Mayors: Cryptocurrency won’t solve your cities’ problems    


Miami Mayor Francis Suarez wants to make his city the world’s cryptocurrency capital. New York City Mayor Eric Adams’ first paycheck was automatically converted to bitcoin and ethereum. And in Jackson, Tenn., Tampa Bay, Fla., Austin, Texas, and other cities across the country, mayors are embracing cryptocurrencies.  

These mayors want to strike “digital gold” for their cities and boost economic growth by attracting cryptocurrency and blockchain companies. Some even believe cryptocurrencies may be a way to address income inequality or provide alternative payment methods for unbanked and underbanked residents.  

However, regardless of how compelling these opportunities appear, more weight seems to be given to the potential benefits of cryptocurrencies than to the risks. Before embracing cryptocurrencies, local leaders should ask themselves: 

  • What problems are we trying to solve and, more importantly, why?  
  • Can or should cryptocurrencies solve these problems, and are the risks greater than the benefits? 
  • Could these problems be solved without cryptocurrencies?  

This is not meant to suggest mayors should oppose innovation. But the premise that innovation will automatically lead to positive outcomes should be scrutinized. There are disadvantages to be mindful of given the lack of cryptocurrency regulations to ensure adequate consumer protection, as well as the potential risks to the broader financial system.  

As the federal government attempts to develop a regulatory framework for cryptocurrencies, local leaders should exercise caution before promoting cryptocurrencies or establishing policies without adequately understanding how they function. As part of their assessments, mayors and other local leaders should examine the use cases for cryptocurrencies, how cryptocurrencies operate, how attracting crypto businesses may affect local economies, and how local leaders can improve financial access and wealth-building opportunities for their communities beyond cryptocurrencies. 

Defining common cryptocurrency terms 

The confusion surrounding cryptocurrencies is reasonable given the terminology is still fluctuating and contested, with many unsettled definitions. Below are working definitions for some common terms; however, this is not a comprehensive or definitive list, as the terms will continue to evolve over time.   

Fintech, or financial services technology, is technology that enables companies, business owners, and consumers to provide or access financial services. The development and use of cryptocurrencies fall under the fintech umbrella. There are many different types of fintech companies providing various products and services, such as mobile payments, international payments, digital lending, and retail investing.  

Cryptocurrency is a digital representation of value, whose movements are tracked on a blockchain record. Cryptocurrencies are created, traded, and stored digitally. Thousands of cryptocurrencies exist; bitcoin, ethereum, and dogecoin are some examples.  

Stablecoins are a subcategory of cryptocurrencies, but these digital assets are distinct because they are designed to be pegged to a fiat currency. They are not, however, issued by a central bank, nor are there currently standards or public information requirements regarding a stablecoin’s reserve assets.  Presently, U.S. federal lawmakers are evaluating the systemic risks that stablecoins pose and potential legislation to provide safeguards.  

Blockchain technology, which uses a particular data structure consisting of a chain of blocks of data, is considered by some to be a subset of the broader distributed ledger technology (DLT) universe. A DLT system is a distributed record-keeping system, rather than a centralized one, and is collectively maintained and updated by multiple nodes. In this case, think of people on different computers seeing changes made to the ledger at the same time. Blockchain is the technology that enables cryptocurrency transactions. A blockchain can be public, which is how most cryptocurrencies operate, or it can be private, which is limited to a select group of verified participants.  

Bitcoin mining is a resource-intensive process of verifying transactions, adding them to the ledger, and creating new bitcoins. To verify a transaction, “miners” use computing hardware to solve complex math problems, and once solved, “blocks” of verified transactions get added to the ledger, and the miner that succeeds in solving the problem is rewarded with bitcoin. 

Though “cryptocurrency,” “blockchain,” and “bitcoin” are sometimes used interchangeably, they are not the same. More importantly, if someone claims that blockchain technology can solve a specific subset of problems, it does not mean cryptocurrencies can as well. 

