BBW23 – Day 2 – Aligning Civic & Financial Interests: Tokenizing Municipal Bonds

[Music] well well thank you thank you everyone uh and this should be a really interesting to Ian's Point continuation of the panel uh that just completed uh as Ian also mentioned you know it was a macro discussion of what cities and municipalities and governments and how everyone can work together uh we're going to take a very very micro approach uh and focus our time on the Public Finance mechanism you know how do cities and towns raise money to support those constitu to support new projects to just make you know everyone's environment a a better place to live um so Justin adal founding a partner at blockwise advisers also proud member of cubic Labs which is the organizer of this event so very very happy to be part of that and um I do want to ask my two panelists to introduce themselves um Eric if you want to start down the end U but just a quick thank you as being such a gracious host the city of quiny uh and for your generous support for a uh for an event like this so just a very quick Round of Applause please for the city thank you very much people hire to me that that get this stuff done yeah no that's right and then and then Paulo will go next and I think Paulo you probably have the award for the longest distance traveled I think to attend uh this event so okay we're incredibly grateful to have you in Petro here thanks for the invitation as well so pleasure to be here no that's great so let's dive into Quick introductions uh Eric if you want to start and then we'll move to Poli yeah absolutely uh my name's Eric Mason I'm the CFO for the City of Quincy um I met uh my educational background as I went to West Virginia University for both my bachelor's and master's degree in economics I've always been very interested in the decentralized space in the fin financial markets I've been lucky enough to been serving the city for worked for the city for eight years serving as a CFO for three years so some quick math I took over the CFO ship right in the middle of the pandemic so technology had to be something very important to us to keep the city rolling and it kind of uh progressed very quickly into this discussion we're having today but I've been very fortunate to work for mayor Koke and work with Council an Kan who really helped put this together and uh you know I'm excited to be up there excited to talk Paul yeah um I'm Pao Deputy CF of the city of Lugano as SP mentioned in the previous panel Southern Switzerland beautiful place but yeah thank you very much for the invitation because you also have a beautiful city here great region thank you very much for that and I do think it's important to point out there are a lot of similarities between loano and quiny as far as population um City budget size of as we'll get into all those sorts of things so a nice counterplay here between the two a good point and we have a lot of similarity so we can do a lot of things together even in the future why not absolutely good good right yeah my background is in finance I studed finance at the University then NBA at UC Berkeley in the middle of the 90s so in the middle of the rise of Internet um I'm a passionate of uh computers and Technology since the beginning of the ' 80s I was a very little kid so I grew up with technology so when I went to Berkeley you know internet was there I got passionate did also a startup in Internet and then later on blockchain got passionate by blockchain and crypto in 2016 and also helped to found um a blockchain startup in Milan in 2018 um from the professional point of view I've been entrepreneur for the first 20 years of my life then I passed uh I I uh got hired by the bank uh first by um as a risk officer and and then a head of retail banking Southern Switzerland for a large Bank in Switzerland then I passed to the public sector I became Treasure of the state of Canton toino as P mentioned is the local state like the massachus said but with the right proportion naturally but it's the local state of Canton of toino and finally I reach the city of Lugano's Deputy CFO and exactly at the right time when the city of Lugano was starting all those blockchain projects so I'm very you know happy about what I'm doing today yeah that's great and just a quick little pitch for every everything that's going on over in Switzerland there's there's great programming throughout the year there's a lot of funding available for startups and education and so I'd encourage anyone that's interested in learning more about Plan B and what's going on there to connect with Paulo connect with Petro uh while while they're here with us so yes uh Plan B is not an alternative plan the B is the B of Bitcoin which is a very strong message to the community uh you know we have a lot of uh let's say important topics we want to develop and we are developing we don't have the time to talk about you know just you know take a look on the internet you really find all the information sure fantastic great um so you know as I was thinking about the preparation that we were doing for this panel and and why is this interesting why should we even be talking about a market like municipal bonds um in addition to it just being a great segue from the prior panel and you know for me personally and obviously you know we can dive into your thoughts as we go uh it's just a massive massive Market a massive Capital Market that is incredibly ripe for disruption um depending on the year um in the United States alone there's somewhere between 350 and 400 billion of Municipal issuance every year right that's a massive Market um I think as we'll we'll dive into today it's also right for disruption in a sense that a lot of the technology a lot of the infrastructure a lot of the process was developed 20 30 40 years ago right there's been very very little Innovation and so you know when I think about big dollars and I think about old technology you put those two things together and boom disruption but also hopefully value creat right it's not disruption for disruption sake it's how can we create value for the people that are most important and in this case it's constituents it's citizens of a city or town in which in which people live and so I think that's why this is such an important topic to understand um in and to understand how blockchain or other distributed Ledger