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

Originally posted at

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.

Cities Can Prepare for Trump by Establishing Digital Service Organizations and Mobilizing Civic Tech Communities

Originally posted at

Within a few weeks of Trump’s victory, mayors of big “sanctuary cities” throughout America, including New York, Chicago and Los Angeles declared that they wouldn’t collaborate with a Trump administration order to deport peaceful, law-abiding resident. Trump is now threatening that he will deny these cities federal funding unless they comply. The amount of money that cities could be denied by the Trump administration isn’t entirely clear, but Mother Jones estimates that Washington DC could potentially lose up to 25% of its budget, New York and San Francisco could lose 10% and Los Angeles could lose 2%.

If cities want to have a leg to stand on during their negotiations with the Trump administration, they must prepare to operate without federal funding. If there is one message US cities need to convey to Trump, it’s that they can turn Trump’s belligerence into the political will they need to make municipal government more  efficient, transparent and participatory than the Federal government; and in the process restructure the relationship between municipalities and nations. Trump and his supporters must realize that the more pressure the Federal government puts on cities, the more cities will unite together, and the faster an emergent, post-nation-state paradigm will emerge. If In short, if Trump doesn’t play his cards right, he could very well become the president that undermines the role of the nation-state in global affairs and kicks off a new version of the “devolution revolution“, but this time based in cities and inspired by progressive values.

Municipal governments will not be able to fend off the federal government if their bureaucracies are inefficient and unpopular with the public. Most municipal bureaucracies were designed in an era of switchboards and memos and need a significant upgrade. Is there really any doubt that new systems designed around smart phones and open source software couldn’t out perform the many-decades-old legacy systems most cities currently use by significant margins? The factor limiting the upgrading of municipal bureaucracies are political, not technological. Changing how government works involves shifting the balance of power within agencies, department and groups. These types of changes require tremendous amounts of buy-in from members of the bureaucracy and the public in general. This buy-in is hard to get, but with the nightmare of Trump using federal funds as leverage to coerce cities to adopt policies their residents abhor, it will become much easier to make the case that municipalities must engage in serious internal reform.

The choice for city residents should be clear: adopt 21st century technologies and organizational forms, or submitting to federal coercion. If current city leaders can’t or won’t execute the reforms needed to wean their cities off federal funds, then new leaders need to be brought in who will. Instead of talking about it — let’s build it. For our cities. And now. As if the lives of our neighbors depends on it. Because it might.

Existing models show us how we can systematically transforming government agencies through the adoption and use of inexpensive open source tools and techniques. One group that performs this type of activity is 18F, a unit within the Federal Government’s General Services Administration. 18F helps federal agencies figure out how to improve their operations using open source technology and iterative development processes. They’ve been extremely successful, to the point where government contractors lodged an official complaint that 18F was hurting their businesses because they were saving the Federal government too much money.  18F’s is small group in a massive federal government so their impact is limited, but their model is spreading. The Pentagon’s Defense Digital Services and the White Houses US Digital Service both model themselves off of 18F. City governments could and should create similar types of Digital Service Organizations (DSOs) as a means of increasing their ability to not only do more with less, but also as a means of challenging the Trump administration’s competence.

One of the innovative features of DSOs is their commitments to clear documentation of business processes and utilization of open source software. This allows them to share the innovations they develop for one agency with other agencies within that government (and ideally with other governments around the world.) This eliminates complex procurement processes, reduces costs and even creates an opportunity for highly skilled developers outside government to contribute to their effort. Since the solutions DSOs create are often open source, they can (and do) set up bounty systems that allow software developers to submit code that solve problems identified by the DSO. Allowing highly skilled urban residents to contribute code to a project that improves a city’s effectiveness if precisely the type of deep contribution city residents should be able to make to defend their cities from federal coercion.

There are existing “civic tech” volunteer groups in cities all around the country filled with people passionate about finding ways to help city governments run faster, better and cheaper. A great example is NYC’s BetaNYC group. These groups present fantastic venues for sourcing and organizing volunteers that can amplify and support the work of DSOs to help make cities more resilient to federal coercion. But technology is just one area. Cities will need to build many more mechanisms that can convert their resident’s anger at Federal policies into surges of local volunteer-ship that increase the capability of city governments and reduce their need for federal aid.

If cities can find more effective ways to mobilize their massive human resources, then the era of Trump will be a catalyst pushing cities to be more efficient, autonomous and globally networked than ever before. This might sound like overkill, or too much work, but we have to be prepared if we want to defend ourselves and our neighbors from destructive federal actions. And if it turns out we overreacted and mistakenly volunteered to improve our cities, so it goes.