Blockchain Revolution (updated)

by Don Tapscott

  Microfinance: Peer-to-Peer Aid with Picopayments

  Microfinance is an industry that transcends both financial services and development aid. Rather than delivering aid from the top down, microfinance institutions (MFIs) try to empower individuals to save, invest, and build small businesses. More often than not, they take the form of communal savings co-ops, where members of the community come together to pool their funds and loan them out to one another for short-term needs. When implemented and managed properly, microfinance outfits can deliver a real benefit to struggling communities: they reduce chronic hunger, increase savings and investment, and in many cases empower women.55

  However, there are some problems with MFIs today: First, there is very little oversight into how they are run and occasionally they enable predatory loans and coercive loan recovery methods, straining communities and adding to their desperation. Second, in light of this, governments in developing countries have found that the best way to curb bad behavior is to outlaw or severely restrict MFIs altogether, as was the case in India in 2010, following an MFI controversy.56 Third, funds don’t always end up in the right hands. There is no way to ensure that the community member who needs the money the most receives it. Fourth, they are still largely regional, limiting both funds and also opportunity to invest and save.

  So, people who are working on poverty will ask themselves, where does the blockchain fit in the mix of tools? How can it improve on what we’re doing?

  First, it will improve administrative accountability. As with corporate transparency, donors will be similarly attracted to any nonprofit outfit that uses the blockchain for greater transparency and accountability. Additionally, if microloans are recorded to the blockchain and customers of an MFI are granted permission to access them, then they can hold those outfits more accountable for bad behavior. What would-be borrower or saver would choose the opaque and murky when she can choose the open?

  Second, it can mean better protection of women and children. Through smart contracts, funds can be donated into escrow accounts, accessible only by women, say, for accessing food, feminine products, health care, and other essentials. The men can’t take it out of their hands to buy cigarettes or booze, or to gamble, which can be a persistent problem with money from savings or microfinance.

  Third, it will enable people to source funds and opportunity worldwide, and will attract donors worldwide. Communities are typically limited by geography in which MFI they use. In the future, a would-be borrower could go online and source the best bids from a number of potential lenders, finding the one with the best rates, terms, and reputation. Formal MFIs will continue to exist, of course, but there will be easier ways to connect peers through blockchain that will make them less necessary.

  Finally, blockchain payment rails, such as bitcoin, are basically tailor-made for small, disenfranchised borrowers by enabling tiny payments (picopayments, we call them) and by dropping costs close to zero. In a world where every penny counts, users should be able to pay back loans, withdraw funds, and save in tiny increments, all of which was far more challenging in a preblockchain world. They should also be able to do it instantly and efficiently, given that despite abject poverty in many parts of the world, cell phone penetration and Internet connectivity are becoming commoditized.

  SAFE AS HOUSES? THE ROAD TO ASSET OWNERSHIP

  Land title registration is what Hernando de Soto referred to as a nonmarketed transaction, an economic exchange generally involving a local government. Nonmarketed transaction costs include the resources wasted by waiting in line, tracking down ownership, completing and filing paperwork, cutting through red tape, resolving disputes, greasing the palms of officials and inspectors, and so on.57 These costs are rampant in poor economies where systems are weak and government officials are known to behave without integrity. Honduras is such a place, the second-poorest country in Central America with an extremely unequal distribution of income. The economic downturn of 2008 stymied the inflow of remittances, and a military coup ousted the democratically elected Manuel Zelaya in 2009. The coup was backed by one of the region’s largest landowners, a palm oil tycoon who benefited significantly in earlier land grabs that coerced Aguán campesinos to sell their land titles.58

  Since the mid-1990s, the World Bank and other global NGOs59 have poured $125.3 million plus technical expertise into Honduras for designing and managing land-related development projects that would accelerate the country’s growth.60 We came across plans to incorporate spatial data infrastructures that would support the geotagging of data on land and natural resource ownership and usage, climatic and natural hazards, and socioeconomic conditions that municipalities could use to inform strategic planning and investment. There was also mention of integrating databases of land projects with databases of environmental and disaster management projects at national and local levels.61 Very ambitious.

  The problem is that there are still allegations of pervasive corruption in property registry, land sales, and dispute resolution, including accusations against the middlemen, judges, and local bureaucrats. According to the Office of the U.S. Trade Representative, the property registration system is still highly unreliable.62 Households in rural villages were systematically passed over during land title registration of residences, usually their most valuable asset, because the government limited the World Bank’s jurisdiction to urban zones. In rural areas, the cash-strapped campesinos benefited least from land administration programs. Rural poverty has not decreased in Honduras since 1998. Ambiguity and corruption manifest themselves in title disputes all over the developed world. If Honduras was to suffer a catastrophic natural disaster, as Haiti did in 2010, aid organizations like the Red Cross would be similarly hamstrung in untangling the mess of titles to deliver safe, durable housing.