type Technologies can better enable this process uh uh allow for cheaper more efficient more access again all things we'll get into uh but just a really interesting Market that tends to be overlooked in the the grand scheme of blockchain and crypto so you we're excited to dive into all that um but I would like to start with the basics and and and I do mean Basics and so Eric why don't I uh ask you the question to kick us off here uh just to give us a domestic perspective and then Paulo If you want to add any differences sure from Switzerland what is a municipal Bond yes uh some Tim Duncan fundamentals right there I'll definitely take that um so M bond is a debt vehicle that is issued with the assurity of of a Municipality of the most local form of government whether it's local government or it's County government um and it's backed by the collection of either an independent Revenue Source like say parking parking receipts or on the city's ability to tax or the to collect property tax um it's one of the oldest Financial vehicles that exists in the United States um municipal bonds well predate the founding of the United States um they predate the writing of Adam Smith's Wealth of Nations um but it's our our one of our fundamental Securities that we have in this country that both provides funding for public investment but also provides tax-free growth and income for holders of these uh of the Municipal debt uh so I consider it one of the pillar obviously I'm very bias but I consider one of the pillars of the financial Market uh but yeah I think it's the starting block of all kind of uh discussion on debt in in Paulo um we don't have to get into all the ny- gritty details but just from a conceptual perspective any differences or and you'd like to highlight how things operate in Switzerland versus here in the states I think Ed gave a perfect explanation what the bound is maybe I would just that in Switzerland um the minimum size to go uh to issue a bond on the stock exchange is 100 million so everything else is micr bonds so you need some you know big depths and as city of Lugano we have 900 million depths which is not huge but for the size of city of Lugano it's considered a kind of high level of De got it all right that's great um and before we dive into um where you are each respectively in your journey right as far as tokenizing municipal bonds um maybe let's just touch on why this financing mechanism is a great candidate to be tokenized right and you know we could differentiate between you know partially tokenized fully tokenized permission blockchains you know public blockchains you we don't necessarily have to get into all that but just as a concept as a finance mechanism you know why should this or could this be tokenized what are the benefits that could drive from it um and then we'll go from there really yeah Paul one well I think the first point is efficiency as you said the process today is really costly for for the municipality for the issuer the banks earn a lot of money on that uh probably because they do you know kind of hard work to to issue that but at the end of the day everything Could Happen easily smoothly and with less costs that that's the first point I think efficiency is really something interesting I will add something else for the future uh that maybe it's a strong it's a strong statement but with the blockchain blockchain technology we can probably issue without the need of an intermediaries which is the bank right so if you cut off the intermediary then you can reduce cost even more uh I'm not telling you have to cut off Banks but Banks should you know try to understand that this can disrupt their business so they should get into this technology and try to to be more efficient on that and give this uh gaining efficiency back to the issue I think this is very important Point yeah just to Echo that I can't agree with you more it's there's so much inefficiency there's so many parts that can be modernized automated um so much of issuance cost is redundancy uh I think a lot of people in this room and I certainly know everybody up here we hate redundancy I mean I think that's why we're here is that we don't like the idea that just to repeat an action just to pay somebody else extra money to have the same thing that which could be replicated and the data stored on the same transaction um but why I think it's so good for disruption and tokenization uh is scale there's $1 trillion in outstanding P state and local debt in the United States right now I don't know if there's any other Market that has legislation that's older than I am and 10 trillion and nobody incentivized to look left or right on ways to make it more efficient and we have a great tool sitting here that's able to provide a level of security that regular debt just really doesn't have the ability to do um and to have that those two opportunities sitting beside each other that you can both have enough investment and scale to invest in these systems mixing in with the stability that's offered through Municipal uh municipal bonds and the stability in security that's offered through blockchain it's kind of like they're made for each other I would argue that the other side from the crypto currency Viewpoint that a lot of the municipal bonds actually better marry the allegiance to security um than some of the other tools we see blockchain being used for right now but I can't agree with you more it's absolutely it's the efficiency it's absolutely efficiency and maybe I will add a very important point to from the investor side if I issue 100 million Bond and five investor buy 20 million each they will basically tell me the price I mean you know the bond the bond price is you know the coupon is set by you know the normal rate and then you pay a spread based on the risk of the issuers so the risk of the city and actually the higher the spread the higher the risk the most costly is the bond so basically if you negotiate with five investors well they they will tell you the price imagine if I can issue a bond now in 10 minutes or in an hour uh instead of having five client five investors I have 1 million investors giving me only $100 each I can tell them the price so I can reduce my spread they will be happy because today they cannot buy my bond because you know the size the minimum size of buying a chunk of a bond to us is 5,000 Franks