Austin report warns of blockchain risks

Research into blockchain commissioned by the City of Austin has found that while the technology could offer municipal benefits, the risks are significant – particularly related to cryptocurrencies.

The reports were produced in response to two March resolutions for the city to conduct fact-finding studies 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 turn the promises of Web3, cryptocurrency and blockchain technology into reality.”

For other cities around the world that have set out their ambitions to be crypto hubs promoting innovation and economic development, the reports could make interesting reading.

In a memo which accompanies the blockchain summary for the mayor and city council, Austin’s Interim Chief Innovation Officer Daniel Culotta writes: “There are municipal use cases which could benefit from blockchain solutions. These primarily involve validating, tracking and improving transparency for certain types of records and transactions.”

Advantages identified include immutability, transparency and accessibility but the report recommends that at this stage city departments consider alternative proven technologies and approaches that could help them reach their goals. It includes a checklist to help them make their assessment.

“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 states.

Crypto

The cryptocurrency summary finds that the city couldn’t legally accept cryptocurrency as a form of payment unless it used a third-party processor, which could be costly and complex. It did not find any other applications of cryptocurrencies that could benefit the city and concluded that for consumers, risks “far outweigh” the benefits.

“Companies are increasingly marketing cryptocurrencies to Black, Indigenous, and people of colour (BIPOC) communities as a vehicle for rapid financial gain that does not require access to or regulation from banks or other financial or industry middlemen,” the report states.

It warns that: “Cryptocurrencies share many of the hallmarks of predatory financial products which have been focused on communities of colour in the past, such as subprime mortgages, cheque cashing services, and payday loans.

“Such products seemingly offer an avenue to stability and wealth that circumvent the traditional and discriminatory financial system, but in fact carry extreme risk of fraud and loss, and little to no regulation to protect consumers.”

The report recommends that the city should help educate communities about the risks related to cryptocurrencies.

Energy

Further 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 operations.

While efforts are in progress to drastically reduce emissions from the cryptocurrency industry, analysis suggests that Bitcoin mining uses more energy globally per year than countries like the Philippines and Venezuela, mostly powered by fossil fuels.

Austin’s study says that: “While other industries use as much or more energy, most provide significantly more utility 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 the creation of crypto 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 trials

Several government experiments with blockchain and cryptocurrencies are underway.

Reno is piloting blockchain for building records and the Colorado Department of Revenue now accepts cryptocurrency as a form of payment. Miami has adopted the CityCoins cryptocurrency, which has paid out US$5.25 million to the city so far but the coin’s value has plummetted since it launched in August last year. San Jose recently decided not to extend a pilot using 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 that incorporates blockchain technology to allow homeless people to store and share important documents. The department is seeking a collaborator to continue developing the platform.

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

Staff will “continue to monitor the blockchain and Web 3.0 space and create a supportive environment for its development in Austin,” as well as keeping an eye on how the technologies could be used by the city.

On his message for peers in other cities that are 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. When you have a thorough understanding of the problem from the viewpoint of those experiencing it, then you can begin confidently exploring pathways that may present a variety of solutions – tech-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.