As the world grapples with financial inequality, one innovative solution has the power to transform community finance: microbonds. Microbonds, small denomination bonds, enable community capital to fund local projects, ensuring that the capital remains within the community and that repayments directly reinvest into local development. The Center launched The Blockchain Microbond (BMB) Project. Funded by the Stellar Development Foundation (SDF) to help reimagine community financing and promote financial inclusion through microbonds issued on blockchain. Today, we’ll dive into what makes microbonds unique, their benefits, and why they aren’t more prevalent.
Understanding Microbonds vs. Traditional Municipal Bonds
Before we delve deeper, let’s clarify what a microbond is in relation to a regular municipal bond. Municipal bonds are issued by local government entities for various public projects, usually with denominations starting at $5,000, making them inaccessible to many. Microbonds, on the other hand, can be as small as $100 or even less. This significant reduction in denomination opens the door for a broader spectrum of investors within the community, enhancing financial inclusion and local investment.
Three Key Benefits of Microbonds
- Accessibility: Microbonds lower the financial barrier to entry, allowing more community members to invest in projects directly impacting their environment. This accessibility can transform a passive community into active investors in their local economy.
- Local Economic Growth: Unlike traditional bonds, where repayments often end up with out-of-state or even international creditors, microbonds ensure that the money stays—and grows—within the community. This circulates and escalates the local economic activity, fostering a self-sustaining economic environment.
- Community Empowerment: With microbonds, local communities have greater leverage in dictating the terms of financial engagements. This shift rebalances the power from large, distant creditors to the local populace, aligning financial strategies with the community’s values and needs.
The Challenges: Why Aren’t Microbonds More Common?
Despite their benefits, microbonds are not without challenges. Primarily, they are costly to issue relative to their size. The cost structure of bond issuance shows a clear inverse relationship between the size of the bond and the per-unit cost of issuance. For example, fixed costs like design, compliance, and management might cost $100,000 whether for a $1 million bond or a $100 million bond. Proportionally, these costs are much higher for smaller bond amounts, discouraging their issuance.
Internal Infrastructure: Government entities need robust systems to issue and manage bonds. This includes costs related to design, compliance, and repayment mechanisms, which are proportionately higher for smaller bond amounts.
External Marketplace: Unlike the well-established markets for traditional municipal bonds, microbonds lack a broad marketplace. Creating such a marketplace requires significant investment in infrastructure to attract and maintain a diverse pool of buyers and sellers.
Conclusion and Looking Ahead
While the current financial landscape favors larger municipal bonds because of their cost-efficiency, microbonds offer a transformative potential for local economies. They can democratize investments, keep capital circulating locally, and align financial strategies with community values. However, to realize their full potential, we must address the high transaction costs associated with their issuance.
In the next blog post, we will explore how blockchain technology can revolutionize this landscape. By reducing the transactional and infrastructural costs associated with microbonds, blockchain could make them not just viable, but preferable. Working closely with Stellar, the Center aims to pioneer new financial innovations that will make government services more efficient and empower local communities. Stay tuned as we delve into how technology can turn the vision of accessible community financing into a reality.
For more information or to participate in the initiative, please visit the BMB Project’s website here or contact the Center (cltsg@usfca.edu).
