The Austin report warns of blockchain risks

Research on blockchain commissioned by the city of Austin has found that while the technology can offer municipal benefits, the risks are significant – especially related to cryptocurrencies.

The reports were produced in response to two March resolutions requiring the city to conduct fact-finding on blockchain and cryptocurrencies, including on fostering a supportive environment for technology development, potential municipal applications and the possibility of accepting cryptocurrencies as payment for taxes.

Austin Mayor Steve Adler said at the time, “Austin is excited to support the businesses and innovations that will make the promise of Web3, cryptocurrency and blockchain technology a reality.”

For other cities around the world that have set their sights on being crypto hubs that foster innovation and economic development, the reports could make for interesting reading.

In a memo accompanying the blockchain briefing for the mayor and city council, Austin’s interim chief innovation officer Daniel Culotta writes: “There are municipal use cases that could benefit from blockchain solutions. These primarily involve validating, tracking and improving the transparency of certain types of records and transactions.”

Identified benefits include immutability, transparency and accessibility, but the report recommends that city departments at this stage consider alternative proven technologies and approaches that can help them achieve their goals. It includes a checklist to help them assess.

“Many blockchain-based solutions and their providers are still being proven, and there are environmental, equity and ethical concerns with the space in general,” the report said.

Crypto

The cryptocurrency summary finds that the city could not legally accept cryptocurrency as a form of payment unless it used a third-party processor, which could be costly and complicated. It found no other uses of cryptocurrencies that could benefit the city and concluded that for consumers, the risks “far outweigh” the benefits.

“Companies are increasingly marketing cryptocurrencies to Black, Indigenous and People of Color (BIPOC) communities as a vehicle for quick financial gain that does not require access to or regulation by banks or other financial or industry intermediaries,” the report said.

It warns that: “Cryptocurrencies share many of the characteristics of predatory financial products that have been focused on communities of color in the past, such as subprime loans, check cashing services, and payday loans.

“Such products ostensibly provide a path to stability and wealth that bypasses the traditional and discriminatory financial system, but actually carry extreme risks of fraud and loss, and little or no regulation to protect consumers.”

The report recommends that the city should help educate local communities about the risks associated with cryptocurrencies.

Energy

Additional blockchain-related issues raised include slow transaction speeds, costs, and energy and climate impacts.

Some cities, including Denton and Fort Worth in Texas, are becoming home to cryptocurrency mining.

While efforts are underway to drastically reduce emissions from the cryptocurrency industry, analysis suggests that Bitcoin mining consumes more energy globally per year than countries like the Philippines and Venezuela, fueled mainly by fossil fuels.

Austin’s study states that: “While other industries use as much or more energy, most provide significantly more benefit to society than cryptocurrency and blockchain applications currently do.”

Culotta told Cities today: “All blockchain applications are tied to crypto, to a greater or lesser extent, because any information written to a chain results in crypto being created when blocks are validated. Thus, environmental challenges apply to all blockchain-based applications, especially those with proof-of-work and other energy-intensive consensus mechanisms.”

Government tests

Several government experiments with blockchain and cryptocurrencies are underway.

Reno is piloting blockchain to build records, and the Colorado Department of Revenue now accepts cryptocurrency as a form of payment. Miami has adopted the cryptocurrency CityCoins, which has paid out $5.25 million to the city so far, but the coin’s value has plummeted since it was launched last August. San Jose recently decided not to expand a pilot with a crypto-mining Internet of Things network to raise funds for digital inclusion.

Through the grant-funded LifeFiles project, Austin’s innovation office researched and prototyped a platform incorporating blockchain technology to allow homeless people to store and share important documents. The department is looking for a partner to continue developing the platform.

Such pilots could help “stabilize the landscape,” says Austin’s report, and the White House recently released its first framework for what crypto regulation in the United States should look like.

The staff will “continue to monitor the blockchain and Web 3.0 space and create a supportive environment for development in Austin,” in addition to keeping an eye on how the technologies can be used by the city.

On his message to peers in other cities considering the implications of blockchain and cryptocurrencies, Culotta said, “Always start by creating a deep understanding of the problem you’re trying to solve, not the solution you want to implement. Once you have a thorough understanding of the problem from the point of view of those experiencing it, you can confidently begin to explore avenues that may present a variety of solutions – technology-related and otherwise.”

A spokesperson for the mayor’s office declined to comment on the findings of the reports and their implications for the city’s future plans.