GFOA warns issuers against crypto

Bonds

The Government Finance Officers Association has issued a warning urging government finance officers to abstain from using and investing in cryptocurrencies for government operations.

“GFOA advises governments to abstain from accepting cryptocurrency for receivables, using cryptocurrency for payables, and investing in these products,” the GFOA advisory notice issued this week says.

The group starkly warns that cryptocurrencies lack any substantive value, are incredibly volatile by nature and are potentially illiquid.

“Cryptocurrency is not legal tender,” said Cory Kampf, finance and central services division manager for Anoka County, Minnesota and co-author of the advisory. “I’m not even able to take foreign currency, much less crypto,” he added. “The IRS still considers it to be property.”

“It’s one thing for me to say, ‘I’m gonna put 1,000 bucks into Bitcoin or some other cryptocurrency and see where it goes’,” Kampf said. “It’s another thing for me to say, ‘I’m gonna put the government’s dollars in’.”

SEC chair Gary Gensler has called Bitcoin and its blockchain-based applications in distributed ledger technology as “a catalyst for change,” and many localities have already begun testing its applications. New York, Texas, Ohio and Wyoming have begun drafting legal frameworks for rolling out cryptocurrencies and a few localities, such as Williston, North Dakota, allow utility bills to be paid in cryptocurrency.

But local officials hoping to spur economic development through cryptocurrencies may be getting ahead of themselves, Kampf said.

“As a finance officer, I’ve got a fiduciary responsibility,” Kampf said. “I really don’t understand the logic behind this being a hedge against inflation,” he added. “It’s a speculative investment, if you can even call it an investment.”

This advisory serves as yellow tape for the moment, which Kampf doesn’t believe will stop the interest in crypto currency in its tracks but will give issuer officials a few months before they reconvene in June for the GFOA Annual Conference.

The group has also issued its fourth and final best practices on environmental, social and governance practices, drawing a sharp line between general risk disclosures and disclosures related to green and social bonds.

“Those first three were focusing on those risk disclosures, what you talked about with the credit rating agencies and how you communicate those in the offering statement,” said Emily Brock, director of the federal liaison center at the Government Finance Officers Association. “This, on the other hand, is trying to very significantly draw a bright line between those risk disclosures, and when an issuer wants to issue a green, social or sustainable bond.”

“There is not just the commitment to fulfilling the objectives of the bond itself but also there may be additional disclosures that you may want to take on,” she added.

Issuers of designated bonds assign a label based on the objectives of the issuance. Green bonds should be used for projects with environmental benefits such as renewable energy infrastructure and natural resource conservation; social bonds for those with positive social outcomes such as affordable housing, sustainable food systems; and sustainability bonds for those projects with environmental and social benefits such as clean transportation, the GFOA said.

This creates expectations, the GFOA said, and mapping out a use-of-proceeds description in offering documents.

Cindy Harris, chief financial officer for the Iowa Finance Authority and co-author of the best practices, has participated in green bond sales and says they distribute a use of proceeds to investors, but have yet to add ongoing disclosures, of which should also be disclosed.

“Governments should clearly state within their offering documents if they are committing to on-going project performance monitoring and reporting,” the best practices says.

“Governments will need to include additional disclosure in their initial offering documents regarding the use of proceeds, project selection criteria and project goals,” the GFOA notice says. “These reporting items may include comparing defined project performance measures to the original goals of the project.”

For Hughey Newsome, chief financial officer for Wayne County, the county that includes the City of Detroit and co-author of the best practices, thinking about issuing designated bonds requires internal infrastructure, which must be handled before issuance takes place.

“We’re looking into it now and we’re launching a sustainability office,” Newsome said. “It’s a bit of a challenge right now, because for a county like us, we are swimming in COVID money.”

The County intends to use much of this federal funding to spur sustainability projects, which includes launching a Climate Action Plan. But as Newsome begins to think about issuing designated bonds in the coming years, the lack of standardization around continued disclosures seems to be a benefit.

“Disclosures don’t scare me, per se, considering the usefulness of designated bonds and the fact that there aren’t hard and fast requirements,” he said. “It’s very qualitative and subjective.”

But issuers should also develop “an alternative or contingency plan if circumstances change that may reduce the ability to meet the original project performance goals,” the best practices says. Within legal considerations, issuers and governments should consult their outside bond counsel and “be mindful that the antifraud provisions of the securities laws do apply and could be used in SEC enforcement actions,” the best practices says, as governments and underwriters are prohibited from misrepresenting material facts in connection with bond offerings.

Authors of the best practices urged those interested in designated bonds to use this as a roadmap as they provide both tangible benefits in the form of “broadening your investor base that may eventually provide pricing advantages in the future,” the best practices said, in addition to intangible benefits may include “advancing political goals and policies.”

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