Cryptocurrency is inherently risky to treat as a public good 

Before promoting cryptocurrencies and treating them as a public good, mayors and other local leaders should be aware of the technological landscape they aim to adopt. They should consider the use cases first, since cryptocurrencies have so far shown little utility despite much hype. Moreover, they should examine the fundamental characteristics of cryptocurrencies and how they function prior to designing policies based on a poor understanding of the technology. 

Using cryptocurrencies as a payment option is one possible use case that local leaders have promoted. But there are some disadvantages to keep in mind. Cryptocurrencies are notoriously volatile, and their dramatic price fluctuations make them poor payment methods for daily transactions. A transaction made in bitcoin today could result in a significant loss tomorrow if, for instance, the price of bitcoin skyrockets the next day. And unlike cash, cryptocurrencies are still not universally accepted. Moreover, as Brookings’s Eswar Prasad noted, transactions using cryptocurrencies can be slow and costly: Bitcoin transactions can take about 10 minutes to be validated, with an average fee of about $20 for just one transaction. In El Salvador, which adopted bitcoin as legal tender in 2021, residents are experiencing high fees on both ends of their transactions, price volatility, and technical issues such as lost transactions, error codes when making payments, and accounts created through identity fraud.   

Common criticisms of cryptocurrencies are usually based on how people, businesses, or organizations use them to conduct illicit transactions or commit cybercrimes, including money laundering. To be fair, cash can also be used in this way. Even so, local leaders should be aware that crypto is rife with scams. The Consumer Financial Protection Bureau has reported an increase in complaints about cryptocurrencies, including crypto companies and exchanges, from 488 complaints in 2019 to 979 in 2020 and more than 1,400 in 2021. 

Beyond these concerns on how people use cryptocurrencies is a much larger one: Local leaders need to consider the risks regarding how cryptocurrencies operate and their basic characteristics. Legal scholars such as Angela Walch stress that some cryptocurrencies’ fundamental features carry operational risks that make them unsuitable to serve as money, due to technology vulnerabilities or basic governance problems. Bitcoin, for example, works as money only if the software itself is functioning—but what happens if there are software bugs or cyberattacks?  

Mayors and local leaders should be aware that many cryptocurrency proponents make claims perceived as factual, but in reality are more aspirational. For example, they may emphasize the “immutability” of the blockchain database as a selling point, arguing that the blockchain cannot be altered and therefore is “tamper-proof” or “secure.” Walch, who studies the nascent field of cryptocurrency governance structures, points out that the distributed ledger system is not in fact “immutable,” and there are developers in these public blockchain spaces maintaining a considerable amount of decisionmaking power. There have been instances when a small group of developers, some of whom Walch likens to fiduciaries, have made a call on behalf of the larger group to address bugs or theft in the system, sometimes altering the underlying code. As Walch stresses, this type of decisionmaking power raises important questions: How will these decisions be made? Will only software experts make them? Is it possible that a small group of investors will end up making decisions? If so, who can stop them if there are no accountability systems? These are critical questions for local leaders to scrutinize before promoting specific cryptocurrencies.  

While regulators are still figuring out a framework for regulating these technologies, some are also urging more thought be put into clarifying blockchain law and governance to better understand the roles various actors play in these spaces and create systems of accountability. In the meantime, mayors should proceed with caution: Before romanticizing cryptocurrencies and blockchain technology and making policy decisions based on assumptions about the technology, they should aim to better understand it—following a similar approach that Walch suggests regulators take:  

  • Adopt a critical approach in their education process and seek diverse perspectives, including across disciplines.  
  • Interrogate whether the technologies’ capabilities are actually demonstrated and seek to understand how they accomplish what proponents claim they do.   
  • Consider the source making claims about the technologies and that source’s incentives.  

Mayors should think about how crypto will impact residents 

Mayors who want to transform their cities into crypto hubs claim new jobs would be created and new workers would move in. As a result, local leaders are trying different tactics to attract crypto businesses, including city-branded cryptocurrency projects. Some states are offering tax incentives to lure bitcoin mining companies, and cities such as Miami and Austin, Texas are promoting their low energy costs and competitive tax rates.  

