Analysis: Cryptocurrency for the city has become the new mayor’s clothes

New York Mayor-elect Eric Adams grabbed headlines by declaring his support for a cryptocurrency for New York City, emulating MiamiCoin that Miami Mayor Francis Suarez has been promoting since August. These assertions are a new development in the evolution of cryptocurrencies, and a milestone in their acceptance by the government.

The idea that a mayor who rules a major cryptocurrency mall and “gets it” should support a city’s cryptocurrency is passing for a moment. But, having watched the rise and fall of cryptocurrency trends for more than a few years, I can’t help but find this moment to be closer to the famous “Emperor’s New Clothes” by Hans Christian Andersen – when the leader reviews his new “look”, which he thinks is absolutely gorgeous. So much so that it is invisible to inappropriate officials and fools. However, these new crypto fashions seem likely to be a source of relatively little embarrassment, even if they prove to be lacking in substance – more akin to a lost hat than a completely lost costume.

What are these city coins?

The city’s cryptocurrency has not been issued in recent media reports by the city’s own governments. Its creator is CityCoins, an organization that does not claim to be affiliated with any city government or part of any formal public-private partnership. CityCoins announced city-branded crypto projects on its own initiative, then issued coins after obtaining municipal approvals. It is noteworthy that city councils that are supposed to be responsible for the financial and budgetary affairs of the city government appear not to have been involved in these decisions.

CityCoins announced the MiamiCoin project in first tweet June 2, after the mayor of Miami in public supported currency in july, Launched in August. NYCCoin was launched on November 10 after New York Mayor-elect Adams won the November 2 mayoral election and immediately declared his support for the coin. CityCoins announced that it would then create an Austin Coin, but that coin did not exist yet because the mayor of Austin, Texas, had not approved it as of December 14.

What CityCoin actually is, and what purpose it serves, are puzzles wrapped in ambiguous terms. “CityCoins are cryptocurrencies that allow you to support your favorite cities while earning Bitcoin (BTC) and Stacks Tokens (STX),” according to the description of the CityCoins website. CityCoins is powered by Stacks, a blockchain that enables smart contracts on the Bitcoin network. Apart from being programmable, CityCoins have two immediate functions upon launch: mining and stacking. “

Regarding the meaning of ‘mining’ and ‘piling’, the site’s FAQ provides the following clarifications.

“CityCoins are mined by redirecting the STX (Stacks token) to the CityCoins smart contract on the Stacks protocol,” the website says. Winning miners can claim their CityCoins reward from their Stacks address at any time. In other words, a person earns MiamiCoin or NYCCoin by acquiring Stacks tokens, forwarding the Stacks tokens to CityCoins, letting CityCoins mine for them, and then claiming the mined coins.

The benefit to the city comes from the following feature described on the CityCoins website: “30% of the STX miners send to the Stacks protocol is sent directly to a city-dedicated wallet that is part of the CityCoins ecosystem. The city mayor may choose at any time Accept the reserved wallet for access to the treasury for use by the city.” This 30% reduction provides millions of dollars in financial benefits to Miami that Mayor Suarez proudly announced. The City of Miami’s portfolio contained approximately 10.6 million STX, equivalent to approximately $19.8 million, as of December 14, according to a website cited in a CityCoins press release.

Stacking provides “rewards” for CityCoin token holders. The website describes the process as follows: “The remaining 70% of the STX that miners send to the Stacks protocol is distributed to holders of CityCoins who choose to stack their tokens. Stacking requires holders to lock in their CityCoins for specific ‘bonus cycles’. CityCoins are earning STX rewards. STX rewards can also be stacked on Stacks to earn BTC rewards.”

Long-term benefit is another claim in the CityCoin FAQ: “CityCoins are programmable and will have additional benefit over time. The possibilities of CityCoins become endless as cities one by one begin to demand the contributions of the protocol, communities and programs that develop around their CityCoins. They will create CityCoins communities are apps that use tokens for rewards, local benefits, access control (to digital or physical spaces), trading, lending, smart contract execution, and more.”

when Howey Meet City Queens

The existence of a bounty program for holders of MiamiCoin and NYCCoin raises an important question: whether CityCoins has adequately taken into account the SEC’s history of finding violations of federal securities laws in crypto token sales.

The Securities and Exchange Commission (SEC) issued its first enforcement action against the sale of cryptocurrency in 2017, and since then the agency has found that in several cases the sales of crypto-tokens were sales of unregistered securities in violation of federal securities laws. The SEC used the test from SEC vs. WJ Howey Co. To assess whether token sales represent security sales. under Howey Test, sale of securities occurs when there is an investment contract, which is defined as “investment of funds in a joint venture with a reasonable expectation of profits to be gained from the entrepreneurial or managerial efforts of others”.

MiamiCoin and NYCCoin appear dangerously close to meeting the definition of security under Howey Test, though CityCoins stack to describe it in language that creates a superficial distinction from the exact words for that definition.