  “What if there was a universal ledger that could include all these data and infuse trust into a highly untrustworthy situation? Blockchain seems to be particularly good at handling transactions, which none of the other systems necessarily are,” said de Soto. “The fact is poor countries are by nature very corrupt, and so having your transaction ledger in every node with safety procedures makes the system efficient, cheap, and fast, but it is also the kind of thing that the poor want too because it protects their rights,” he adds.63 Here’s how it works: The blockchain is an open ledger, meaning that it could reside on the desktops of the Honduran officials who needed to reference it, the mobile devices of field workers who input data, and citizens who want to maintain a copy. It’s a distributed ledger, meaning that none of these parties owns it, and it’s a P2P network, meaning that anybody could access it. In jurisdictions like Honduras where trust is low in public institutions and property rights systems are weak, the bitcoin blockchain could help to restore confidence and rebuild reputation.

  That’s what the Texas-based start-up Factom plans to do in cooperation with the Honduran regime and in partnership with Epigraph, a title software company. Factom’s president, Peter Kirby, said, “The country’s database was basically hacked. So bureaucrats could get in there and they could get themselves beachfront properties.” He added that 60 percent of Honduran land is undocumented. The goal of the project, which has not been signed definitively, is to record the government’s land titles on the blockchain ledger. Kirby told Reuters that Honduras could leapfrog legacy systems used in the developed world by deploying Factom’s blockchain technology, and it would eventually make for more secure mortgages and mineral rights.64 “Documentation for ownership from patents to houses is extraordinarily paper-based, and there’s no reason it should be, other than history. Blockchain works with any transaction or interaction where property rights and timing matters,”65 said Kausik Rajgopal, who heads up McKinsey’s Silicon Valley office and payments practice.

  At the end of the day we don’t know whether the Honduran government will enforce land titles registered on the blockchain or sustain its use. In previous land registration attempts, the government has backed away from
the additional costs of scaling up and including more people. But if the ledger delivers reliable, tamperproof data, then NGOs could get the additional data they need to inform and influence policy decisions and governance. If it eliminates five of the six steps currently required to register land in Honduras, and cuts the length of time from twenty-two days to ten minutes, then those nonmarketed transaction costs drop to nearly zero.66 And perhaps it would enable journalists and rights advocates to shame large global corporations into not purchasing or building on or sourcing timber or water from land that has been designated for environmental protection or has historically been used by the campesinos or indigenous people without compensating them fairly. We’re hopeful!

  IMPLEMENTATION CHALLENGES AND LEADERSHIP OPPORTUNITIES

  Blockchain technology is obviously not a panacea for the world’s economic and financial woes. Technology does not create prosperity; people do. There are obstacles to overcome and opportunities for leadership. The first is technical. According to International Telecommunications Union data, there are still significant gaps in Internet connectivity, either because the telecommunications infrastructure is poor or because service is unaffordable.67

  The second is literacy. Using smart phones and interacting online requires a workable level of literacy. In the United States, 18 percent of adults over the age of sixteen read below the fifth-grade level, 30 percent have low math literary,68 and 43 percent of these illiterate adults live in poverty.69 Literacy is highly uneven in the developing world. In many parts of Africa, literacy hovers around 50 percent, and the problem is even more severe when comparing the genders. For example, in places like Afghanistan, Niger, Sierra Leone, Chad, Mozambique, and other poor nations, the gap between male and female literacy is a staggering 20 percent.70

  The third is corruption. Blockchain is a powerful tool, but like all technologies, it is not inherently good or bad. People can harness brilliant technologies, from electricity to the radio and through to the Internet, for benevolent or malevolent goals. We need leadership from the institutions in society that can leverage blockchain technology for good, such as aid groups, civil society organizations, companies, and governments, right down to the individuals who are connecting to this vast network. Only when these challenges have been met and overcome will blockchain technology fulfill its potential as an instrument of global prosperity and positive change.

  CHAPTER 8

  REBUILDING GOVERNMENT AND DEMOCRACY

  The Republic of Estonia is a Baltic state with Latvia to the south and Russia to the east. With a population of 1.3 million, it has slightly fewer people than the city of Ottawa.1 When Estonia regained its independence from the former Soviet Union in 1991, it had an opportunity to completely rethink the role of government and redesign how it would operate, what services it would provide, and how it would achieve its goals through Internet technologies.

  Today, Estonia is widely regarded as the world leader in digital government, and its president, Toomas Hendrik Ilves, will be the first to say so: “We’re very proud of what we’ve done here,” he told us. “And we hope the rest of the world can learn from our successes.”2

  Estonia ranks second of all countries on the social progress index for personal and political rights, tied with Australia and the United Kingdom.3 Estonia’s leaders have designed their e-government strategy around decentralization, interconnectivity, openness, and cybersecurity. Their goal has been to future-proof infrastructure to accommodate the new. All residents can access information and services online, use their digital identity to conduct business, and update or correct their government records. While much of Estonia’s work predates the blockchain, the country introduced a keyless signature infrastructure that integrates beautifully with blockchain technology.

