Unprecedented: Suarez push to do Miami city business in cryptocurrency meets the law
Miami is positioning itself as the vanguard for a brave and some say risky new and uncharted world where municipal business is conducted with cryptocurrency — a key tenet of reelected Mayor Francis Suarez’s second term.
The city is now trying to turn Suarez’s proclamations — from pumping up the city budget, not to mention residents’ wallets, with money derived from the mining of a Miami-branded cryptocurrency to paying employees in Bitcoin — into a reality for which there is no precedent.
The groundbreaking next step is already in motion: Miami’s procurement director, Annie Perez, told the Miami Herald that crypto exchanges — which must convert cryptocurrency into actual U.S. dollars for the city — are being invited to “industry days” on Dec. 6-7 so city administrators can meet with potential bidders before a formal solicitation is put out in early 2022.
“We’re doing this to help build knowledge to help us see what’s out there, to see the options,” she said.
One crypto exchange company has already started to make moves.
“When it comes to cryptocurrency payment processing, BitPay is the only company in the world that allows you to accept crypto with no price risk or volatility risk because you will never be touching or holding cryptocurrency,” wrote Brennan Boyajian, enterprise sales director for BitPay, in a May 25 email to a city procurement employee.
No municipality in the U.S. has been down this road before.
Emails show that staffers have spent months tweaking a request for proposals and Perez said the city could create a pool of vendors as opposed to awarding one exchange a contract.
Supporters of the overall push, including those who want to see Tallahassee clear a path so state financial regulators can find a place for cryptocurrency in the existing financial system, say crypto’s growth is inevitable and shouldn’t be turned away.
“The law is always [lagging] behind the technology,” said Dara Tarkowski, managing partner at Actuate Law, a tech-focused law group that recently opened an office in Miami. “Sometimes it’s a struggle to understand the true functionality of how these [Bitcoin] tokens work.”
Meanwhile, some critics describe cryptocurrency as a big hustle, an unregulated mechanism that allows criminals to make transactions anonymously — and that a city like Miami with a troubled financial history should be treading carefully.
“It’s the same as if the city of Miami had decided to use ‘blood diamonds’ as currency,” said John Reed Stark, a cybersecurity consultant who spent 20 years with the SEC and founded that agency’s internet enforcement office, referring to diamonds mined in areas controlled by rebel forces that are sold to fund insurgent military attacks.
City crypto contract
No precedent exists for a city to cut a deal with a crypto exchange company, research by city staffers has found. But an exchange is required because the city and its employees cannot come into direct contact with crypto, according to a seven-page legal memorandum dated May 7.
Assistant City Attorney Xavier Alban addresses two questions in the memo, obtained by the Herald: Whether the city can accept cryptocurrency as a form of tax payment and whether it can pay employees in cryptocurrency. The answer to both is stated clearly and unequivocally in a first-page summary: They can only accept payments and pay employees in U.S. dollars.
For Miami to get around this, the memo says, the city would have to procure a third-party cryptocurrency exchange vendor that would convert the cryptocurrency into dollars and vice versa.
The two days of meetings early next month will set the stage for a public bid that would yield a unique kind of municipal contract enabling city employees to route all or part of their pay to a third-party firm that would convert the salary dollars into Bitcoin. The outside firm would likely charge a fee from employees who use the service.
Employees would sign up to make the conversion at their own risk. City administrators say they want to educate the workforce before offering the option, and the city’s attorneys have recommended getting signed waivers from employees before they turn wages into crypto.
The practice could begin as early as next year.
It’s unclear how many employees would be interested in this arrangement, or if any have volunteered. Erica Paschal, the city’s finance director, said she was not aware of anyone asking for the change, adding that the city will know the level of employee interest once the conversion is available.
MiamiCoin and the SEC
The city legal analysis that transactions must be undertaken in U.S. dollars was issued before the advent of MiamiCoin, a cryptocurrency created by a third-party group called CityCoins that seeks to generate funds for municipalities. The group recently launched a New York City-branded cryptocurrency that Mayor-Elect Eric Adams has endorsed on social media, though the current administration has not formally partnered with CityCoins.
In Miami, the arrival of MiamiCoin does not appear to have slowed the city’s crypto adoption efforts. Indeed, Suarez recently announced that city residents would soon be eligible for a Bitcoin “yield” dividend based on the rising value of MiamiCoin.
Through the MiamiCoin protocol, digital “miners” compete for cryptocurrency rewards, a percentage of which is steered toward a digital wallet reserved for the city of Miami. Under an agreement approved by commissioners in September, the city will receive the value of the rewards in U.S. dollars on a quarterly basis, beginning in December.
When the city gets the money, which municipal administrators are treating as a donation, it will essentially be a piggy bank for the City Commission. “We created a separate bank account strictly for that, and it will sit there until the commission will appropriate it accordingly,” Paschal said.
Paschal said there are no restrictions on how the money could be spent — the equivalent of general fund tax dollars that pay for a wide range of municipal expenses and projects.
The Securities and Exchange Commission does not treat Bitcoin as a security, and federal regulators might not jump in until there’s an obvious problem to fix. Still, state lawmakers are expected to consider legislation that would formally define cryptocurrency. This would allow regulators to create rules for how crypto fits into existing financial systems. Suarez quietly pushed lawmakers in Tallahassee on the issue in the spring.
Tarkowski, the tech attorney, says that because the SEC tends to be more reactive than proactive, it is not likely to intercede in Miami’s crypto initiatives unless something goes wrong.
“If anyone is waiting for the security blanket of regulators saying MiamiCoin is safe ... it’s just like they can’t say a specific stock is a safe investment,” she said. “But most consumers should know that they’re watching in the background, and if they believe there are shenanigans, they will start to issue subpoenas. ... They are likely doing lots of that work silently and behind the scenes.”
But the SEC does not treat all cryptocurrencies as they do Bitcoin — and MiamiCoin may fall into a different category. Daniel Stabile, a partner in the Miami office of Shutts & Bowen who has authored a book on crypto regulation, says the SEC has taken a harsher view of so-called coin offerings that are created to raise money. If it determined that CityCoins was taking outsized profits from MiamiCoin, the SEC would likely intervene, Stabile said.
Risks
Miami City Hall knows about things going sideways with the SEC. The only city in the country to be caught twice committing securities violations, Miami paid the SEC a $1 million civil fine in 2016 after a jury determined the city had played shell games with its finances to hide massive losses from the public and municipal bond investors.
In a recent “Fox and Friends” interview, Suarez said he’s already reached out to the federal government to talk crypto.
“We want to get ahead of it,” he said. “We want to talk to them.”
After the interview, a spokesperson for Suarez told the Herald that the mayor has scheduled a call with SEC regulators in early December to discuss cryptocurrency.
Stark, the ransomware expert, blasted the enthusiasm for cryptocurrency in Miami as irresponsible.
“There is no federal oversight,” he said.
Suarez has framed his embrace of cryptocurrency as a boon for Miami, a city he’s promoting as a major tech hub. In one of his cafecito talk videos posted on Twitter last week, Suarez touted the announcement that upcoming art fair Design Miami will accept cryptocurrency as payment for art for the first time.
“I can tell you that people underestimate or don’t have a true sense of what the real market is in crypto,” Suarez said.
This story was originally published November 29, 2021 at 1:00 AM.
