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Equipping Local Governments with Digital Assets and Blockchain

tl;dr: As cities and states grapple with the challenges of the 21st century, digital assets and blockchain offer innovative solutions. From streamlining benefits programs to simplifying title transfers and tax collection, these technologies can transform the way local governments work every day.

By Coinbase Institute


I. Introduction

Local governments provide essential services and opportunities for economic growth, but also face challenges related to managing public records, storing sensitive personal data, distributing public benefits, and more. Digital assets and blockchain technology offer new tools for meeting these challenges. Specifically, they can help local governments raise funds more efficiently, make data management more efficient and secure, and help residents access government services while protecting personal privacy.  

II. Use Cases for Local Governments

a. Payments and Finance 

Local governments around the country have begun accepting cryptocurrency as payments for bills and taxes. The towns of Portsmouth, New Hampshire, and Miami Lakes, Florida, both allow residents to pay city bills using Bitcoin or other types of cryptocurrency stored in their PayPal accounts. The Portsmouth mayor explained that smaller cities have the freedom to “move quickly” to embrace innovation, and that accepting more forms of payment will help reach more residents.   

Colorado began accepting crypto as payment for all types of state taxes in 2022. The development is part of a “broader push to encourage the use of blockchain technology in the state.” The governments of Florida and New York are also exploring the use of crypto for tax payments and other state bills, and the mayor of Miami has taken his salary in Bitcoin as part of his efforts to make the city a “digital asset capital.” Finally, Wyoming is preparing to issue its own digital currency, a stable token that will be linked in value to the U.S. dollar. State lawmakers are currently exploring the best way to structure the token, which they expect to “power cheaper, faster and more secure transactions” throughout the state.    

Digital asset technology can also help local governments raise funds more efficiently. Municipal bonds are a type of debt security issued by local governments that help fund public infrastructure, from local libraries to emergency response. Investors are repaid in full with interest. But the traditional process of issuing and investing in these bonds is paper-based and labor-intensive, leading to considerable costs and delays.

Blockchain has the potential to revolutionize the municipal bond market by tokenizing bonds, making them more efficient, transparent, and accessible. Tokenization involves placing a digital representation of the asset on the blockchain, which can reduce issuance costs and eliminate barriers to entry such as required minimum investment amounts. Blockchain can enable direct participation in pricing decisions and allow bonds to be subdivided, making them more accessible to the average investor. Greater access would in turn facilitate increased investment. 

Hong Kong has embraced this technology by issuing the world's first tokenized green bond by a government agency, enabling instantaneous delivery-versus-payment settlement of the primary issuance within a day. And Colorado has laid the groundwork for tokenized bonds by passing a new state law that defines security tokens as digital contracts on the blockchain. This move would enable the issuance of municipal bonds on the blockchain, which could reduce costs by allowing individual investors to directly own bonds, eliminating the need for intermediaries. But before full adoption is possible, the state must develop the necessary infrastructure to track token ownership on a digital ledger and ensure regulatory compliance. 

b. Identity Management 

To access government services, individuals typically must show proof of their identity. From education enrollment, foreign travel, or even voting, all of these fundamental services require ID. But over 10 percent of U.S. adults, or 21 million people, lack a government-issued photo ID. The current system is fraught with challenges, ranging from lack of accessibility and regulation to failure in adequately addressing privacy and security concerns.

The current identity system is also vulnerable to fraud. In 2021, U.S. consumers filed over 1.4 million complaints of identity theft, most commonly related to government documents and public benefits fraud. A particularly alarming trend is synthetic identity fraud, where criminals combine real information such as a social security number with a fake mailing address or phone number, using the falsified ID to access employment or government services.  

Decentralized identity (DiD) protects against this fraud while giving users greater privacy and control over how, when, and where they display their personal information. With DiD, a person's data is verified a single time and securely stored on the blockchain and in a digital wallet on their smartphone. This approach offers individuals enhanced control over their personal data while simultaneously bolstering security and streamlining the authentication process. 

Several local governments are embracing DiD to improve their services: 

  • Rhode Island is developing a “future-ready approach” by integrating records from various agencies into a unified blockchain-based system. The new process will let citizens verify their information once and then use it whenever interacting with a government agency. For example, the new system will allow accountants to renew their state licenses through verifications in their digital wallet, “[r]educing a multi-week policy to 30 minutes.”