  Central to the model of e-Estonia is a digital identity. As of 2012, 90 percent of Estonians had an electronic ID card to access government services and travel within the European Union.4 The chip embedded in the card holds basic information about the cardholder as well as two certificates—one to authenticate identity and one to provide a digital signature—and a personal identification number (PIN) of their choice.

  Estonians use these to vote, review, and edit their automated tax forms online, apply for social security benefits, and access banking services and public transportation. No need for bank cards or Metrocards. Alternatively, Estonians can do the same with mobile-ID on their mobile phones. In 2013, Estonians submitted over 95 percent of taxes electronically and conducted 98 percent of banking transactions online.

  Parents and students use Estonia’s e-School to track assignments, curriculum, and grades, and to collaborate with teachers. Estonia aggregates in real time diverse health information from various sources into a single record for each citizen, and so these records don’t reside on a single database. Each Estonian has exclusive access to his own record and can control which doctors or family members have access to these data online.5

  Since 2005, citizens have used i-voting for their national elections. Using their ID card or mobile-ID, Estonians can log in and vote from anywhere in the world. In the 2011 parliamentary election, citizens cast almost 25 percent of ballots online, up from 5.5 percent in the previous parliamentary election. The people obviously like and trust the system: the number went up again for the 2014 European Parliament elections in which a third of voters participated over the Internet from ninety-eight different countries. The Estonian cabinet uses a paperless process and makes all draft legislation accessible online. The average length of weekly cabinet meetings has gone from around five hours to under ninety minutes.6

  Estonia has an electronic land registry that has transformed the real estate market, reducing land transfers from three months to a little over a week.7 In the last few years, Estonia has launched its e-Residency program, where anyone in the world can apply for a “transnational digital identity” and authentication to access secure services, encrypt, verify, and sign documents digitally. An entrepreneur anywhere in the world can register his or her company online in fewer than twenty minutes and administer the company online. These capabilities contribute to Estonia’s image as a digital country.8

  None of this would work or be acceptable without solid cybersecurity. As Mike Gault, CEO of Guardtime, noted, “Integrity is the number-one problem in cyberspace and this is what Estonia recognized ten years ago. They built this technology so that everything on government networks could be verified without having to trust humans . . . it is impossible for the government to lie to its citizens.”9

  Estonia’s cybersecurity derives from its keyless signature infrastructure (KSI), which verifies any electronic activity mathematically on the blockchain without system administrators, cryptographic keys, or government staff. This capability ensures total transparency and accountability; stakeholders can see who has accessed which information, when, and what they may have done with it. Consequently, the state can demonstrate record integrity and regulatory compliance, and individuals can verify the integrity of their own records without the involvement of a third party. It lowers costs: there are no keys to protect, and no documents to re-sign periodically. According to e-Estonia.com, “With KSI, history cannot be rewritten.”10

  Clearly, blockchain technology applies not only to corporations fixated on profits but also to public institutions focused on prosperity for all, from government, education, and health care to energy grids, transportation systems, and social services. Where to start?

  SOMETHING IS ROTTEN IN THE STATE

  In his Gettysburg Address in 1863, Abraham Lincoln said that society’s greatest goal was a “government of the people, by the people, for the people.” Twelve decades later, President Ronald Reagan said in his 1981 Inaugural Address, “Government is not the solution to our problem; government is the problem.” Many in the nascent blockchain ecosystem agree. In a 2013 survey, over 44 percent of bitcoin users professed to be “libertarian or anarcho-capitalists who favor elimination of the state.
”11

  Libertarians of all stripes tend to support bitcoin. It’s decentralized and free from government control. It’s anonymous and difficult to tax. It resembles gold in its scarcity, and libertarians favor the gold standard. It’s a pure market, driven by supply and demand rather than quantitative easing. Not surprising, the first 2016 presidential candidate to endorse bitcoin for campaign payment was Rand Paul.

  The libertarian bent has given opponents of digital currencies fodder for dismissing blockchain technologies outright. Jim Edwards, founding editor of Business Insider UK, wrote of the libertarian paradise he called Bitcoinistan, a country like Somalia “with as little government interference as possible, in a market free of burdensome laws and taxes.” He described the paradise as “a total nightmare . . . characterized by radical instability, chaos, the rise of a boss-class of criminals who assassinate people they don’t like, and a mass handover of wealth to a minority even smaller than the one percent that currently lauds it in the United States.”12

  Certainly, we live in a crisis-racked world. “The world has not seen this much tumult for a generation. The once-heralded Arab Spring has given way almost everywhere to conflict and repression,” wrote Kenneth Roth, executive director of Human Rights Watch, founded in the 1970s to support citizen groups. “Many governments have responded to the turmoil by downplaying or abandoning human rights,” using the Internet to spy on citizens, using drones to drop explosives on civilian populations, and imprisoning protesters at mega public events like the Olympics.13