but I know bonds the minimum size is 200,000 so not everybody can buy it so we can democratize the bond I can sell one small Chun to everybody and then a smaller price for me so a less cost for the community that's very important point and and that actually stole a little bit of my thunder I was going to touch on how um accessibility or democratization of this mechanism plays into motivations here thank you for those insights uh uh Paulo um how about Eric from your perspective in in the mayor of Quincy's perspective you know how does democratizing access to that Public Finance mechanism where does that fall on the priority list in how does that play into motivations here yeah absolutely I think the keyw right there we we're at $5,000 per Bond offering also per per segmentation um it is that word it's democratization the role of government is not government is not to pick winners and losers at any level it's to allow the best access to everybody and right now because of the high issuance costs because of some of these redundancies uh not everybody has access to it right now when the city of quiny sells a bond over 50% of the bond is is bought by smas are bought by people who just because of their wealth have better access to the market by adopting blockchain we can open up quiny investment for quiny people that we can allow somebody with a self-directed 401k or somebody just has $5,000 in their pocket to be able to participate in the Investments of their community and reap tax-free income from that investment and I think that's really important to because I I think one of the best things government so that government could do is not just make good solid Investments like the park we're sitting in right now the Gage across the street uh a brand new school but allow the people in our community who are going to pay that Bond back to participate in those advantages right now 9% of all uh money collected in our uh collected through our tax revenues uh goes to paying interest what if we could keep 9% approximately $21 million in the community that's what blockchain gives the opportunity and the democratization of blockchain allows us to keep that money in the community okay and I and just to be clear for the audience here uh what you're hearing is this desire to increase accessibility the reason that we really can't do that today uh is because of the Legacy technology the Legacy infrastructure that's in place right and and as great as it is in theory to say let's open this up you know quiny bonds for quiny people without the use of blockchain or you know other dlts it's just literally not possible right it is not technically feasible to do that it would cost too much yeah it would cost too much the the the processes aren't set up the the way they need to be and so I mean that is a critical component of increasing that level of accessibility is this new technology this new innovation that will actually allow us to do that more than conceptually right and so um so that that's good to understand um you know one thing I I want to uh ask both of you now um we can get into where you are in your Journeys you know along the tokenization Route if you will uh and the reason that we have uh Paulo here today and then Eric here today in addition to just being fantastic panelist of course is that you know they are at different stages in the journey right and in and I'll let them go into in a moment but Paulo I think it's fair to say that as part of everything you've done over in Logano you completed I think what is the world's first tokenized Municipal Bond issuance you could correct me if I'm wrong but I think generally that's that's how I've always made it and I think generally that's fair and then and then just you know Eric for you you're in the very early stages I would say of understanding how you should do this you know getting advice and thoughts from folks like Paulo who have gone through all that before so um maybe Paulo you can just give us some insights into exactly what you have accomplished when it comes to this Finance mechanism and please tell me I'm wrong if that was a misstatement it's correct but you I I need to give some more details on that uh it is true in the last let's say 5 years I think um other digital bonds have been issued on the market uh but this is why it came on the statement I come back to the statement you said my bond is really the First full characteristic bond which means it's really like a traditional Bond you it is a digital native Native digital sorry uh is transacted there he has a secondary Market he is recognized by the National Bank in the global collateral basket which is a a basket of assets that you Banks use to get money from the National Banks or from the Federal Reserve for instance so this is the really first one there and then you can transact uh clearly on the stock exchange and actually this bond has something future more than a traditional one because it's traded and listed in two stock exchanges the traditional one and the digital one and actually the bond is born in the first fully regulated uh the first fully regulated digital platform in the world so I would say it's the real one first one but there are many others the European investment bankers don't already Tre but this is kind of uh they issued the bond they toize the bond and then you have to keep the bond until the end so there is not a secondary market right exact I would say this is really the first you know food character invol yeah it's concept into practice right which is incredibly exciting and I think important to note that correct me if I'm wrong but the rate that you're paying on the bond was about the same if not equivalent to traditional bonds which is obviously very important you don't want to increase risk because of just new technology right that was a big issue uh this bone was a very big issue and a lot of work to do because you have to take into consideration that normally takes me 4 hour from the time I decide to is shall Bond uh I asked for the offers the bands give me the offers then we open the boot can we close the book in 2 hours 4 million is very easy so 4 hours this time it took me 3 months got it because the stakeholders around the table were uh the city of Lugano Sil can bank which is a large Bank in s was the lead manager so a bank I need a bank to do that the sdx platform which