Even so, local leaders must weigh how crypto companies might affect their current residents and workforce. Consideration should be given to potential environmental effects (including energy usage) and how the promotion of specific cryptocurrencies may encourage residents to engage in speculation. They should also assess whether there are ways to ensure residents are not displaced and can benefit from economic development efforts.  

Undoubtedly, crypto businesses would affect cities’ energy use and climate goals, as well as residents’ energy bills. Cryptocurrencies using a “proof of work” protocol, such as bitcoin, require energy-intensive verification processes. One analysis found that bitcoin mining consumes more electricity than the entire country of Argentina. It is important to note that several cryptocurrencies were designed to minimize energy consumption, and not all operate like bitcoin. Even so, it is crucial to highlight this environmental impact, since many mayors who have promoted cryptocurrencies have embraced bitcoin in particular. Local leaders must consider how their communities will cope with the mining process, its high energy consumption, and the spillover effects to local economies. For instance, one working paper found that in upstate New York—where a quarter of all U.S. crypto mining occurs—energy bills have gone up because of the increased demand for electricity, with small businesses and households paying an additional $79 million and $165 million, respectively, in annual electricity bill costs.  

Furthermore, local leaders should evaluate whether cryptocurrency’s broader economic benefits are overstated. Despite incentives offered by states to lure crypto-mining companies, Brookings’s Eswar Prasad noted some of these mining facilities would require few, if any, workers to operate them. Furthermore, a crypto-related company’s headquarters may be located elsewhere, or nowhere at all, which limits a locality’s tax benefits. Prasad also pointed out that the environmental impact of cryptocurrency mining, including the diversion of energy from other uses, will remain local.  

Local leaders should also be mindful of how city-branded cryptocurrency projects could affect their residents. Despite the seemingly appealing prospect of “fundraising” for a city through city-branded cryptocurrency projects, these initiatives have raised questions that local authorities should consider. Some of these questions include whether the projects encourage speculation among residents or whether proper due diligence was performed. 

For example, MiamiCoin lets people who want to support the city invest in it, whether they live in Miami or not. Yet MiamiCoin presently has no utility, so critics say Mayor Suarez is encouraging speculation, drawing comparisons to gambling and pyramid schemes. MiamiCoin’s arrangement also raises important questions about accountability, since its creator, CityCoins, is not a company, but rather a group of unknown individuals registered in Delaware as a nonprofit and communicating over Discord. Moreover, though Mayor Suarez celebrated the $5.25 million gifted to Miami from the project, the city may need to rethink the initiative given the coin’s volatility, as its value fell by nearly 93% recently, and it is not entirely clear that the city’s leaders fully understand the project or know how to effectively manage the digital assets. Local leaders should follow this case study with a critical eye before making a commitment to such initiatives. 

Finally, mayors and policy staffers should examine how incentives they use to attract crypto businesses will affect current residents. In Puerto Rico, for example, tax incentives designed to attract crypto, tech, and finance investors are driving up housing costs and displacing low-income Puerto Ricans. And in Miami, the soaring cost of living—due to the influx of wealthy newcomers—is outpacing the promised tech job growth. Local leaders may be tempted to focus on attracting companies and workers because they receive attention-grabbing headlines for such efforts. But instead of concentrating on new workers they hope to attract, mayors should consider investing in their existing workforce instead.  

Democratize finance and wealth creation beyond cryptocurrencies  

Earlier this year, Miami Mayor Francis Suarez took over as head of the U.S. Conference of Mayors and, laying out his vision for American cities, he proposed cities sign onto a “crypto compact.” Mayors at the conference expressed interest in crypto’s potential to address the financial needs of low-income communities and the unbanked or underbanked.  

Indeed, cryptocurrency advocates often cite financial inclusion as one of their main objectives. There is a growing number of people of color and the underbanked who are trying their hand at cryptocurrencies, taking on huge risks in the hopes of gaining some semblance of wealth. A Harris poll showed 20% of Latino or Hispanic Americans, 18% of Black Americans, and 13% of white Americans own cryptocurrency. Another survey found 37% of the underbanked own cryptocurrency, versus 10% of the fully banked. Historically, these groups have been denied access to traditional financial institutions and their services, so it is understandable they seek alternative financial service providers for making transactions and generating wealth. They may also be tempted to engage with cryptocurrencies due to the constant promotion by celebrities, athletes, influencers, and the already wealthy—who, by virtue of their wealth and ability to arbitrage, face few risks when dealing in speculative assets. 

