Watch Out for the Pols Bearing Crypto

Public institutions of all kinds, including government treasuries, are steadily warming to bitcoin and cryptocurrency. The volatile new asset class presents an opportunity for governments, which are often underfunded, to reap massive rewards. The risks are self-evident, 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 Brazil’s largest cities, announced its intentions to allocate 1% of its municipal treasury to crypto. It will also give a discount to those taxpayers who pay their dues in bitcoin and rework its tax code to attract foreign, crypto-rich, individuals and companies.

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“It makes a lot of sense for the city of Rio de Janeiro to become a tech hub, and also work with blockchain technologies,” Municipal Secretary for Economic Development Chicão Bulhões told CoinDesk TV’s “First Mover” 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.

“It's the future that is already here. So we want to be a part of it,” he said.

You might think Copacabana and Ipanema beaches would be enough of a draw, but several cities and governments are following a similar playbook to Rio’s to compete for this wave of capital.

Miami Mayor Francis Suarez, who attended the “innovation week” where Rio announced its plans, was a first mover. He recently took a paycheck in bitcoin, floated tax breaks, promised Miami would buy bitcoin and set up a “MiamiCoin,” where anyone can mine on the Stacks blockchain to reap rewards for both Miami’s semiofficial wallet and themselves.

There are others, too. New York City Mayor Eric Adams wants to become “mayor of all the bitcoins.” Scott Conger, the mayor of Jackson, Tenn., is trying to find a way to mine bitcoin in a disused wing of city hall. Mark Wheeler, chief information officer of Philadelphia, is extending the city’s namesake brotherly love to the coins.

Reshma Patel recently ran a campaign to become the next comptroller of New York City with a thought-out blockchain plan that included investing the city’s pension fund in “major cryptocurrencies.”

See also: Nayib Bukele Is Not the Bitcoin Hero We Need

“Bitcoin has a set, finite supply, which gives investors a hedge against inflation – which could be on the rise if further stimulus actions are needed. Fears of inflation today, and through the future, are valid, and that is why some of the world’s most forward-thinking companies, like Tesla and Square, have invested a portion of their total cash reserve in bitcoin,” Patel wrote in a draft policy proposal.

Patel didn’t win her bid for office, but her thinking is widespread. Crypto investors steeped in the community thinking of crypto, look at all this and say, “It’s game theory.” All governments, just as all people, will one day have to own crypto if it becomes widespread – and it will – and those who move quickly now will benefit the most. It’s the money of the future on sale today.

One notable example of this idea came from maven investor Cathie Wood’s Ark Invest, which predicted the price of bitcoin could reach $1 million by decade’s end, with “nation-state “adoption” being a prime mover behind the increase.

That is the “hodlers” mindset. Bitcoin, admittedly, isn’t great to use today. It’s volatile, expensive and – most importantly – deflationary, meaning if you sell or trade it for anything today, you might regret it later when it’s much more expensive. And because bitcoin is capped at a supply of 21 million coins, if demand goes up, so will prices. Economics 101.

It’s for that reason that MicroStrategy CEO Michael Saylor, the uber-holder, is careful not to call bitcoin a “currency,” but a rapidly appreciating digital asset. MicroStrategy made waves in 2020 when it became the first publicly traded company to allocate a portion of its assets to bitcoin.

Several, but not many, companies have followed suit. As have a few governments, like El Salvador’s. The country has made bitcoin a legal tender, and its president executes late-night bitcoin buys using public funds.

There is certainly an argument that cryptocurrencies – especially bitcoin, which is the first, most decentralized and so far most resilient coin – will increasingly appear more attractive for public institutions to invest in. It’s where the smart money is going. Gold hasn’t held up its promise to be an inflation hedge.

Read more: Bitcoin Is 'Armageddon Insurance'? | The Node

Ultimately, as an advocate for democracy, I want all governments to do what their citizens vote for – whether that’s buying bitcoin or banning it. But it’s important to remember that crypto still comes with risks, even if you can rationalize your investment, or even your losses.

If cities start plowing into crypto, it will become important to note when (if ever) governments offload their assets and where they appropriate the funds.

Rio de Janeiro's tidy 1% investment is prudent, a way to potentially reap a windfall without betting the house.

“We're talking about Web 3.0, here, we're talking about a probably new revolution in the way people pay their bills or pay their taxes or even their investments,” Bulhões said. “It's new for everyone. It's new for us.”