is the six digital exchange this is the the first world first fully regulated digital platforming and then moodies who is our rating agency so actually nothing more traditional than those stakeholders right but this is completely new because it was done everything in the blockchain so the discussion was more on the risks about the bond so moodies really went deep down in the technology deep down in what we were doing why we were doing that so we spent three months in really in meetings very interesting meetings tough meetings at one point I say to I chatted with with my B say we are done we are not going to do that I mean no they will never say we can do it but finally Moody said okay we analyze everything and there are no additional r because you're doing in this platform on the blockchain right so just to be clear Moody said in this platform so they Analyze This platform maybe in another blockchain they have to reanalyze the blockchain but for this platform now everybody can issue a digital Bond and it's really like few hours so now I can do it again in few hours great and then just one more quick question for you Paulo how about um it's great to uh to build out the supply side of this market right you you have an issuer you want to issue a bond that's fantastic um there can be complications on the demand side for investors that actually need to hold a digitally native asset I know there was some benefit of the Dual listing here which maybe uh went around some of those those problems but what was the process like as far as generating interest on the investor side to actually hold one of these assets you know something very new and very novel that's a good question uh as I say normally 4 hour to issue a traditional Bond I don't even ask the investor if they're there because they are so everybody's waiting for bonds from the cities and the cantons they are very higher level rated this time was kind of uh you know the time I spent with moodies and the platform and the bank discussing this we we decided with the bank that maybe the investor were not there and buying a new complete new digital Bond on a new technology and the custody is done EX in another way as a traditional way so we decide to make a investor call like a road show we invited 25 big um investors among the biggest in Switzerland and I presented you know the plan B what we are doing why we are doing that what Moody said and the fact that I was waiting for them in this new technology because we need to adopt the technology you know to make the future so I really ask like this please buy this Bond not because it's me but because it's a digital Bond it's the first really first one do it because you will learn about the process I will learn about the process and after that Bond everything will be normal and actually the investor bought it in an hour and a half 100 million 1 hour and half everybody was happy and I was also more relaxed at the end there sure that was a risk there fantastic fantastic and um Eric so in in your case um I think it's fair to say that the city is considering um tokenizing municipal bonds or exploring that process and the benefits of of what it could bring um so maybe just tell us a little bit to the extent you can around you know what that process has been like as far as you know who were the folks on the city side that had to sit in a room and say okay we want to explore this and then what does exploration actually mean to you as far as understanding if we are to do this what is the path forward who are the partners we work with Etc yeah absolutely uh I think anybody Works in government whenever we want to Branch into something new we need buy and we need support from the policy makers I'm I'm not a policy maker I'm a technocrat uh I'm I'm I'm much more entertained with spreadsheets than I am with uh you know with you know sometimes the uh political maneuvering that has to occur and we were very fortunate have a mayor and a very strong member of our city council who want to adopt these mayor Tom Co counselor an Kane who push to who like Innovation who don't shy away from exploring something new that is where 90% of Municipal projects die exploring something new it's e your municipality you have no competition you're not a business there is not a second government option in quinsey it's just quiny so there's no incentive to explore new options so to have have the political support to start this discussions and valuable and then we couple it with Justin's team over at blockwise because we need to bring an expertise government government's great at putting out fires it's great at educating kids it's great at Paving roads it's not great at adopting new technology who's not in the states a little different uh so bringing on Community Partners like blockwise who are have a who are invested in quiny who who want to see the City of Quincy succeed and have them come on board and guide us through this process and have us understand what are the pros what are the cons of this offering because here's the thing we can sit up here and say blockchain's the best thing in the world it's the best me it's it's Flawless it's not everything's a trade-off I'll tell you right now uh for my early experience with this the pros vast outweigh the cons and uh I think you said it better than I'd ever be able to say it why it does I think it's democratization I think it's efficiency so being early in this process and really trying to explore what this new technology means I we we kind of feel the gerk morang it's a little bit feels a little pioneering I I I kind of almost feel like we're the first people to get in a car a little bit of a little bit of wild west kind of feel you know pushing towards the horizon yeah very new being a a horse and buggy it stinks a little bit but you know how it works car's a little scarier I know although you be going right to to fighter jet supercharging everything here but uh so early on this process it's exploring how do we how do we make sure this product's helping the city and by helping the city I mean I mean the people how does it does it give us better interest rate does it democratize it does it give us better access to Market um does it give us more financial and cyber security we all we're all sit in the room knowing that it's a joke to compare regular Bond issuance and turns of security to a blockchain