by Don Tapscott
Financial inequality is an economic condition that can quickly morph into a social crisis.18 In 2014, the World Economic Forum, a multistakeholder organization whose members include the largest companies and most powerful governments in the world, argued that growing inequality posed the single biggest risk globally, beating out global warming, war, disease, and other calamities.19 Blockchain could be the solution. By lowering barriers to financial inclusion and enabling new models of entrepreneurship, the tonic of the market could be brought to bear on the dreams and ideas of billions of the unbanked.
Prosperity Purgatory: An Exercise in Futility
For centuries, banks have relied on network effects. Each successive customer, branch, product, dollar in, and dollar out increases the value of the bank’s network. However, building these networks has come at a cost. Specifically, the cost of acquiring a profit-turning customer has only increased. If a prospect’s money won’t earn its keep, the bank won’t be interested in keeping it. Thus, banks have little economic incentive to win customers in the bottom half of the pyramid. According to Tyler Winklevoss, banks don’t serve most of the world and have no existing plans to serve them. However, new technology could remove that step. He said, “A lot of African countries leapfrogged the infrastructure of landline telecoms with cellular. They skipped that step. Blockchain will have the greatest impact in areas where the payment networks don’t exist or are very poor.”20 Blockchain will push many nascent initiatives, such as mobile-money service providers like M-Pesa in Kenya, owned by Safaricom, and microcredit outfits globally, into high gear by making them open, global, and lightning fast.
A bank is the most common financial institution, and so we will use it as an example here. How do you open a bank account? If you live in the developing world today, you will likely have to visit the branch in person. In Nicaragua, there are only 7 bank branches per 100,000 people compared with 34 per 100,000 in the United States. Nicaragua looks well banked compared with many countries in Africa, where there can be fewer than 2 branches per 100,000 people.21 So you will probably have to travel a good distance to find a bank. You will also need to bring a government-issued identity card, but that will be just as difficult to come by if you don’t already have one.
In the developed world—say, the United States—you need to meet certain requirements. While these requirements vary from bank to bank and state to state, you typically need to deposit and maintain a $100 to $500 minimum balance. You also need to prove your identity. Banks that do business in the States must comply with stringent “know your customer,” “anti–money laundering,” and “anti–terrorism financing” regulations.22 And so they must do more comprehensive background checks on applicants before granting them an account. Ultimately, the bank is less interested in evaluating your character than it is in complying with regulatory agencies. That means a laundry list of requirements. First, you need a Social Security card. Don’t have one? That’s usually enough to get rejected. How about a photo ID like a driver’s license or passport? Don’t have one? You’re not opening a bank account. Let’s say you have both a Social Security card and photo ID. The bank, just to be safe, asks for a recent utility bill as proof of permanent residence or some proof of a previous bank account. If you happen to be new to town, or staying with family, or from an entirely unbanked region of the world, you’d likely fail some of these tests. The bank doesn’t want you as a customer unless it can confirm your identity based on various papered credentials. It’s not interested in knowing you as a well-rounded person. It’s interested in knowing you as a set of checked boxes. Previous attempts to streamline this process for immigrants and the poor, such as the New York scheme to allow people to use their city ID cards, have failed.23
The Prosperity Passport: An Exercise in Utility
Fortunately for the unbanked, blockchain technology is engendering a new form of financial identity—one not dependent upon one’s relation to a bank but rooted in one’s own reputation. In this new paradigm, being “banked” in the traditional sense is no longer a prerequisite. Instead of passing the traditional ID tests, individuals can create a persistent digital ID and verifiable reputation and deploy it, in whole or in part, in different relationships and transactions. The blockchain endows this digital ID with trust and access to financial services. This capability is unprecedented at a massive scale. Joseph Lubin of ConsenSys said, “We all have reputation. It just isn’t easy to use as social and economic systems are currently constructed. Most of it is ethereal and ephemeral. In the best case, it is fragmented and you have to present shallow documentation of it anew for every venture that requires it. In the worst case, billions of people don’t have a way of presenting reputation to anybody but their immediate social circle.”24 It might as well be a pig or a cow. However, with the basic building blocks, people can construct digital identities that are not fragmented or ethereal but universal and standardized, with robust attestations of aspects of themselves and their interactions. They can share these digital IDs granularly—that is, share only very specific information about their identity—to facilitate more interactions that will likely lead to their own personal economic growth and prosperity. David Birch, a cryptographer and blockchain theorist, summed it up: “Identity is the new money.”25
Consider the possibilities: the underbanked of the world can enfranchise themselves as they interact with microlending outfits. Potential vendors or lenders can track their usage and repayment of tiny loans, previously unfeasible, on the blockchain rather than rely on some credit score. “Once a previously unbanked person pays back a microloan, they are on their way to securing more and larger loans to build their businesses,”26 said Lubin. This behavior, when repeated, adds to the reputation score of the borrower. Combined with a global, frictionless payment platform, individuals and small business owners can do the previously impossible: pay a remote vendor for merchandise or services, thereby advancing their prospects in the global economy. Joyce Kim mused, “What if we could create a credit score for women based on their household history?”27 Economic and financial fault lines often run alongside gender lines, making this technology a boon for the world’s disenfranchised women. Referring to the global poor, de Soto said, “It’s not that they don’t want to come into the global economy. It’s that the standards and information to bring them into the system are not in place. Blockchain is terrific because it gives us a common platform to bring people together.”28
What could this persistent reputation mean for global entrepreneurship? If you have a reliable, unique, and robust identity, and you’re deemed trustworthy, counterparties will feel more comfortable providing you with access to value. This is not redistribution of wealth but a wider distribution of opportunity. Haluk Kulin, CEO of Personal BlackBox, said, “The biggest redistribution that is about to happen is not a redistribution of wealth but a redistribution of value. Wealth is how much money you have. Value is where you participate.”29 Blockchain can enable every person to have a unique and verifiable reputation-based identity that allows them to participate equally in the economy. The implications of this equality are profound. Lubin imagines a future where the “unbanked and underbanked will become increasingly enfranchised as microlending services will enable investors across the globe to construct diverse portfolios of many microloans of which the usage and repayment can be tracked in full detail on the blockchain, using Balanc3’s [a ConsenSys portfolio company] triple-entry accounting system, for instance.”30 In this new future, when people repay microloans, they are on their way to securing more and larger loans to build their businesses.
