Berke­ley Vot­ing on Blockchain

The Bond Buyer - - Front Page - By Kee­ley Web­ster

The Berke­ley, Cal­i­for­nia, City Coun­cil will vote Tuesday on whether to move ahead on plans to is­sue a “mi­cro” bond us­ing blockchain tech­nol­ogy.

Vice Mayor Ben Bartlett pro­posed that the city coun­cil con­sider is­su­ing $3 mil­lion in a seven-year note to pay for a new fire engine.

The note would help test-drive the financial in­fra­struc­ture for the new fund­ing method and could set the city on a path of is­su­ing bonds for af­ford­able hous­ing, coun­cil mem­bers said dur­ing an April 24 work ses­sion.

Bartlett said in an interview he wants to use blockchain tech­nol­ogy to is­sue mi­cro-bonds, not mini­bonds, be­cause he wants the city to be able to is­sue bonds in de­nom­i­na­tions in the $10 to $25 range – not the $1,000 blocks that Cambridge, Mas­sachusetts em­ployed when bro­ker-dealer Neigh­borly sold $2 mil­lion in mini bonds for the city in Fe­bru­ary 2017. Neigh­borly won the Bond Buyer’s Deal of the Year award for the non-tra­di­tional cat­e­gory last year for that trans­ac­tion.

“We want to go fur­ther than what Cambridge and Den­ver did, by mak­ing the units even more ac-

ces­si­ble to more peo­ple, be­cause they would be cheaper,” Bartlett said.

More peo­ple could af­ford $10 than $1,000, mak­ing in­vest­ing in city projects an op­tion for more peo­ple, which Bartlett said would be a wealth builder for residents.

“It’s an ex­cit­ing course to be ex­pand­ing the mar­ket; and also to be cre­at­ing new as­set classes and op­por­tu­ni­ties for our peo­ple to own new as­sets, par­tic­u­larly in light of what is hap­pen­ing with creep­ing poverty,” Bartlett said.

The work ses­sion, or­ches­trated by Bartlett to better ex­plain the con­cept to the coun­cil mem­bers, broke down the pieces of what the coun­cil is try­ing to do. The deal in­volves sev­eral new con­cepts, and the city could de­cide to move ahead on all or parts of the pro­posal.

“The idea is to is­sue mi­cro bonds via the blockchain,” Bartlett said. “If the process al­lows it, we could go a step fur­ther and drive re­sources via a to­k­enized cur­rency.”

The city an­nounced in Fe­bru­ary it was work­ing with Neigh­borly Corp. on a plan to head to mar­ket as soon as May with a pub­lic ini­tial coin of­fer­ing that would be backed by mu­nic­i­pal bonds. Neigh­borly would act as the un­der­writer and the UC Berke­ley Blockchain Lab would help de­velop the code.

Bartlett and Mayor Jesse Ar­reguín brought the con­cept to the city.

The city had talked about in­vestors be­ing able to pur­chase the bonds us­ing cryp­tocur­ren­cies like bit­coin.

In­vestors could also choose to re­ceive in­ter­est pay­ments in dol­lars or from a to­k­enized de­nom­i­na­tion.

The city also dis­cussed at its work ses­sion cre­at­ing a to­k­enized mon­e­tary sys­tem that would be more like a voucher sys­tem to pur­chase goods and ser­vices from Berke­ley residents.

Un­der that sys­tem, in­vestors in the city bonds could re­ceive in­ter­est pay­ments us­ing the Berke­ley money.

Scott Mor­ris, founder and chief executive of­fi­cer of Amer­iQoin, who cre­ated Itha­cash, ex­plained dur­ing the work ses­sion how the city could set up a sys­tem that has been used in cities like Ithaca, New York, to cre­ate Berke­ley’s own to­k­enized money.

The money would be more like a voucher sys­tem or coupons than an ac­tual cur­rency and could be used to pur­chase items from Berke­ley busi­nesses.

Such sys­tems have typ­i­cally been used to in­cen­tivize spend­ing at lo­cal busi­nesses and bol­ster lo­cal economies. Berke­ley al­ready has a sys­tem in which se­nior cit­i­zens can use vouch­ers to take a taxi.

If the city moves ahead, it would be the first in the coun­try to hold an ICO, the process through which cryp­tocur­rency to­kens are dis­trib­uted in ex­change for in­vest­ments. The claim is that mar­ry­ing blockchain tech­nol­ogy with mu­nic­i­pal bonds would make trans­ac­tions more ef­fi­cient and trans­par­ent.

Putting the bonds on a blockchain would not only cre­ate transparency, but could save the city money by cut­ting out some of the in­ter­me­di­aries in­volved in bond trans­ac­tions, said Boris Reznikov, di­rec­tor of part­ner­ships at Stel­lar dur­ing the pre­sen­ta­tion.

Un­der the pro­posal, the shares are like reg­u­lar mu­nic­i­pal bond cre­ation and dis­tri­bu­tion, but would be done in sys­tems that record to a blockchain, a pub­lic, en­crypted ledger that keeps track of trans­ac­tions, Reznikov said.

The city’s pre­sen­ta­tion pointed to a 2015 study by the Uni­ver­sity of Cal­i­for­nia, Berke­ley’s Haas Institute that re­ported it costs is­suers $3 bil­lion to $4 bil­lion an­nu­ally to sell mu­nic­i­pal bonds.

The ef­fi­cien­cies cre­ated by us­ing blockchain would also make it eco­nom­i­cally fea­si­ble to is­sue bonds in amounts as small as $25, Reznikov said. ◽

Berke­ley Mayor Jesse Ar­reguin sup­ports the blockchain bond idea.

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