Municipal or “muni” bonds help fund infrastructure that citizens use every day: roads, schools, libraries, parks, sewer systems, and the like. However, since the minimum cost to purchase a muni bond is around $5,000, the typical taxpayer isn’t likely to invest in them. Instead, institutional investors and high-net-worth individuals are often the primary purchasers of muni bonds—and the ones who benefit from these bonds’ often tax-free status.
Officials in Quincy, Mass., a city of around 110,000 people just outside Boston, wanted to change that. By using blockchain technology, they’re working to make muni bonds more accessible to less-affluent taxpayers—and, by doing so, keep more of the money these bonds generate in the community.
Quincy announced its first blockchain bond this April. Though the bonds aren’t “at the stage yet where John Q. Public can engage,” Quincy CFO Eric Mason told CFO Brew, he sees that happening in the future. He envisions a day when the city will build a new school funded by a blockchain bond. “Somebody could buy a bond for that new school, drive their kid to that school, drop them off, and then look and see that tax-free payment in their 401(k). That’s a goal that government should pursue,” he said.
Automation drives costs down: The city makes about $25 million in loan interest payments a year, Mason said. That money leaves the local economy, but he and other officials wanted to find a way to keep it in the community. “As issuers of debt, as people who use debt as a way to increase our operational capacity,” they wanted to find “a way that we can do this better,” Mason said.
Blockchain appeared as a potential solution. Simply put, blockchain technology lowers transaction costs because it automatically documents transactions at each stage of a bond’s life cycle.
“You don’t have that repetitive documentation for trades. All that information immediately travels around with the bond wherever it goes,” Mason said. That eliminates many of the fees that would normally go to intermediaries, or that are generated when ownership of the bond is reassigned.
And it will help the city achieve its goal, Mason said, of lowering the barriers into the muni bond market. “The technology is as replicable at the penny par as it is at the $5,000 par,” he said. “The smaller we can break down [the units] the more people will enter the market.”
News built for finance pros
CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.
Blockchain brings other advantages as well, including faster dispersion, Mason said. Many public sector employees, he said, know the anxiety of having to wire out large bond payments and wait for the bank to process them. With a blockchain bond, on the specified date, funds are automatically distributed “to every single bond holder, no matter how many there are,” Mason said.
And the blockchain platform increases their visibility into bond transactions. Their treasurer could see that information “immediately,” Mason told Global Government Fintech.
Getting comfortable with change: Quincy’s bonds, worth $10 million in total, are among the nation’s first blockchain-enabled municipal bonds. Mason and other officials worked with banking partner JP Morgan, which operates a blockchain platform called Onyx Digital Assets, to get it off the ground. They also consulted with Paolo Bortolin, deputy CFO of Lugano, Switzerland, which generated one of the world’s first blockchain muni bonds.
Since the idea was so new, Mason and his colleagues knew they’d need to spend time explaining it to regulators. Initially, some regulators confused blockchain with cryptocurrency, he said, and he explained that wasn’t the case, likening the blockchain bonds to digital savings bonds. “When I was a kid, people would go buy savings bonds and they’d be physical pieces of paper,” he said. “I just found out that I can’t go buy a physical I or double E bond anymore. It’s digital. That’s just the new technology.”
The “regulatory authorities were very open,” he said. “They had their questions. They wanted to make sure the people buying these are safe.”
Mason advises fellow CFOs to embrace new technology. Technology is moving quicker and CFOs won’t always have “a long time to consider the ramifications,” he said. “[If] you don’t want to adopt it because you don’t want to learn about it,” he said, “you’re going to be behind the eight ball and you’re not going to be able to catch up.”
Paper and concrete: As ethereal as the blockchain bond may sound, there are some tangible aspects to it. Paper copies of the bond are still kept “in a safe in Louisiana,” Mason said.
And then there’s the matter of what the bond is being used for. “Roads and sidewalks!” Mason said with a laugh. “I said, ‘Let’s take this new technology and do good old-fashioned government with it.’”