Public institutions of all kinds, including public treasuries, are gradually turning to bitcoin and cryptocurrencies. The volatile new asset class presents an opportunity for often underfunded governments to make massive gains. The risks are obvious, although some in the crypto industry might say it's riskier for governments not to get involved.
Earlier this month, Rio de Janeiro, one of the largest cities in Brazil, announced plans to allocate 1% of its municipal treasury to cryptocurrencies. It will also give a discount to taxpayers who pay their dues in bitcoin and amend its tax code to attract crypto-rich foreign individuals and companies.
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"It makes a lot of sense for the city of Rio de Janeiro to become a technology hub and also work with blockchain technologies," Municipal Economic Development Secretary Chicão Bulhões told CoinDesk TV's "First Mover" program on Thursday. .
Bulhões also noted that the city's burgeoning blockchain industry, which includes stablecoin issuer Transfero and crypto fund Hashdex, is perhaps one of the largest in Latin America.
"The future is already here. So we want to be a part of that," he said.
You might think that the beaches of Copacabana and Ipanema would suffice, but several cities and governments are following a similar playbook to Rio to compete for this wave of capital.
Miami Mayor Francis Suárez, who attended “Innovation Week” where Rio announced its plans, was one of the favorites. He recently took a salary in bitcoin, gave out tax breaks, promised Miami would buy bitcoin, and created a "MiamiCoin," where anyone can mine the Stacks blockchain for rewards for both Miami's semi-official wallet and himself.
There are others too. New York Mayor Eric Adams wants to become "mayor of all bitcoins." Scott Conger, the mayor of Jackson, Tennessee, is trying to find a way to mine bitcoins in a disused wing of City Hall. Mark Wheeler, Philadelphia's chief information officer, extends the city's namesake brotherly love to coins.
Reshma Patel recently led a campaign to become New York City's next comptroller with a well-thought-out blockchain plan that included investing the city's pension fund in "major cryptocurrencies."
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“Bitcoin has a defined and finite supply, giving investors a hedge against inflation, which could rise if more stimulus is needed. Inflation fears now and in the future are valid, which is why some of the world's most forward-thinking companies, like Tesla and Square, have invested some of their total cash reserves in bitcoin," Patel wrote in a draft. policy proposal.
Patel didn't win his contest, but his thinking is widespread. Crypto investors steeped in the crypto thought community, look at all this and say, "That's game theory." All governments, just like all people, will one day have to own crypto if it goes mainstream, and it will, and those who act quickly now stand to gain the most. It is the money of the future for sale today.
A notable example of this idea came from investment expert Cathie Wood's Ark Invest, who predicted that the bitcoin price could reach €1 million by the end of the decade, with state-nation "adoption" being one of the main drivers of the rise. .
That's the hodler mentality. It is true that Bitcoin is not good to use today. It's volatile, expensive, and most importantly, deflationary, meaning if you sell it or trade it for something today, you might regret it later when it's much more expensive. And because Bitcoin has a supply limit of 21 million coins, if the demand increases, the prices will also increase. Economy 101.
It is for this reason that MicroStrategy CEO Michael Saylor, the superholder, is careful not to call bitcoin a "currency," but rather a digital asset that appreciates quickly. MicroStrategy made waves in 2020 when it became the first publicly traded company to allocate a portion of its assets to bitcoin.
Several companies, but not many, have followed suit. As some governments have done, such as that of El Salvador. The country has made Bitcoin legal tender and its president is making overnight purchases of Bitcoin with public funds.
There is certainly an argument that cryptocurrencies, especially bitcoin, which is the first currency, the most decentralized and so far the most resilient, will seem increasingly attractive to public institutions. This is where the smart money goes. Gold has not lived up to its promise of being a hedge against inflation.
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Ultimately, as a defender of democracy, I want all governments to do what their citizens vote for, be it buy bitcoin or ban it. But it is important to remember that cryptocurrencies always carry risks, even if you can rationalize your investment and even your losses.
If cities begin to invest in crypto, it will be important to consider when (if at all) governments offload their assets and where they appropriate the funds.
The Rio de Janeiro 1% investment is conservative, a way to get windfall profits without betting the house.
"We are talking about Web 3.0, here we are talking about a probably new revolution in the way people pay their bills or pay their taxes or even their investments," Bulhões said. “It is new for everyone. It's new to us.