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CodefiCodefi Assets

It’s Time to Re-Democratize Our Local Communities’ Funding

by Alex KosturaFebruary 4, 2020
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ConsenSys Codefi and a recent acquisition will restore grassroots participation in muni bonds, written by Patrick Berarducci and Emma Channing

The municipal bond market has always been popular with retail investors, offering what are considered relatively safe investments often with both federal and state tax exemptions.  However, local residents have been priced out of investing in their own communities by bond denominations as high as $100,000.


The once grassroots community-funded projects are now reserved for large institutions and mutual funds, shifting the focus from opportunities to improve communities to profit-generating projects.

Attempts to shift the focus back to the community have been hit-and-miss. Some U.S. cities have successfully used “mini muni bonds” for small community infrastructure projects. Lawrence, Kansas, with fewer than 100,000 residents, issued around half a million dollars of bonds specifically to purchase a fire truck in 2017, and Denver sold $12 million in mini muni bonds in 20 minutes in 2014. In fact, around half of the municipal bonds issued in 2019 were under $10 million, yet the total raised was only about $31 million or 5% of the municipal bond market.

While these initiatives demonstrate abundant local demand, the high cost to issue smaller bonds prevents scaling. That much is clear from the demise of well-funded startup Neighborly, which set out to bring munis to the masses, but struggled in the face of high costs for selling, distributing and maintaining the bonds.

Tokenization for Community Financed Munis

In the past, municipal bonds have funded huge, revolutionary projects. One of the first muni bonds was issued in 1818 by New York State to finance the Erie Canal, which enabled lower shipping costs between the Midwest and Northeast of the US, driving down prices of food and supplies for eastern cities. Also notable, the Golden Gate Bridge was constructed using funding from a $35 million muni bond offering purchased by residents of San Francisco.

But mini muni bonds typically do not have such grand ambitions. With issue sizes ranging between $10-20 million in $5,000 denominations, most of the funds last year were used to on projects costing less than $10 million: discrete community impact projects rather than larger rolling infrastructure plans.

The problem with smaller-scale public infrastructure funding is that the cost of issuance is just as high as for a multi-billion dollar bond. In fact, the process of selling and managing muni bonds within local communities adds an extra layer of administrative costs along with regulatory requirements. The barriers to entry are high for smaller firms entering the $3.8 trillion municipal bond market.

To address these challenges, the infrastructure around muni bond issuance has to change. Blockchain technology, with its potential to revolutionize social and capital coordination, is perfectly positioned to create innovative and manageable opportunities in muni bond financing.

In practical terms, municipalities can use tokenization to enable more efficient management throughout the bond lifecycle. Interest payments, for example, can be programmed automatically using smart contracts.

Acquisition of Heritage Financial Systems

As a battle-tested operating system for commerce and finance, ConsenSys Codefi already efficiently and reliably leverages blockchain technology for multiple use cases. Codefi has enabled Her Majesty’s Land Registry in the UK to test tokenization of real estate, for example, along with a 26 million-euro tokenization of ownership of a building in Paris. The platform has produced the world’s first tokenization of a litigation finance investment, empowered companies to accept digital, programmable payments and built data analytics of blockchain-based “DeFi” lending activity.

Codefi is currently preparing to power global trade for the some of the world’s largest commodities companies through Covantis, an initiative formed by ADM, Bunge, Glencore Agriculture, Cargill and Louis Dreyfus Company.

Building a cost-efficient and effective solution for direct, local investment in mini muni bonds is a good thing both for financial markets and democracy. After all, local residents have the greatest incentive to invest in their local communities and possess the deepest knowledge and insight to protect against risk and over-borrowing. Greater local participation in mini-muni bonds will re-engage residents with their communities.

As a real-world use case for digital securities, mini muni bonds are an extremely powerful force toward helping cities to engage, inform and reward citizens who invest.

And so, at ConsenSys, we’re going even further to bet on this vision for a better muni fundraising experience: ConsenSys Digital Securities LLC (“CDS”), the FINRA registered in-house broker dealer of ConsenSys, has acquired Heritage Financial Systems Inc. to enter the muni finance market and make it even easier for muni issuers to use Codefi software to tokenize their muni offerings.


The Future of Municipal Bonds

ConsenSys is excited to push forward with innovations in both technology and structuring that will support the mini muni bond evolution. Tokenization can make an already powerful financial market more accessible for individuals and communities.

“Tokenized, digital municipal bonds can help restore the muni market to its original community-driven spirit by making the securities more accessible to everyday citizen investors and more cost-effective for communities of all sizes,” said Joseph Lubin, Co-Creator of Ethereum and Founder of ConsenSys. “Customizable digital agreements, or smart contracts, will help streamline and automate processes such as muni bond payment and settlement, legal arbitration and investor ID verification.”

Community members will always have the greatest incentive to invest in their surrounding environment, and tokenization makes these investment opportunities a realistic local prospect once again. Residents know which highways need to be improved or built. Parents understand local needs and will invest in better schools, parks and communal areas. Blockchain-enabled, community-engaged funding can ensure that investment in public infrastructure maximizes the benefits for the people who live there while improving accountability and local democracy.

Patrick Berarducci is co-Head of ConsenSys Codefi and global fintech in New York and Emma Channing is a Registered Representative for ConsenSys Digital Securities LLC and Heritage Financial Systems Inc. in Colorado.