreements, and those are interest-bearing," he said. "Essentially, we buy the bonds, the federal government pays interest on those bonds, and the state receives that interest."
The state plans to use the interest earned to help fund programs, including public schools.
The token has seen limited use, but the commission is hopeful engagement will increase. Efforts to increase usage in-state are still at the grass roots level, but the commission has seen interest from other states.
"We've received inbound interest from other states about issuing tokens on their behalf," Apollo said. "We do have explicit statutory approval to do that."
The commission has explored the potential impact of the stablecoin on the muni market.
The panel had a "number of conversations around what issuing a muni bond on a blockchain would look like;" however, there are no plans for the agency to issue bonds anytime soon, Apollo said.
"There does not seem to be any impediments for other private issuers to issue tokenized muni bonds and then use the stable token as the vector in which dollars are collected, utilized, and then provisioned as interest to the holder of those tokenized bonds," he said. "We're certainly looking at that."
On the other hand, the North Dakota stablecoin varies slightly from Wyoming's. Roughrider Coin is solely utilized for banks to accommodate transfers to other banks and credit unions; the token will not be made available for general public use, according to the Bank of North Dakota's website.
BKC co-founder Gregg Bienstock has a mixed perspective.
"I don't quite understand what I'm going to call the business strategy of a state issuing their own stablecoin," he said.
The utility of a state-specific stable token does not seem to hold too much benefit for Bienstock. However, he believes states' movement toward embracing digitalization, tokenization and digital assets has value, but the effort could be devoted to better projects.
"Being ready for digital and what the digital world will bring to us — everything from debt administration to compliance to transparency across the life cycle of an issue to payments to receipts, taking advantage of smart contracts, taking advantage of the ability to collect and also make payments to whether it's bondholders or vendors or tax receipts coming in from all those things — makes all the sense in the world," Bienstock said. "I just question why one would create a currency stablecoin as opposed to building the digital infrastructure to take advantage of a stablecoin."
Despite his feelings surrounding state-backed tokens, Bienstock feels these experiments are steps in the right direction because the initiatives provide insight.
"Any steps forward by folks are beneficial for the purposes of the rest of us who are interested in this area of learning," he said. "So whatever we do next, we can benefit from what others have done, both good and bad."
How states approach state-backed stablecoin initiatives could have varying effects on the market, according to Moody's Ratings.
"If every state does create its own stablecoin, we could have an increasingly fragmented system, and that's why we need to look toward interoperability," said Gregory Sobel, Moody's vice president of public, project and infrastructure finance.
"We do need interoperability, but at the same time, we have to understand that most of these stablecoins, especially backed by the state, are for interstate usage and not across jurisdictions," said Rajeev Bamra, Moody's executive director of digital economy. "They are focusing on how they can make their existing interstate processes efficient in terms of payments and perks and whatever else they want to offer to the citizens."
Colorado, Utah and Ohio incorporated crypto into their finances, allowing citizens to pay taxes with digital currencies.
Ohio began this capability in 2018 but suspended the program the following year, "because [the program] hadn't gone through the proper approval process," the Ohio Treasurer's Director of Communications Laura Martine said. "So since 2019, we haven't had that capability to use crypto."
Despite the suspension, there was little to no pushback, considering "few people ever used it," the Ohio Treasurer's Deputy Chief of Staff Zach Pouty said.
Ohio plans a more widespread digital wallet:
"We're in the build process of this brand new holistic centralized digital wallet concept," Pouty said. "Taxpayers, licensees, anyone who interfaces with the state can pay really anything, not just their taxes, with crypto or other forms of digital payments."
He doesn't expect "everyone's gonna start using crypto to pay their taxes or whatever. But for those that want to, now they'll have the opportunity to do so."
Cryptocurrency and digital assets still have miles to go.
"Using digital assets as collateral in public finance-related financings is rare and will remain circumscribed, reflecting issuers' legal, fiduciary and reputational obligations," according to a Moody's report.
In order to reach a point where digital assets can be borrowed against, there needs to be examples of these transactions coming to market and performing as expected, more adoption of the use of stablecoins by states and local governments and the governance framework really needs to be built out, Moody's Sobel said.
The acceptance and integration of crypto in public finance depends heavily on market demand.
"I think that it's about demand from not necessarily the municipalities, but from citizens and residents, and also from the actual financial markets themselves, " Sobel said. "We have growth in the holding of digital assets, and citizens and residents actually want to use these for payment. It's not necessarily coming from the states and locals, but it's coming from the market that they need to participate in."
