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Why São Paulo Wants to Pay for Infrastructure with Cryptocurrency

The Brazilian state of São Paulo is looking to cryptocurrency to help solve its infrastructure problems.

The state, home to 45 million residents and the city of São Paulo – the largest metropolis in the southern hemisphere and the third-largest in the world – plans to use a token called buildcoin to pay engineers across the globe for feasibility studies. These studies are required to assess the practicality and justify the expense of large construction projects.

To test the concept, São Paulo will crowdsource and finance studies this way for the Ilumina SP program, which aims to swap out antiquated public lighting systems for newer and more efficient alternatives.

If successful, the blockchain solution could be a workaround for governments that want to invest in infrastructure, but lack either the money to pay for credible independent studies (which are needed to attract outside investors and get the ball rolling on projects) or access to the needed expertise.

São Paulo officials say a model that can attract more minds from around the world and compensate them with cryptocurrency can help the state meet its infrastructure requirements in a way that is more transparent, cheaper and faster than the existing process.

“We like innovation in São Paulo, and blockchain and cryptocurrencies are being followed as extremely interesting innovations that we had to start experimenting with,” Hélcio Tokeshi, secretary of treasury for the state of São Paulo, told CoinDesk.

How it works

The state is partnering on this initiative with CG/LA Infrastructure, a Washington, D.C., consultancy, and the BuildCoin Foundation, based in (where else?) Zug, Switzerland.

The pilot project will leverage CG/LA’s global network of 60,000 infrastructure experts with the foundation’s eponymous token, which is designed to create an alternative payments ecosystem for the construction industry.

First, study proposals would be submitted by governments to the BuildCoin Foundation for vetting. Selected projects would be green-lighted and floated to experts in CG/LA’s database.

That’s where the coin, an ERC-20 token that runs on top of the ethereum blockchain, comes in.

For example, an engineer in Finland who specializes in bridges could receive an invitation to collaborate on a feasibility study for a bridge commissioned by a local government in Brazil. He would receive remuneration in buildcoin based on his overall contribution to the project, measured with a Reddit-like system where other participants can vote up or down the quality of his work.

Why would the engineer accept payment in a specialized digital token rather than money he can spend at the local grocery? If all goes according to plan, the buildcoins would eventually be redeemable for other services in the same ecosystem, such as subcontracting from other participating firms, market research and professional training.

Similar to many token-based blockchain projects, the value proposition gets stronger the more participants join the network – provided the initial chicken-and-egg problem is overcome.

In this way, CG/LA and BuildCoin believe that a blockchain and a native cryptocurrency for the infrastructure and construction industry will not only ease burdens on governments, but also open up new opportunities for subject matter experts around the world who are eager to contribute to projects but have historically had difficulty finding studies or colleagues to match up with their particular skill sets.

“Collaboration is almost the Holy Grail of infrastructure,” said Norm Anderson, president and CEO of CG/LA. Yet before the idea came along of a token to incentivize members of the network, he said,

“There was no way to get them engaged at a high level on a consistent basis.”

While there is undoubtedly some uncertainty involved with such a novel approach, Tokeshi argued that for São Paulo, the potential benefits of an auditable public ledger, and a way to pay for studies without tapping taxpayers’ funds, outweigh the risks:

“It is an innovation and this in itself will require people to take some time to study and understand. On the other hand, we gain by increasing the potential sources of financing for the projects, gaining more visibility and transparency.”

Desperation breeds innovation

Faced with an economic crisis and tighter government purse strings in recent years, infrastructure spending in Brazil has shrunk to around 1 percent of gross domestic product – significantly lower than the 4 percent global average and insufficient to cover even basic maintenance requirements.

Traditionally, Brazilian empreiteiras – massive construction conglomerates – would perform both the feasibility studies and the construction work for a given project after winning the contract from the government.

But because of an ongoing corruption scandal, which has seen a number of construction tycoons jailed, these conglomerates have been largely removed from the picture.

This situation has left local governments in search of a new way to pay for the studies, which typically run between $500,000 and $1 million.

But it created a window of opportunity for buildcoin.

Were it not for the scandal, Anderson said,

 “We wouldn’t have a project because some empreiteira would be all over this thing promising some magic saying ‘trust me, don’t worry about it, just send the checks to this account in Panama.'”

A global problem

A former informal advisor to U.S. President Donald Trump on infrastructure issues, Anderson argues that the buildcoin model, if successful, could be deployed outside of Brazil to help solve the massive worldwide problem of infrastructure underinvestment.

Global infrastructure investment falls short of target by an estimated $1 trillion a year, and in the U.S., the American Society of Civil Engineers reckons that $3.6 trillion in spending is needed over the next five years just to maintain and upgrade existing infrastructure.

Further, the problem of financing the studies needed to kickstart these projects expands far beyond just Brazil.

Anderson estimates that there are 80,000 infrastructure projects proposed worldwide in a given year, but only $200 million in funding is available for feasibility studies – meaning only about 400 studies are conducted each year.

And because studies frequently don’t translate into real projects, they typically cause a host of budgeting and political headaches for governments.