just there's not enough raw computing power in a lot of cases to to corrupt certain blockchains it's just it's just a better securitization so in our process we're in the early phases of understanding the landscape and how municipal bonds can fit in there both within a financial strategy but also within the regulatory environment I got to say blockwise has been very helpful in that standpoint of understanding who do we actually ask questions to because government moves government moves slow and it moves even slower at the federal level uh so a lot of times we are disruptive just by asking questions not even by action and uh I think that's been the funnest part I'm a little bit of a disruptor by Nature just a little bit right but no that that's great Eric and um just to touch on something you said around um s Innovation being sometimes very difficult to come by in the world the public sector world right for all sorts of reasons better than others of course but um given that I am seated here with two very very Innovative Municipal leaders right particularly in the at the intersection of of finance and Technology I mean what what message would you give to your peers as far as how willing they should be to lean into something whether it's blockchain or not I mean it it's it points sort of moot right you know how do we get more cities and towns to innovate and use technology to innovate and maybe Paul I'll start with you as someone who's gone through you know big part of this process and then Eric we'll get maybe your closing thoughts from there so well I think the first message is one when a new technology comes up take it a look try it make some test adopt it uh you know the adoption doesn't have to be forever just adopt once and try to understand if there are benefits then you build on this so the learning curve is really high when you do one or two projects on that and then it's very easy because you can also think okay we failed on these two project but I can use the technology for something help so as the city of Lugano you know we have done many experiments now which are no experiments I mean I really use cases so I will name this use cases instead of experiments and now we can really open up and say okay let's sit down and what we can toonize or what sure how we can apply the technology how we can expand the luga token to make the citizen benefit more from that and there are so many ideas coming on the table we don't have the time to do everything but we are selecting some very interesting projects and sometimes extremely Innovative so I'm not scared but like wow wait a minute we have to think about and with a lot of this new technology particularly blockchain that's tends to be more open source less expensive easier to develop you know you can experiment to your point relatively inexpensively and do so in a you know sandbox environment so that you're not necessarily putting something into production that's going to affect a city process and so the ability to experiment now I'd say is dramatically increased from 10 20 years ago you know when it comes to this Market um Eric why don't you provide some some words of wisd into your peers if you will that might be a little hard but what I'll say is don't be scared of disruption don't be scared of I'm going to use the word scared but don't be scared of new technology I I tell people a lot there's one adage I love which is the wor the hardest time to do something is the first time you do it the first day of your job is the most stressful day at your job uh the first time you adopt new technology that's the most painful Point don't get turned off by that being the most difficult aspect is that first day because the it's like learning anything new once you get better at it you gain more efficiencies you become better at being able to adopt stuff uh outside of blockchain uh one of the things I have a lot of discussions with other people at the municipal level uh in the state is the adoption of advanced analytics um you can download our program for free there's nothing that costs to any computer can host R you can bring in real econometrical analysis and real kpi and fpna to your process like you do in the private sector and I hear the some of the complaint not complaints but some of the hesitation I hear is well what if I don't know what I'm doing and I was like well you're not going to know what you're doing if you're just sitting there ignoring the technology and being able to adopt this is really going to put you in a stronger position 30 40 years ago I remember the previous CFO I work for uh he talked about driving down to New York and having to manually sign bonds and now we do digital Bond offer offerings or we everything's done digitally you just sign the bond and I go well the next step is this this is the next step whether municipalities want to admit it or not 20 years from now they're going to be doing what you're doing they are are so adopt it early work out the problems now because you'll benefit down the road there's an investment to be made today to reap tomorrow fantastic um I think uh that about wraps up the the programming here so I think we have time for maybe one question if if there are any and if there's a mic to pass around um I think both folks will be around for a little bit afterwards if anyone wants to say hello but certainly open to a question if anyone has one what work say that again sorry you had to convince a of people to do anything like this what was the line that works how one line how did you convince people to get on board with this proc I like that question just do it so you the Nike slog I like it's the Nike slogan that's all you need technology is there is working I did it for 100 million so I took all the risks now you don't take any risk more because it's there so that's it just yeah it's it's it's proven right so it it works it can be done and I think just we're all very hopeful that other municipalities both abroad and here in the states adopt the model of Lugano and some of the Innovation that is happening right here in quiny so um for what I know I think the next six month we will have three or four bonds coming on the platform good well fantastic well please keep an eye out for uh developments uh from both quiny and Lugano but thank you so much to the panelist we really appreciate your [Applause] [Music] time