Despite the belief that cryptocurrencies could “democratize finance” or even wealth, the growing concentration of the wealthy in these spaces demonstrates that not all cryptocurrency holders are created equal. Ownership of bitcoin is becoming increasingly more concentrated in a small group of investors, with 0.01% of bitcoin holders controlling 27% of the currency in circulation. In addition, cryptocurrency mining has become so expensive that only a small group of companies and people can afford to do it, with approximately 10% of miners controlling 90% of bitcoin mining capacity. Given the concentration of wealthy investors and miners in these areas, can local leaders be confident the market will not be manipulated to benefit only a few?   

Local leaders would be wise to contemplate whether cryptocurrencies are an adequate remedy for highly complex social problems rooted in decades of systemic financial discrimination. Or, if local leaders are simply viewing cryptocurrencies as another tool in the toolbox, they should evaluate whether it is the right tool given the risks. Due to their constrained choices, communities of color have a history of using expensive, complicated, or risky alternative financial services, many of which are marketed to these communities, including payday loans, check-cashing services, and subprime mortgages. Similar to how cryptocurrencies are currently depicted, payday loans were once described as a way to promote the “democratization” of credit, and subprime mortgages were heralded as “innovations” that would open doors for excluded communities—but ultimately hurt them during the 2008 financial crisis and its aftermath. Mayors should ask themselves: Should the worst-case scenario occur and the digital bubble burst, are they prepared to shoulder the blame for promoting digital assets that exposed their most vulnerable constituents to significant financial risk? 

Instead of signing a “crypto compact,” mayors should consider using their energy, influence, and collective action to push the federal government to address systemic racism in financial services systems and close the racial wealth gap. Indeed, many resources and policy proposals are available to address the root causes of financial access and wealth disparities. Local leaders could champion policies that open payment systems to the unbanked and underbanked. 

Recently, the 12 district banks of the Federal Reserve System hosted a “Racism and the Economy” series to examine the impact of structural racism on our economy. The series shared several proposals to improve economic outcomes for all Americans, many of which local leaders could certainly champion. And in terms of closing the racial wealth gap, Brookings scholars offer a number of recommendations, including supporting credit-scoring practices with fewer discriminatory effects and providing credit and down payment assistance to borrowers affected by discriminatory housing and lending practices. Mayors can also stand behind national, evidence-based efforts to cancel student loan debt, launch baby bonds, or provide a guaranteed income to residents. 

Ultimately, if the intention is to advocate for greater economic opportunities for marginalized communities, local leaders should support policies which help them reduce debt and grow wealth rather than promote unregulated digital assets with limited utility.  

Cryptocurrencies should remind us to take a step back   

 There are of course other practical and tactical considerations for local leaders to keep in mind regarding cryptocurrencies. For instance, once they have done the work to understand how people use cryptocurrencies and how they operate, local leaders may need to evaluate the technological capabilities of their cities, legal hurdles, and even state regulatory barriers to do things like accept payments or incorporate cryptocurrencies into their investment strategies. They should also consider the role city councils will play in decisionmaking regarding city-branded crypto projects, as these governing bodies are typically responsible for city government financial and budgetary issues.  

On a more profound note, however, mayors and local leaders should take a step back and think carefully about the problems they are trying to solve and why. By doing so, they may find that many of the challenges they seek to address are fundamentally social problems requiring policy solutions rather than technological ones. Or, they might recognize that some of these problems have existed over generations and run deeper than any one new tool can solve, particularly one with limited utility. In any case, local leaders should remember that they are accountable to the public, and the public deserves having their local leaders conduct a full assessment of this opaque technological landscape. Given the current risks and drawbacks when it comes to cryptocurrencies, mayors should exercise caution.