ROAD MAP TO PROSPERITY
Financial identity is the genesis for a wide array of financial and economic opportunity previously unattainable for more than two billion of the world’s population. Blockchain technology enables people from all walks of life to map out their own prosperity. Imagine that, a wealth of one’s own—for large numbers, ultimately billions of people.
Tools
of Abundance: The most basic requirements to participate in an economy are tools like a mobile phone and some kind of Internet access, the portal through which people interact with different value systems. Dr. Balaji Srinivasan, managing partner at Andreessen Horowitz and a lecturer at Stanford University, said, “If you can access the Internet on a mobile phone, suddenly you’re able to access all these other things. You can access a bank or at least the mechanisms for it.”31 Blockchain technology creates a whole new set of business models previously unimaginable that empower individuals as economic agents.
Persistent Identity: You can use and port identity into different networks to establish reputation in a financial transaction or to plug into different social networks. Suddenly, a pig no longer has to be the family piggy bank. New payment rails and means to store value and transact with counterparties will open new frontiers. Indeed, this lowering of barriers to financial inclusion will make it easier than ever for entrepreneurs in the developed and developing world alike to build businesses. This includes everything from turning on a payment mechanism, to having a reliable store of value, to using blockchain software to manage financial statements.
Democratized Entrepreneurship: Under the right conditions, entrepreneurs are the engines of economic growth in society. They bring fresh thinking to the marketplace and fuel the creative destruction that makes market economies prosper. Blockchain technology bestows individuals and small companies anywhere in the world with many of the same capabilities of larger organizations. Blockchain-based ledgers and smart contracts lower barriers to starting a company, expedite incorporation, and cut red tape particularly in the developing world, where it takes three times longer to incorporate and costs five times as much.
Blockchains can automate, streamline, and otherwise dramatically improve the three components of business building: formation, fund-raising, and sales. Formation costs will drop significantly, as blockchain is a trusted, known way to incorporate a business. You can see ownership and maintain records easily, especially helpful in areas where the rule of law is absent. Financing a company is easier as you can access equity and debt capital on a global scale, and if you’re using a common denominator—like bitcoin—you need not worry about exchange rates and conversion rates. Sales become a function of accessing anyone with a connected device. Buyers don’t need a credit card, local currency, or bank account.
Through secure and immutable ledgers, entrepreneurs will be able to register their business and title of corporate assets; manage inventory, payables, and receivables; and leverage other financial metrics through triple-entry accounting software and other blockchain-based applications, reducing the need for auditors, tax lawyers, and other vendors who weigh on small businesses.32 Regulators might cut small businesses a break for opting into a triple-entry accounting scheme. That means more to the bottom line and less wasted time. As the company grows, reconciling corporate actions and documentation will become less complex. Through smart contracts, an entrepreneur could automate many aspects of a company’s operations: purchase orders, payroll, interest on debt, and financial audits in real time. Two new models for individual entrepreneurship will gain traction:
METERING EXCESS CAPACITY. From the centralized sharing economy to the distributed metering economy, individuals will be able to loan out their spare beds, wheelbarrows, oxen, and other tangible and intangible assets to peers in a network based on reputation scores. Blockchain enables previously impossible revenue streams such as metering Wi-Fi, electricity generated from roof-installed solar panels, Netflix subscriptions, latent computing power in your phone, and other household appliances—all through micropayments and smart contracts. The blockchain becomes a new utility for individuals to create value and earn income in nontraditional ways.
