Government gets ready for fintech

As innovation creates more opportunities for secure digital transactions, financial technology, or fintech, is taking root in the public sector.

Fintech, which the Brookings Institution defines as “the merger of finance and technology,” covers blockchain and digital ledgers, online marketplace lending, crowdfunding, automated investment advice and initial coin offerings.

Fintech is handled by nontraditional financial institutions, or companies that develop software around banking and payments but are not banks themselves. “Many large, well-established firms involved in data, software, cloud computing, internet search, mobile devices, retail e-commerce, payments, and telecommunications have begun to engage in activities directly or indirectly related to financial services,” according to a July 31, 2018 report from the Treasury Department. “The availability of capital, the large size of the financial services market, and continued advancements in technology make accelerating innovation nearly inevitable.”

These new technologies could let agencies “provide financial services faster, more efficiently, more conveniently, and more cheaply to everyone, including the historically underserved,” Brookings wrote in its 2017 report on fintech in government. Treasury's report cited the use of fintech by the Education Department for student loans repayment and the Federal Reserve to facilitate retail payments, for example.

OhioCrypto.com is an example of fintech at work in state government. When it launched on Nov. 26, 2018, Ohio became the first state to let businesses pay their taxes using cryptocurrency, a digital currency secured by blockchain and encryption.

“Our goal with launching OhioCrypto.com was two-fold,” state Treasurer Josh Mandel said. “First was to help taxpayers by giving more options and ease in how they can pay their taxes, and second was to plant the flag in Ohio and really project to the rest of the country that Ohio is loud and proud about embracing blockchain technology.”

The state contracted with BitPay, a cryptocurrency payment service provider, to build the site. To use it, businesses register with OhioCrypto.com, enter tax payment information such as the amount and tax period dates and pay with Bitcoin from the cryptocurrency wallet on their smartphone or computer. BitPay converts that into U.S. dollars, which are then deposited into the state's account.

Users can track their payments in real time, and the blockchain network makes payments transparent to anyone. Twenty-three taxes can be paid via the site, including withholding and public utilities.

“Before we launched OhioCrypto.com, taxpayers could pay their taxes via check, via ACH, via credit card,” Mandel said. “Now they have an added option: paying via cryptocurrency," which is less expensive for taxpayers than paying via credit card, he added.

Paying taxes by credit card in Ohio comes with a 2.5 percent fee, whereas BitPay collects a 1 percent fee. Currently, it works only with Bitcoin, but there are plans to accept other cryptocurrencies.

BitPay, which is a software-as-a-service solution, processes more than $1 billion a year in cryptocurrency, said Stephen Pair, its cofounder and CEO. He said that fintech solutions for governments can be as simple or complex as necessary.

“You can just put a button on a website and start accepting cryptocurrency in a few minutes, but if it’s something more involved, we’ve got people who can help developers do that integration,” Pair said. “Government, like any other business that we see, benefits from lower cost points, less fraud, just more choice for the consumer as far as the way they might want to pay for something – in this case, taxes.”

Other states including Georgia, New Hampshire and Utah have looked at using cryptocurrency for tax payments, but legislatures have yet to approve such initiatives. Arizona passed a measure, but it was vetoed in May 2018. At the federal level, the IRS has yet to accept cryptocurrency payments, but the U.S. Commodity Futures Trading Commission said it intends to establish a secure testing environment for fintech.

That’s what Brooks McCabe, a West Virginia Public Service commissioner, would like to see happen in his state. In an October 2018 column, he encouraged West Virginia to pass a sandbox law that would let fintech companies implement services on a temporary basis and develop proofs of concept. “A FinTech sand box law would allow West Virginia banks to emulate the big banks at a much smaller scale without having to invest the capital,” McCabe wrote. “Growing new FinTech tools in your back yard will help drive the state’s economy and foster increased expertise within the banking community. It is an example of embracing change and the new economy rather than resisting it.”

Embracing change is one reason why Seminole County, Fla., Tax Collector Joel Greenberg announced on May 14, 2018, that he would accept Bitcoin and Bitcoin Cash through BitPay for some services.

“The aim of my tenure in office is to make our customer experience faster, smarter, and more efficient, and to bring government services from the 18th century into the 21st century and one way is the addition of cryptocurrency to our payment options,” Greenberg said in a statement.