  • The California DMV is partnering with Spruce ID, leveraging the company’s open-source toolkit for decentralized ID to produce a “privacy-first mobile driver’s license.” The license will not only allow residents to drive a car, but will help them prove their identity online, access health care, and verify their age without disclosing other information like their home address.    

  • The Maryland Medical Cannabis Commission launched a project to use decentralized ID to simplify patient onboarding, “reducing the process from an average of 4.3 hours to a few minutes.” Residents are issued credentials that they store in an app. These credentials can be used to purchase medication without revealing personal information, and “[d]ispensaries can be sure that they are transacting with a registered patient without putting the patient’s personal data at risk.”

  • The Canadian province of British Columbia has implemented a “verifiable organizations network” (VON) that provides user access to authenticated organizational data by offering an open platform, eliminating the need for users to search for and re-enter information that the government already has. This makes it easier for residents to access government service, improves user privacy, and reduces overhead costs.  

c. Benefits Distribution  

One particular area in which local governments need to verify resident IDs and manage logistical challenges is in the distribution of public benefits. States operate and help administer a variety of benefits programs, including the federal Supplemental Nutrition Assistance Program (SNAP), which helps low-income households purchase food by issuing monthly benefits to a debit card. Specifically, states determine eligibility for the program and issue the benefits themselves, which flowed to about 41.2 million people in 2022.     

These tasks can be difficult to coordinate: benefits are administered at the county level, and California alone has 58 counties. Fraud is another problem. SNAP fraud amounted to $592.7 million in 2016, and could be as high as $130 million per month today. Specifically, identity-related fraud made up about a third of all fraud cases in a recent study. 

Blockchain technology has the potential to help secure and streamline state and local benefits administration by verifying identity and combating fraud. One solution is for each program participant to receive a unique digital card that can be disclosed to vendors as needed, decreasing fraud and protecting privacy. For example, All_EBT is a blockchain-based platform that provides a virtual food stamp card to SNAP participants through the Facebook Messenger app. Users create an account by uploading a picture of their EBT card or WIC coupon and using a virtual wallet to purchase food online. Although the concept is still preliminary, it may eventually allow users to access multiple social programs using the same digital wallet, and even serve as a type of bank account for those previously deemed “unbankable.”

d. Records Management  

Blockchain can also help secure and streamline records management for local governments. For example, each U.S. state maintains an intricate system of public land title recordation that verifies land ownership. But the system is rife with fraud and susceptible to human error. Home title theft, where an individual unlawfully claims ownership of property in order to sell it, is on the rise:  in 2017, over 9,600 victims lost $56 million to title fraud schemes. And 2023 has seen an increase in attempts at fraud through seller impersonation

The adoption of a “Blocktitle” system can reduce these risks of fraud and error. When an agreement to transfer land rights is executed and authenticated on the blockchain, only one valid transfer is recognized and recorded in the ledger. Every time a property interest is transferred, it is added as a block on the chain, allowing ownership changes to be easily traced. The blockchain's nodes confirm the legitimacy of the transfer, and smart contracts can automatically hold each party accountable, ensuring adherence to purchasing restrictions. Because a blocktitle system is transparent and searchable, it eliminates the need for extensive research to discover property encumbrances, and ensures that only valid titleholders can initiate a property transfer.  

Several state and local governments have begun innovating with blockchain in the area of records management:  

  • A county in Virginia is recording land titles, liens, and other key documents on the blockchain. The program will enable “faster, better, cheaper access” that lets residents “pull up 40 years’ worth of transaction history in seconds.” The project will also use AI to generate property abstracts. Overall, the program aims to improve the integrity of property records and free up valuable time for county administrators.

  • The California DMV is tokenizing the titles of over 14 million registered automobiles, issuing them as non-fungible tokens (NFTs) on the blockchain. This move could reduce fraud and expedite the process of issuing and transferring vehicle titles, reducing it “from weeks to minutes.” The blockchain also could be used to record vehicle repairs and coordinate with other state agencies that license vehicles, increasing efficiencies.  

III. Conclusion  

Digital assets and blockchain have the potential to improve a variety of government services going forward. But widespread use of blockchain by local governments will take time. Successful integration depends in large part on increased public understanding and regulatory clarity. Above all, government policies on digital assets should preserve their innovative potential. In an on-chain world, transparency and trust are built into the products themselves, and these protections will only grow as the technology develops. This growth would empower continued innovation in these breakthrough technologies, allowing individuals to directly share information peer to peer, and ushering in multiple use cases that benefit from the technology’s efficiency, transparency, and accessibility.

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