Successful smart cities will be impossible without decentralized techs

Smart cities are steadily garnering attention worldwide as they become points of aspiration for many jurisdictions. There is a very clear relationship in these urban utopias between the citizens for whom they are built and the systems, networks and devices that enable their safe, secure and efficient operation. Most importantly, they will be built on entirely new financial technology infrastructure that supports the flow of micropayments over financial “plumbing,” in a similar way that other essential utilities (water, energy, data, etc.) flow over pipes, cables and fiber.

The principal aim of a smart city is to optimize city functions and promote economic growth by leveraging cutting-edge technologies. Smart cities seek to increase operational efficiency, achieve sustainability goals such as energy efficiency and scarce resource management and, above all, improve the lives of the citizens within.

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Some early-stage, yet promising, smart cities include Singapore, Dubai and Oslo. In Singapore, one of the world’s most densely populated cities, sensors are used to digitally collect data on traffic volume and pedestrian activity. The data is then transmitted to agencies for analysis to decide on the appropriate actions both in terms of real-time flow redirection, but also for policy and planning improvements. Other areas of focus include the use of smart home technologies to address issues such as waste management and energy efficiency.

Accurate and trusted data collection from connected devices is, therefore, critical and the best way to get active participation by a city’s residents to provide this data from their devices is to incentivize them to do so. Clearly, there are some very foundational concepts that also need to be in place to ensure citizens’ safety and wellbeing such as digital identity, personal privacy and consent of data sharing, and that will be the subject for another article.

A smart city has a responsibility to its citizens to operate and report on sustainable infrastructure and build Environmental, Social and Governance (ESG) factors into its design. Implementing incentivization schemes to encourage positive behavior will likely play an essential role in addressing the most important environmental, societal and economic issues that citizens within those cities face. Indeed, as cities take action on implementing the United Nations’ 2050 Climate Targets under the Paris Agreement, such incentivization schemes could be pivotal in helping cities reduce emissions and reach a carbon neutral future.

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While smart cities with entirely integrated services are still a few years away, the use of incentivization systems based on the ability to transfer tiny amounts of value — or micropayments — could accelerate smart city creation. Put simply, micropayments are transactions for very small values, often fractions of cents, made in real-time as a user or device actively interact with a system or process. A topical example of this is the proliferation of COVID-19 check in and tracking processes. We aren’t currently rewarded for signing into public establishments but perhaps there would be a greater level of compliance if we were. Any smart city initiative that requires the collection of data for processing by the city’s analytical systems, which responds with community behavioral “nudging” via a reward, would benefit from a payments infrastructure that supports micropayments. Effectively, all citizens and their devices become “city data prosumers (producers and consumers)” and are rewarded in real-time with micropayments for their participation.

Smart cities need public buy-in

Successful smart cities will have incentivization at their core. While people might generally be in favor of technological advancement to improve the quality of their lives, the abuse of personal data by centralized “Big Tech” platforms, in recent years, has undoubtedly caused public hesitance to partake in technology-driven information gathering.

Amid the COVID-19 pandemic, data breaches are significantly on the rise. Confirmed data breaches in the healthcare industry alone increased by 58% in 2020. According to the same report, web application breaches overall doubled between 2019-2020. Smart city initiatives need to address these data privacy and security concerns, otherwise, participation in them will be hindered by concerns from citizens about how their data is being used when adopting the technology.

Related: Smart cities are the future, but they might threaten privacy

Therefore, consent-focused and trust-building incentivization systems will be necessary to drive public endorsement of smart cities. If implemented correctly, with citizen privacy built into the design of the systems, behavioral incentivization can ensure a smoothly operating and safe city. Citizens could be benignly nudged to encourage them to respond in a particularly beneficial way, for example, to promote road safety or waste recycling. In these examples, micropayments could be paid directly and in real time for compliance with variable speed limits, rewarding children for crossing the street in a safe place, or as a gamified reward for the correct disposal of different types of waste.

Decentralized device-based infrastructure

Smart cities (and their citizens) will rely upon the sensors and devices built into their fabric. Connected Internet of Things (IoT) devices will be the eyes, ears and hands of the city, automatically collecting data on everything from traffic movement to environmental factors, weather, supply chain tracking and city resource management (water, energy, waste, etc.). This data will be used to inform and adapt policy as well as in real-time decision making to enable the city’s systems to run smoothly.

As new high-speed networks such as 5G or LoRaWAN deploy and the use of connected IoT devices for essential services and utilities grow, so will the need for automated and device-to-device micropayments. Use cases include electric vehicles automatically paying for tolls as they pass, automatic payment on delivery by drones, or an IoT network gateway provider being paid by the devices that they are enabling within their range. The primary requirement for these mesh networks of devices is scale, speed and security, as well as delegated authority underpinned by digital identity.

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Current payment infrastructure cannot support tens of billions of always-connected IoT devices. The underlying infrastructure, connecting various data points, devices and stakeholders to one another, holds the key to success for the incentivization systems and overall integrity of the smart city. Distributed ledger technology promises to be the foundational network layer for many of these systems underpinning financial services, supply chain, interoperable identity systems and new decentralized economic models. In addition, decentralized ownership of the data ledgers and repositories at the core of the smart city makes corruption nearly impossible, as no one centralized entity controls access to the ledger.

First-generation distributed ledger technologies, or DLTs, cannot scale to meet these needs without compromising on security or decentralization, but next-generation DLTs are emerging that can address the very high throughput requirements without compromising on the security and, therefore, the trust that is essential.

If we consider that smart cities require a new type of financial “plumbing” that supports all of their services and are most likely to be based on distributed ledgers, then we must consider the type of digital currency that they will use as public DLTs operate on native token economies or cryptocurrencies. Much has been written about cryptocurrencies, stablecoins and central bank digital currencies (CBDCs), and it may well be the case that some smart cities have their own CityCoin currency, but we may also need to consider a new type of currency: machine money.

In Germany, the financial regulators are openly discussing the creation of a special type of currency to support their “Industry 4.0” initiatives — euro-denominated machine money that is digital cash but optimized for the super-fast transactions required by devices. This would not require the complexity of “wholesale” CBDCs that are being proposed for national financial institutions or the fully offline, wallet-based requirements of a “retail” CBDC equivalent of digital cash. This smart city “machine money” would be less complex because the transactions will be more straightforward transfers of tokenized central-bank money and may only be intermittently connected to a financial institution. The architecture for these must be robust against cyber-attacks, network failures and equipment malfunctions, but will probably require less regulatory intervention.

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DLT-based infrastructure will be the financial arteries of all-new ‘smart’ cities

These may seem futuristic thoughts, but smart cities are being planned, designed and implemented around the world already, and they all have to consider sustainability and ESG factors in their designs. As global populations grow and as we try to address and adapt to climate change, food security, renewable energy transition and financial inclusion, technology will dominate our urban planning and development.

From Dubai, Beijing and Singapore and the upgrades of existing urban centers, to massive new cities in Africa, it is likely that we will see rewards-based incentive systems using micropayments to nudge and direct citizen behaviors to achieve an optimal operational equilibrium and measurable sustainability outcomes. To achieve this, fast and secure DLT-based financial infrastructure will be deployed like the pipes, cables and fiber optics of other utilities, enabling the flow of micropayments to be the commercial and behavioral lifeblood of all new cities.

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