Retail investors consider the municipal bond market as a relatively safe investment that comes with government tax exemptions. Nevertheless, locals have been barred from investing in their own communities by high entry barriers. The formerly grassroots community-funded projects are now left to institutional investors and high net worth individuals, changing the focus from opportunities to improve communities’ profit-centered projects. Efforts to turn the focus back to the community have proved futile.
Some US states have used mini muni bonds to fund small community infrastructure projects in the recent past. For example, Lawrence, Kansas, with around 100,000 people, issued half a million dollars of bonds to buy a fire truck in 2017, while Denver sold $12 million in muni bonds within 20 minutes in 2014. Sadly, half of the muni bonds distributed in 2019 were below $10 million, but the total generated was around $31 million, or 5% of the municipal bond market.
Though these projects show a high local demand, the high cost to issue smaller bonds hinders scaling. This is demonstrated with the Neighborly Company’s collapse, which was on a mission to bring municipals to the locals. It was brought down by the high costs of selling, distributing, and maintaining bonds.
Tokenization of Muni Bonds
In the past, muni bonds have financed big, impactful community projects. The first muni bond was issued in 1818 by the New York State to fund the Erie Canal. The canal facilitated lower shipping costs between the Midwest and Northeast of the US, lowering foodstuff prices for eastern cities. Additionally, the Golden Gate Bridge was build using funds from a $35 muni bond bought by San Francisco locals.
However, mini muni bonds usually lack such big ambitions. With issue sizes ranging between $10-15 million in $5,000 denominations, most of the funds were used to finance projects costing less than $10 million in 2019.
The disadvantage of smaller-scale public infrastructure funding is that the issuance expense is equivalent to a multi-billion dollar bond. Besides, the process of marketing and managing municipal bonds in local communities brings an additional layer of administrative costs coupled with regulatory requirements. Generally, the entry barriers are so high for smaller companies interested in the 3.8 trillion municipal bond market.
To solve these problems, the infrastructure surrounding muni bond issuance must change. Blockchain technology, with its potential to revolutionize social and capital coordination, is well-positioned to create innovative and convenient opportunities in the muni bond market.
In particular, municipalities can leverage tokenization to realize more effective management throughout the bond lifespan. Interest payments, for instance, can be programmed automatically using smart contracts.
Providing a cheap and efficient solution for direct, local investment in mini muni bonds is beneficial to both financial markets and democracy. The locals should be given the highest priority to invest in their local municipalities. They have the best knowledge and insight to protect against risk and over-borrowing. More local participation in mini municipal bonds will re-engage residents with their municipalities.
At Tokenizer, we acknowledge that mini muni bonds are potent tools for helping municipalities engage, inform, and reward local investors. We are banking on our tokenization infrastructure to offer a better muni fundraising experience.
Tokenizer Blockchain Banking Platform
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