Recent Crypto Securities Ruling Could Aid Smart City Blockchain Usage

On July 13, US District Judge Analisa Torres made a ruling in a case brought by the Securities and Exchange Commission that may make it easier for smart cities to utilize blockchain technology in their operations. Torres issued a summary judgment that the status of a cryptocurrency as a security is based on the terms of the particular offering rather than the underlying asset. According to this ruling, in many cases cryptocurrency should be regulated not as a security but as another type of asset—potentially as a commodity.

Since regulations for securities are more restrictive than for other asset classes, this ruling could clarify regulations for local governments in the US wanting to use public blockchains. The ruling could clear a path for cities to engage with ready-made and thoroughly tested public blockchains by making it simpler to purchase and hold the cryptocurrencies required for network transactions. Purchasing cryptocurrency for data storage could become as simple as purchasing fuel for a municipal fleet.

How Uncertainty around Cryptocurrency Regulation Has Affected Cities

At its most basic, a blockchain is a databasing system that creates a running log of data entries in a way that is easy for an outside observer to view and authenticate. This makes blockchain very well suited to many of the administrative tasks that state and local governments handle. Currently, most cities using blockchain for recordkeeping have used custom-built, private blockchains. These proprietary options give the city complete control over the data that is published, but also the ability to modify that data at will. If historical data is altered, an outside observer could detect that a change was made but have no way of knowing the nature of the original information.

Because of this, and because the immutability of data is a core feature of blockchain’s trustworthiness, some argue transparency can’t be achieved unless cities give up this ability. Doing so requires cities to use public, decentralized blockchains like Ethereum or Algorand. It would also require the city to hold cryptocurrency to pay for transaction fees. This has historically been uncomfortable for cities because of the lack of clarity around which cryptocurrencies are securities and what steps would be required to hold them. No city wants to find itself charged with unintentionally violating securities law.

For example, the City of Miami found data immutability essential when building a record of its air quality. However, achieving this would mean using a public blockchain and require the city to pay a small transaction fee to the network, denominated in cryptocurrency, for each record the city made. Ultimately, Miami decided to engage a private company to handle publishing the air quality data to the blockchain on the city’s behalf. This was a more costly option, but with less potential legal headache.

How This Ruling May Help

The lack of regulatory clarity around holding and using cryptocurrencies has been a barrier to blockchain adoption by cities since the emergence of Bitcoin. There is significant potential for cities in the technology—projects currently using blockchain for public records have proved it can reduce costs and staff time related to data management. If the Torres ruling does indeed set the precedent that a city’s purchase and use of cryptocurrency is not bound by securities law, one major hurdle will have been removed. When interacting with this technology becomes as clear in a legal sense as buying gasoline or electricity for city functions, cities will be able to leverage existing and proven infrastructure to greatly improve their data transparency and management costs.