MICROMONETIZING DATA. Parents who work in the home and family caregivers of all kinds who labor tirelessly over young children and aging parents can at last monetize their efforts and be recognized for the value they deliver every hour of the day. This is not a developed-world opportunity exclusively. Big companies are looking for ways to market to people in the global South but often lack the right data to make business decisions. Contracting and licensing personal data could be a great opportunity to add a new revenue stream for a young entrepreneur while he is launching his new blockchain IPO. Today, huge digital conglomerates like Facebook and Google harvest petabytes of data about billions of people. We enter into a Faustian bargain where we give up data in exchange for cool services, but we lose privacy and data integrity in the process. Blockchain turns consumers into prosumers. Nike might like to know what you ate for breakfast, how often you go for a run, and whether you are thinking of buying new workout gear. Why not contract that data in exchange for Nike points or real money? Let’s go one step further: Insurance companies are searching for the best data to make actuarial calculations. Your own data—how much you exercise, if you smoke, what you eat—are very valuable to them. Enter into a licensing agreement where every time they use your data to make an actuarial calculation and price a new product, you get a micropayment.33
Distributed Ownership and Investment
We’re moving into a period of human history whereby very large numbers of people can become owners of wealth through distributed ledger technology. Enabling access to the world’s financial markets and therefore the universe of investment opportunities, from conventional investments to participation in mass collaborative ventures, microlending schemes, blockchain IPOs, and reputation-based microlending, will open access to capital. Already, crowdfunding is changing the face of finance. In 2012, nonblockchain crowdfunding campaigns raised $2.7 billion around the world, an 80 percent increase over the year before. With direct peer-to-peer crowdsourced blockchain financings, these numbers are poised to grow manifold. Individuals can contribute small amounts of money through crowdfunding campaigns. Imagine a campaign that engages a million people each giving a dollar. Call it distributed ownership. Not meaningful, you say? Augur, the prediction market platform, raised millions of dollars in small increments from thousands around the globe. The range of possibilities is vast. Blockchain IPOs not only can improve the efficacy and efficiency of raising money, lowering the cost for the issuer, they can also be broadly inclusive, allowing previously unimaginable groups of burgeoning investors to participate. To date, the range of proposals to change income and wealth disparity has not reached beyond higher taxes for the wealthy on the one end, or, at its most extreme, outright expropriation by the state. Instead of redistributing and expropriating wealth, let’s imagine how blockchain can create opportunities to share more equally in the wealth created by society.
REMITTANCES: THE STORY OF ANALIE DOMINGO
Analie Domingo34 has been working as a nanny and housekeeper for twenty-five years. One of more than 200,000 Filipino-born people living in Toronto,35 her story is fairly typical: She left the Philippines as a young woman to settle in Canada with no savings, no formal education, and very little knowledge of her adoptive country. Analie has worked very hard and has carved out a life for herself and her family. Ten years ago, she used her savings to put a down payment on a house, a remarkable feat as she had been dutifully sending money to her family in the Philippines for the previous three hundred months. Analie sent home so much money that her mother, now in her seventies, was able to purchase a home of her own in Manila.
Analie graciously agreed to let us join her on payday to document her experience. On Friday afternoon, Analie got her paycheck, handwritten by her employer, and walked it to the local bank. This took fifteen minutes; twenty minutes if you include the lineup at the teller. After she deposited it, she withdrew $200 Canadian. Cold hard cash in hand, she walked a block to catch a local bus. Instead of heading toward her home, she went two miles in the opposite direction and got dropped off at what can only be described as a bad neighborhood. She walked for another four blocks and finally arrived at the “financial institution” from which she would send the money: an iR
emit counter at the bottom of a housing block in Toronto’s St. James Town—one of the poorest and most notoriously dangerous neighborhoods in Canada. Because many people who use iRemit’s services are unbanked, the company has begun offering other financial services, such as check cashing. Analie filled out a paper form, as she has done hundreds of times before, and handed over her hard-earned money. For a $200 wire, Analie paid a flat fee of $10. On the receiving end, her seventy-year-old mother endured a similarly taxing (and equally ridiculous) trek to receive the money. Of course, she had to wait three to four days before going to the bank, the average time these payments take to get processed. Analie walked back to the bus stop, boarded the bus, a subway, and another bus, and eventually, one hour later, reached her home.
The cost of sending that remittance, $10, is equal to 5 percent of the total value. In addition, there is typically a spread on the exchange rate of around 1 to 2 percent. At around 7 percent this is a slight discount to the international average of 7.68 percent.36 That they are both “banked” and still have to go through this process makes the whole farcical routine more egregious. The hard cost fails to capture the all-in cost. For example, the time value of the two hours Analie wasted doing this is equal to another $40, based on her wages. Moreover, she had to leave work early because she feels unsafe going to the neighborhood when it’s dark. For her mother, a septuagenarian living in Manila, the physical toll on her body of making the journey to pick up the money is equally significant. The purchasing power of the $10 Analie forwent to make the transaction happen is certainly material to her, but far more for her mother. Whereas in Canada $10 is the cost of a meal and bus fare, in Manila it could buy food for a week. Over her lifetime, Analie has paid thousands of dollars to intermediaries such as Western Union to send money home. Each monthly fee contributes to a global honeypot of $38 billion in fees paid annually on remittances.37