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Massachusetts Municipality Issues First Blockchain Bonds in US Public Sector
Image by Gerd Altmann from Pixabay
A Massachusetts city has broken new ground in the use of innovative technology in the US public sector by undertaking a municipal bond issue using blockchain.
THE City of QuincyThe public authority has issued $10m (around £8m) of tax-free bonds using the technology, saying in an announcement that it had taken “a first step in transforming US municipal debt markets”.
By seemingly becoming the first example of a US municipality carrying out a blockchain bond issue, Quincy – a relatively small coastal city just south of Boston – becomes the latest example from around the world of a state authority using blockchain technology. distributed ledger (DLT) to raise funds. The city joins a growing and increasingly diverse list of “blockchain bond” issuers, including the Swiss city of Lugano, the governments of Hong Kong and the Philippines, and the Luxembourg-based European Investment Bank (EIB) .
The city’s mayor, Tom Koch, said in an announcement that the innovative issuance is part of efforts to “use emerging technologies to create greater financial participation and better economic outcomes for our constituents.”
“The City of Quincy has been investing in its innovation economy over the past few years, and this is the natural next step toward democratizing the City of Quincy’s bond issuance,” he said.
Quincy’s move welcomed by the Lugano pioneer
DLT records transactions in multiple locations almost simultaneously. One of the components of DLT is the blockchain: a list of records (blocks) securely linked to each other in a cryptographic chain. Blockchains are often programmable and can automate many stages of a bond’s lifecycle, such as interest payments.
Quincy’s bond issue took place on April 25 and was done in partnership with JP Morgan. It used the US-based bank’s Digital Debt Service, an application built on the private blockchain-based Onyx Digital Assets platform.
In recent years, the City of Quincy has supported DLT through sponsorship of “Boston Blockchain Week” and partnerships with research and development initiatives at Qubic Labs, a blockchain innovation hub.
Quincy’s blockchain bond issuance has already been welcomed with enthusiasm by Lugano deputy financial director Paolo Bortolin, who described the development in a Message on LinkedIn as “exciting news in the world of finance and technology.”
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Plan more
Speaking to Global Government Fintech, City of Quincy Finance Director Eric Mason said the issuance went “very well” and was “no different” from previous traditional bond issues.
“Our treasurer, Molly Smith, could immediately see everything in Onyx,” she said. “The platform is one of the most impressive systems you have ever seen implemented and accessible by municipalities.”
Asked whether there was already ambition to undertake further blockchain bond issuance, Mason said “that is currently the plan”.
Rick Coscia, the city’s strategic asset manager who handles all bond activity, “now has DLT as an option in his issuance toolbox,” he continued.
“The long-term goal is to push this toward full democratization,” Mason said. “We want a parent to be able to drop their child off at a school financed by a bond they purchased and look on their phone and see a tax-free interest payment made into their wallet. The city pays about $25 million a year in interest; we want to keep most of it in the local economy; we believe blockchain can help this goal.”
“Democratization of ties”
When asked about the challenges he encountered on the journey to issuing blockchain bonds, Mason responded that the biggest obstacle “by far” was “the regulatory process.”
“Whenever you do something new, especially with public funds, it’s not just about checking all the boxes, but about double- and triple-checking them, and then making sure that it’s an overall beneficial process,” he said.
As for domestic supporters, Mason described Mayor Koch as fully on board “because he sees the potential in the democratization of bonds – how it can open up the market to the citizens of Quincy.”
He said Quincy City Council President Ian Cain had kicked things off by asking whether a blockchain bond issue was actually “feasible in the United States” and had then connected colleagues, including Mason, with Bortolin of Lugano.
“Paolo has walked us through the challenges and successes,” Mason told Global Government Fintech. “The funny thing about government is that local government is pretty similar around the world, so having someone who has already been on this journey as a resource was invaluable. Our meeting with Paolo occurred at the beginning of this journey, and he was one of those inspiring voices who demonstrated that this can be done and that it can better serve the interest of the public dollar.”
To know more: Blockchain Bonds: Breakthroughs in Digital Issuance Create Buzz
Smaller than average issue size
The city of Quincy typically sees bond sales between $20 million (about £16 million) and $75 million (about £60 million), making this inaugural blockchain issuance below average in terms of value. Its Bond Anticipation Note (BAN) sales (short-term debt instruments issued against the proceeds of an upcoming bond issue) can reach the $100 million mark. Most city bonds are tax-exempt, unlike federal bonds.
The initial issue was purchased entirely by JP Morgan, with the aim of distributing the bonds to investors on the secondary market as they are uploaded to the technology platform. The bond has a maturity of seven years.
The City of Quincy has been working with JP Morgan for approximately 11 months prior to the issuance date.
Numerous other outside parties collaborated with the City of Quincy on its groundbreaking issuance, including law firm Locke Lord and financial advisor HilltopSecurities.
“Once we got past the regulatory aspect, everything went pretty smoothly, even with the rating agencies,” Mason said.