The speed and transparency of cryptocurrency and blockchain applications can help state and local governments track where and how transactions occur.
Public-sector use of cryptocurrencies and blockchain is growing, but in varied ways.
For one, agencies can use them in investigations to visually graph, track and analyze transactions.
“There’s this thought that Bitcoin transactions are anonymous. They’re not. They’re pseudo-anonymous,” said Bill Callahan, director of government and strategic affairs at Blockchain Intelligence Group. That means investigators can get information from exchanges to identify who was behind the transactions and if the person or criminal organization is using obfuscation techniques.
“The blockchain never forgets, so we’ll go backwards also in an investigation, so we’ll look at where other transfers took place,” Callahan said.
The company also provides training to government entities looking to better understand cryptocurrencies and blockchain. Its in-person or online certified cryptocurrency investigator training covers the basics of cryptocurrencies, common schemes where bitcoin is used and how to identify and track nefarious activity.
“There’s definitely an increase in demand” for learning about and using technology to track cryptocurrencies for activity related to drugs, human trafficking, child sexual exploitation and other crimes, Callahan said. “What I’m seeing right now is a shift in where that demand is coming from.”
During his 20-year career with the Drug Enforcement Administration, Callahan said it used to be that anything related to cryptocurrency was passed off to the cyber unit. “What’s happened with the explosion of criminal activity, ransomware, stolen NFTs, the ‘cyber guys,’ the cyber units, are swamped with work” and so specialized units are recognizing the need to do the work themselves.
“I think there is a very bright future for this. I think that for the government, too, there will be a number of use cases: recordkeeping and evidence collection, storage of data. I think it’s endless,” Callahan said.
Cryptocurrencies are also being eyed as payments for fees, taxes and even salaries, with Miami and Colorado leading the way.
MiamiCoin debuted in August 2021 in cooperation with CityCoins, a nonprofit and open source protocol. It lets people “hold and trade cryptocurrency representing a stake in a municipality [and] by running software on their personal computers, CityCoins’ users mint new tokens and earn a percentage of the cryptocurrency they create,” according to The Washington Post. A computer program automatically allocates 30% of the currency to the city.
Miami Mayor Francis Suarez, who pledged to accept his salary in bitcoin when he won reelection last November, said at the time that the city earned more than $21 million on MiamiCoin – roughly one-fifth of the city’s tax revenue. But in February, he told the Miami Herald he didn’t “know whether it’s going to work,” as the coin fell to its lowest worth – four-tenths of a cent – since launching.
Also in February, Colorado Gov. Jared Polis announced that his state would be the first to accept cryptocurrency as payment for state taxes and fees. In 2019, the state passed the Colorado Digital Token Act to enable the sale and transfer of digital tokens within the state.
But not all municipalities are jumping on the blockchain. Philadelphia Chief Information Officer Mark Wheeler told Technical.ly on March 15 that the city will not use CityCoins, and Adam Frumkin, CIO of the Franklin County, Ohio, Data Center, told GCN in an interview that “we’re looking at both crypto and blockchain because there is some federal government and state government funding that they’re looking at requiring blockchain, but we’re trying to stay out of it right now for as long as possible.”
One reason for the slow adoption is lack of knowledge, Nathan Jones, senior vice president and general manager of worldwide public-sector sales and government affairs at TaxBit, a platform for crypto tax and accounting.
“When you look at cryptocurrency, one of the big challenges it’s had is it’s so new, people don’t understand it,” Jones said, adding that state and local governments will have to develop policies around how they accept and hold cryptocurrency. “You would keep a separate ledger … to keep track of their crypto assets and then they have their traditional cash ledger. But the states and cities that start to accept crypto, whether it’s for tax payments, parking tickets, permits, essentially it’s just another avenue for them to connect with taxpayers.”
But although adoption is low in the public sector, crypto is the fastest-growing segment of the financial ecosystem. A recent White House executive order on ensuring the responsible development of digital assets cites that growth:
- A $3 trillion market cap in November 2021, up from $14 billion five years ago.
- 16% of American adults have invested in, traded or used cryptocurrencies.
- More than 100 countries are exploring or piloting Central Bank Digital Currencies, a digital form of a country’s sovereign currency.
“It shows us that cryptocurrency has definitely hit the mainstream,” Jones said of the order. “It helps for the government to spend some time looking at all of the different elements which concern taxpayers or concern taxpayers around adoption, but really it’s around what is the protection for consumers.”
He says speed and transparency are the biggest benefits of cryptocurrency and blockchain to state and local governments. Because blockchain is open source, it can provide insight into where and how transactions occur, promoting trust in the new system.
Stephanie Kanowitz is a freelance writer based in northern Virginia.