Investing money in a joint venture. CityCoins mine MiamiCoin and NYCCoin in exchange for Stacks sent by people who will become coin holders. CityCoins may argue that this transaction is only providing mining services, rather than receiving financial investment, but the SEC may consider the distinction not to be material. Moreover, cryptocurrency investing in a joint venture appears to occur in the coin’s other function, which is stacking, when holders of MiamiCoins or NYCCoins lock it into a reward cycle to earn Stacks rewards.

“A reasonable expectation of profits.” CityCoins promises that MiamiCoin or NYCCoin holders will receive “rewards” for staking their coins (70% of Stacks redirected to CityCoins mining), and Bitcoin rewards for staking Stacks on Stacks. This expectation of rewards from Stacks and Bitcoin sounds like a reasonable expectation of earnings.

Derived from the entrepreneurial or managerial efforts of others. Exactly who deals with MiamiCoin and NYCCoin that holders choose to “stack” in exchange for rewards is not authorized. The processor may be a blockchain-based protocol rather than a person. Regardless of who does it, the Stacks Rewards Program must be managed, and MiamiCoins and NYCCoins owners don’t do it themselves. The Securities and Exchange Commission (SEC) already specified in an enforcement action in August that decentralized finance (DeFi) protocols that remove human decision-making do not exclude a transaction from the definition of securities under Howey tested, and the SEC is likely to apply this reasoning in any CityCoins audit.

Regardless of the controversy over how a file works Howey The test applies to stacking things on top of other things (which would be somewhat analogous to Monty Python’s “Royal Society of Putting Things On Top” scheme), CityCoins could make another argument that MiamiCoin and NYCCoin are interest tokens, mainly sold For their “additional benefit over time” and not as investments. Several token issuers have made similar arguments over the years. However, the Securities and Exchange Commission (SEC) has been consistently skeptical of such allegations since 2017, and SEC Chairman Gary Gensler reaffirmed the agency’s enforcement policies in 2021.

As of December 14, CityCoins has not mentioned compliance with securities laws anywhere on its website or stated that it has taken them into account. By registering coins as securities, offering them under an exemption from registration requirements, or finalizing after thorough analysis based on the SEC’s enforcement history, not all CityCoin will be considered a security. However, such due diligence is not evident in CityCoins’ public statements, and this absence is cause for concern.

If you want to go further, get a hat

As important as these legal and regulatory issues are, market forces may pose greater – and unavoidable – threats to the future of CityCoins. Coins are inherently volatile assets. For example, Bitcoin has gone through several boom and bust cycles since 2009, with more than one in 2021 alone. Moreover, CityCoins will face competition from other coins that offer competing interest, a new meme that attracts attention, or less risk from SEC enforcement action. There is no guarantee that the newly mined CityCoins will continue to be in demand, or that significant use will ever emerge.

CityCoins launched a year in which cryptocurrencies quadrupled in market capitalization to over $3 trillion, a Dogecoin crypto joke is rising to new heights fueled by Elon Musk tweets, and a Shiba Inu memecoin joke riding Dogecoin coats with a market capitalization of over $50 billion. Warnings are already emerging that bearish volatility could jeopardize mayors’ ambitious crypto plans, and selling city-branded cryptocurrencies will not be immune to these market forces.

The mayor who supports a branded cryptocurrency wears himself at the risk of CityCoins. But even if the benefits are not realized – like the emperor’s proverbial new clothes – the risks to the mayor and the city seem relatively limited. It doesn’t have to say “I’ve got this failure”, as neither the mayor nor the city has any ownership interest in CityCoins, or even any apparent contractual relationship with it. The cost to the mayor would be nothing, save for some embarrassing and negative headlines.

Meanwhile, CityCoins is offering free publicity to the mayor as a crypto-friendly forward thinker, who can only help attract crypto businesses to the city, adding free money to the budget, without imposing new taxes or issuing municipal bonds. So the mayors’ enthusiasm for CityCoins makes sense. Like a flashy hat, a city-marked cryptocurrency can command attention while offering its holder limited consequences if they disappear. Unlike the Emperor’s new clothes, it appears to pose little risk of undermining the mayor’s standing or crypto-friendly policies.

CityCoins Map of Cryptocurrency for the City Planned and Already Launched, as of December 13, 2021

Next year may bring major new developments to the city’s branded cryptocurrency concept. In addition to Austin, there are 15 other cities that CityCoins claim are “coming soon”: three are in the US (San Francisco, Los Angeles, and Las Vegas) and 12 are outside the US (Mexico City, Rio de Janeiro, Amsterdam, Lisbon, Berlin, Lagos, Cairo Dubai, Singapore, Seoul, Tokyo, Sydney).

Bloomberg Law subscribers can find information about US federal and state regulatory actions towards crypto assets on our website fintech compliance Resources, including new Track financial technology developments.

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