Cryptocurrency Can Shift the Balance of Power Between Cities, States and Nations

Originally posted at municipalist.org

One of the most powerful tools of a modern nation is its central bank’s ability to create money “out of thin air.” Nations can use this new money to purchase their own nation’s debt in the form of treasury bills, bonds and notes, allowing it to spend more than it earns in taxes and other income. If a nation prints too much money, however, it can create inflation, which reduces the value of their currency. In some instances, central banks can lose control of their currency’s inflation rate, destroying the value of the nation’s currency, collapsing its economy and leaving it at the mercy of predatory financial interests. Fear of inflation keeps nation’s from printing infinite amounts of money.

The US dollar is a bit different than other currencies because it isn’t simply the “reserve currency” for the United States, but also functions as the world’s reserve currency. Ever nation in the world uses US dollars because it is the easiest, and sometimes only, currency that can be used  to purchase large quantities of commodities in international markets. The most important of these commodities is oil. Some commentators call this monetary arrangement the “petrodollar system” and view it as the successor to the Brenton Woods system, which still relied on nations to maintain gold reserves. The Petrodollar system was established through a series of arrangements between the US and Saudi Arabia in the 1970s.

Since the 1970s, we’ve seen the development of other transnational monetary systems such as the Euro and the development of giant commercial “money center” banks, which have further consolidated the monopoly on monetary production in the hands of fewer and fewer institutions. If you asked an economist a decade ago about the future of global monetary production, they’d have predicted more consolidation. The Euro in Europe would be complemented by the Amero is North America, and slowly but surely, the world would integrate into a single market with a single currency.

The financial collapse of 2008 helped undermine the vision of a global currency, but it was the invention of Bitcoin and the blockchain technology behind it that has given people a viable alternative to global monetary consolidation. Blockchain is a new type of database that is extremely good at producing “digital cash” and executing financial transactions. It’s open source, so there are no limitations or restrictions on who and how this technology can be used. Currently, blockchains are making it possible for people to create secure, digital money systems for extremely low costs. It’s being used by big banks to speed up their SWIFT international fund transfer systems, it’s being used by countries to create new national digital currency systems, and it’s being used by entrepreneurs and online communities to create their own currency systems outside the purview of the nation-state. It’s only a matter of time, it seems, before sub-national governments and municipalities create their own currency systems and begin to challenge the nation-state’s monopoly on the production of money.

Under normal political conditions, the idea that cities and states would risk disrupting the current monetary order by creating their own currency systems would be outrageous. US city and state governments benefit greatly from the US government’s petrodollar system. Not only does the federal government give cities and states significant amounts of money in the form of grants, they also allow people to deduct income from municipal bonds from their federal taxes. The makes it possible for cities and states to access tremendous amounts of capital at a rate much cheaper than corporations or individuals. These municipal bonds are used to fund everything from a local government’s general operations to specific infrastructure projects. But with the Trump administration and sub-national governments around the US on a collision course over immigration and other policies, it’s possible that federal governments will start trying to squeeze the finances of “sanctuary” cities and states. In fact, Trump declared he’ll do precisely that by threatening to cut off federal funding to cities and states that don’t implement his widely unpopular immigration policies. Eliminating the federal tax deduction on municipal bonds would be an even more aggressive move that he could try to use to coerce cities and states to follow his policies.

In the past, the only institutions that cities and states could look to for financial assistance were the federal governments and large commercial banks. But that is changing. The blockchain makes it possible for sub-national governments to create their own financial systems and begin to insulate themselves from federal monetary policy and budgeting decisions. Cities and states could do many things with their own cryptocurrency networks. They could create cryptographically secured paper monies, credit and debit cards and online transaction systems that enable their residents to more easily engage in local commerce, create international remittance systems allowing residents to transmit money around the world, and create new types of financial contracts that aren’t mediated by the commercial banks or federal entities. These monetary systems could be “backed” by valuable assets owned by cities and states such as real estate, taxes and other revenue streams. The technology to implement these types of systems is new, but its developing rapidly. Financial institutions invested nearly $2 billion in blockchain-based technologies in 2016. And the commercial banks are investing billions of dollars a year to continue to improve these alternative systems.

By developing autonomous, networked, blockchain-based financial systems for themselves, cities and states can create deep and direct financial ties with each other and challenge the US government’s monopoly on the production of money. This challenge, if delivered in a credible way, could threaten the US government’s capacity to pay its debts and seriously impact the federal government’s financial health.

I want to be clear: I’m not advocating for a financial war between US cities and states, and the federal government. Rather, I’m recognizing that blockchain-based technologies could enable sub-national governments to build a new type of power that they currently don’t have: the ability to compete with the nation-state-based monetary systems. This threat could be an extremely powerful tool for cities and states when they negotiate with the Trump administration. If the federal government is going to threaten to undermine the financial health of cities and states, then cities and states should find ways to credibly threaten the federal government right back.

If you’d like to read more about how the blockchain technology fits into a broader history of DIY finance, check out my essay Finance without Force.

Leave a Reply

Your email address will not be published. Required fields are marked *