Detroit has announced it will become the largest municipality in the US to allow residents to pay taxes using cryptocurrencies when it rolls out a new PayPal-managed payment platform in 2025. The initiative hopes to spur technological innovation and foster economic growth—but may come with risks.
The city’s leaders hope this strategy will modernize Detroit’s municipal services and improve the city’s financial inclusivity, particularly for unbanked residents. While Detroit’s plans are forward-thinking, they may come with more risks than rewards. The initiative brings with it numerous potential downsides, ranging from environmental concerns to dependence on third-party platforms, and high transaction fees.
Nonetheless, the Motor City’s experiment with accepting alternative currency for tax payments may serve as a testing ground and, depending on results, may pave the way for similar moves on a national scale.
Environmental Impact of Crypto Transactions
One of the most significant challenges inherent in Detroit’s crypto tax payment program is its environmental impact. Bitcoin and Ethereum, the primary cryptocurrencies accepted under the program, are well-known energy-intensive systems—particularly Bitcoin.
Bitcoin operates on a proof-of-work system, which requires massive computational power to validate transactions, contributing to high levels of energy and water consumption. As Detroit encourages more residents to adopt crypto for tax payments, they may be inadvertently promoting increased use of energy—which may conflict with sustainability goals.
To the extent the city’s tax policies are intended to support green initiatives and sustainability, adopting crypto payments could paradoxically result in the city spending against its own objectives. By facilitating tax payments through energy-intensive crypto, Detroit may be increasing its own carbon footprint and undermining efforts elsewhere in the city’s tax code.
Dependency on Private Platforms
Detroit’s crypto tax payment system is set to use a third-party provider, PayPal, to manage the conversion of cryptocurrency into US dollars before funds are transferred to city accounts. While this arrangement certainly simplifies things administratively, it introduces a significant risk in its dependent on a private company’s technology, policies, and pricing.
In public finance, dependency on private entities can create vulnerabilities and potentially introduce second order instability into things like municipal bonds. Bonds, backed by tax revenues, have the taxing power of the state as a backstop against default.
If PayPal were to alter its platform or fee structures, it could disrupt Detroit’s crypto payment processing and in so doing disrupt the city’s tax revenue collection. A large-scale disruption could undermine the reliability of the tax revenue inflows used to back municipal bonds, posing a risk to bondholders and potentially impacting the financial standing of the city itself.
While third-party platforms offer convenience and established infrastructure, they may lack the continuity and control essential for supporting financial instruments built on predictability.
High Crypto Transaction Fees and Vulnerable Populations
Another potential stumbling block for Detroit’s initiative is the high and often unpredictable transaction fees associated with some cryptocurrencies—especially Ethereum.
Fees on the Ethereum network can vary widely over time, with spikes during heavy usage. This variability can increase the cost of making a tax payment, should PayPal find it necessary to pass those fees on to the city and by extension residents—who may already face economic challenges. If transaction fees become too high, they could deter residents from using crypto as a payment option altogether or, worse, leave vulnerable unbanked individuals locked-in and left with no choice but to incur the added cost.
Such a scenario raises serious questions about the wisdom and appropriateness of adopting a speculative and unstable “solution” to solve problems for residents already facing economic precarity. When payment methods are subject to unpredictable costs, those who are unbanked or economically disadvantaged bear the brunt of these fluctuations because they won’t have an alternative option. This makes an essential civic duty, like paying taxes, more financially burdensome for those already struggling.
Public Finance and Crypto Outlook
If Detroit can address the challenges effectively, it may set a precedent for responsible and inclusive integration of crypto into public finance. If the downsides prove too burdensome, it may prompt other municipalities to approach such innovations with greater caution.
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