“If I do a study, the project may not materialize for several years, so it’s outside the political cycle. So why am I going to budget for something today that’s not going to be done until far off in the future?” said John Cronin, president of the BuildCoin Foundation.

Should the Ilumina SP partnership succeed, Anderson said that the next steps will be to expand into other important but uncontroversial types of infrastructure projects such as wastewater treatment and transportation, in Brazil and other markets.

“We’re injecting private sector velocity into the infrastructure creation process,” he said, adding:

“This isn’t the panacea. It is a catalyst that is deeply needed as part of a new infrastructure project origination model.”

Sao Paulo image via Shutterstock

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Housing or Dotcom: Which Bubble Does Cryptocurrency Mania Resemble?

Marc Hochstein is the managing editor of CoinDesk and a former editor-in-chief of American Banker. 

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.

“It seems like the dotcom bubble all over again, or the housing bubble all over again.”

That’s Robert Shiller, the Nobel Prize-winning Yale economist, quoted in Fortune magazine’s cover story on bitcoin.

So: dotcom or housing? Pick one, professor. Because there’s a meaningful difference.

Debt bubbles, like the one that overheated the U.S. housing market in the 2000s and ultimately sparked a global financial crisis, leave behind encumbrances. Tech bubbles, like the 1990s internet mania, leave behind infrastructure.

The last great debt bubble gave us $700 billion of bailouts and more than 2,000 pages of legislation (not counting the reams of regulations putting the Dodd-Frank Act into practice) in the U.S. alone.

Rather than ending “too big to fail” we ended up with the biggest TBTF institutions ever, zombie foreclosures that sat vacant for years waiting to be repossessed, and the spectacle of Occupy Wall Street stinking up a public park and scaring the children.

The last great tech bubble, on the other hand, funded the rollout of fiber-optic cable networks and research into 3G mobile computing. It fueled the development of smartphones (Apple, Samsung), algorithmic search (Google), big data logistics and e-marketplaces (Amazon, Alibaba), social media (Facebook, Twitter), cloud computing (Dropbox, AWS), the platform and app economies (Airbnb, Uber) and so forth. (To be fair, tech-stock shenanigans from that era were also a factor that led to Sarbanes-Oxley.)

As with a century earlier, when a boom-bust cycle in the 1880s and 1890s left behind a national railroad system, the dotcom bubble totally transformed the economy.

So while cryptocurrencies are almost certainly in a bubble – I mean, come on, dogecoin’s market capitalization is above $1 billion, and its software hasn’t been updated in two years –  the pertinent question is what kind of bubble.

Pain ahead

True, either way, there will likely be steep financial losses, tears, layoffs, business failures, a funding drought, recriminations, pious editorials, lawsuits (meritorious and otherwise), prosecutions, congressional hearings, political grandstanding, unfunny “Saturday Night Live” skits and, quite possibly, burdensome new regulations.

But there probably won’t be bailouts.

For one thing, bitcoin and its myriad clones and mutations are, even now, too small and too segregated from the broader financial system to warrant such an intervention.

And given the threat that decentralized money poses to tax collection and financial surveillance, it’s not something most governments would be inclined to rescue from the abyss.

So crypto bagholders will be on their own – as it should be. If you don’t see why, google “moral hazard.”

Further, if someone makes a stupid bet on a cryptocurrency that goes south, his losses are limited to the cash he invested. (Hopefully not from his retirement savings.)

In sharp contrast, when housing prices returned to earth, the suckers who had taken out subprime mortgages still had six-figure debts hanging over their heads. Even after the borrowers mailed the house keys to their lenders, the foreclosures left a stain on their credit reports for years before they could get their financial lives back.

So the potential damage from this bubble is limited when compared to the crash of 2008. And arguably the upside is greater.

Because this bubble could leave behind the rails of a new and improved financial system.

Laying foundations

It is true that, as Lightning Network co-founder Elizabeth Stark recently noted on Twitter, many of the people doing important infrastructural work in bitcoin do so as a labor of love, not for the money. As the old saying goes, cypherpunks write code.

And it’s hard to imagine many of the frivolous initial coin offerings (ICOs) out there leaving much of a legacy, apart from souvenir white papers (our era’s version of those vintage stock certificates you can buy for a few bucks from Wall Street sidewalk vendors).

But it’s also hard to imagine that none of the blockchain projects being showered with money by venture capitalists and, increasingly, ICO “contributors” (an unfortunate euphemism) will amount to anything. The ones that do may form an important, if intangible, infrastructure for global digital commerce.

Possibly in ways we can’t yet imagine. The spreadsheet and the relational database are examples of applications of pre-internet computing that no one foresaw as they were building computers – transformative technologies that no one could have conceived of until after all the investment in a new platform was done.

And of course there’s the internet itself, whose humble beginnings were in Cold War military commanders’ need for a resilient communication network in the event of a nuclear attack.

Robert Shiller will always be a hero for calling out the U.S. housing market’s excesses when it was politically incorrect to do so. But he’s mistaken for speaking of financial bubbles as if they were interchangeable and equally destructive.

A final note: One good thing did arguably come from the last debt bubble, albeit indirectly.

If the crisis hadn’t shaken the world’s faith in centralized institutions and financial intermediaries, we might not have gotten bitcoin.

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