How Blockchain Will Unlock Access to Capital in Emerging Market Economies
I am fascinated with globalization and the characteristics of each country’s operations, especially the differences between developing vs. developed markets. Each market has their own unique DNA so markets can’t just be divided into emerging/developed as that diminishes the nuances and individualities of each country. No matter how complex or simple the market, one consistent issue for most of the developing nations is access to capital.
The lack of capital and infrastructure slows growth and prevents the masses from rising to a higher economic class. The result?
· 1.8B people operate in a $10 trillion underground economy
· 2B people unbanked
· Billions more underserved by their local banks and governments.
Those who have access to capital are still limited by the high costs of an inefficient system. For example, a typical credit-card consumer in Brazil has the equivalent APR of 345.8 percent.
Blockchain technology offers a valuable catalyst capable of altering emerging markets. It has the potential to unlock billions of dollars of real capital among the lower socioeconomic classes. At the same time it can remove dependence on the inefficiencies of the big central systems (governments, banks, telcos) that are often feeble and corrupt.
The Brazilian government’s corruption scandal at BNDS (National Social Development Bank) shows how in emerging markets an unsupervised centralized capital source can become a recipe for disaster. BNDS was in charge of providing capital to entrepreneurs and development projects, but lack of accountability cost the country $101B USD of loans/year at its peak. It funneled development money to the top businesses and politicians, not to the masses as it was intended. BNDS is, of course, an extreme example, but blockchain can easily shift capital away from big finance back to the people.
Capitalism in Emerging Markets
Before diving deeper into specifics of the blockchain, let’s understand why emerging market capitalism is different than in developed markets. “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” by Hernando de Soto helps explain capitalism in developing nations. De Soto introduces the idea of “dead capital.” This is an asset that cannot easily be bought, sold, valued, or used as an investment.
Five-sixths of the world is poor but the “80 percent [of the poor] majority is not, as westerners often imagine, desperately impoverished” (De Soto, 15). The poor have possessions but lack the ability to produce additional value from those possessions. The poor own houses, crops, and businesses, yet all of it is unverified, not valued, or unregulated by law. What if this could be ledgered and legalized, creating legitimacy and capital?
Hernando de Soto claims poverty comes from the lack of a trusted ledger system that allows property owners in the shadow economy to use their property rights to acquire capital. The very intrinsic nature of the blockchain and smart contracts are the solution. It enables capital for the world’s underground economy, solving De Soto’s mystery of capital.
How Blockchain Attributes Impact Capital
Blockchain solves many of the problems of poverty and dead capital.
1. Smart Contracts. The fundamental unit of the Ethereum blockchain is a smart contract. This programmable script lives on-chain (within the Ethereum network) with perpetual immutability. The smart contracts make transactions between parties secure, hassle-free, automated, and efficient. Smart-Contracts need no middleman such as banks or attorneys. They are peer-to-peer and thus eliminate crooked politicians and businessmen cutting in on the deal by over-inflating projects, laundering money, and paying bribes. It also provides an efficient legal infrastructure, just as De Soto said was essential. The blockchain records deeds and transactions for a more trusted economic ecosystem between populations while reducing the high bureaucratic costs.
2. Decentralization. The centralized governing systems of emerging countries are generally self-serving, costly, and inefficient. In the centralized model, the poorer you are, the less access you have and the more you pay. Centralized governing bodies strangle businesses and consumers with bureaucracy, taxes, and legal burden creating unnecessary complex systems. These systems prevent people from starting businesses, keep them within an extralegal economy, and further propagate the income disparity between the rich and the poor.
Decentralization makes the government and central banks unnecessary. Decentralization democratizes capital, allowing literally anyone in the world to partake in this new economy. Anyone can become a node on the blockchain to earn cryptocurrency by helping the nodes transact. Users may also participate or create direct crowdfunding into a project via TokenSales and ICOs. Funding from reputable sources with reasonable rates can become possible and easy in emerging countries using blockchain. On the blockchain, every node is equal in value and impact.
3. Identity. Under the standard system, it’s hard for most people to qualify for capital. People that once qualified but slipped up may deal with bad credit the rest of their lives, no longer able to transact in the legal economy. In Brazil, if a person has a “nome sujo” (dirty name, a bad credit score) they can’t even qualify for simple utility services such as a cell phone carrier and will be excluded from most capital benefits until they repair their credit history. Archaic credit identity models inhibit credit clean-up.
The blockchain creates more reliable identification for both users and institutions. Blockchain identity can bring documentation to the underground economy and create new standards for identity with ledgers of information that are infallible. Blockchain identity offers a 3-dimensional risk model for financing since the information stored covers more than just payments and debts and is completely trustworthy.
4. Governance. Developing nations’ gatekeepers are often expensive and self-serving. Federal projects like Brazil’s BNDS look pure, but they rarely work well because of governance. Programs become revolving doors for politicians to pocket money and bribes. Blockchain governance eliminates the need for middlemen and gatekeepers, thus reducing the cost of transactions while improving transparency and the ability to auditing.
Decentralized governance thrives on exchanges, allocations, and peer-to-peer transactions built on objective smart-contract agreements. A blockchain allows people who may not know each other to agree to a set of parameters and rules in a way that’s beneficial for them without relying on a centralized organization to reach consensus. Proof-of-work mining makes sure that each node and stakeholder in the blockchain has a system of checks and balances so that the protocol governs itself.
5. Monetization of “Dead” Assets. Lower socioeconomic classes sit on troves of assets that cannot be leveraged because most of the assets are considered untradeable and un-monetizable dead capital. Outsiders who might lend money based on the extra-legal collateral can’t do so because there is no good source of information for these assets or ways to verify and quantify them.
The blockchain can verify and standardize property rights and place them in a global digitalized and formalized economy. Consequently, new market forces will form with more innovative financing and economic models. The blockchain is the trusted ledger needed to formalize this extralegal economy because it enables anyone to create mirror-assets. That is a digital asset that represents ownership of a real-world asset.
Mirror-assets are tied to currency, land, stock, etc. It also allows for anyone in the network to transact with these mirror-assets. Governments or banks may choose not to acknowledge certain assets in these countries, but entrepreneurs within the blockchain may. With blockchain, the information is recorded real-time and guaranteed, while enforcement of the transaction is conducted through permanent smart contracts. Peer-to-peer lending and payments can build emerging markets. Lastly, new forms of digital assets that once were potentially useless or unfathomable to collateralize can now be monetized. A user’s smartphone identity or prepaid carrier balance can have actual value for an advertiser; both could transact via the blockchain. Decentralized data storage is another great example of monetizing previously unused assets.
Capitalism in developing markets is still in its infancy. To put it into perspective, these markets reflect the level of development of the United States 100 years ago. Then, it too was an undeveloped country. Trying to build the same USA Western framework across other nations fails, because these other nations are different. These countries will leapfrog to the forefront once the technology advances and it will enable decentralized peer-to-peer access to much-needed capital.
Just like developing nations leapfrogged with the mobile internet, smartphones, and mobile payments, the blockchain, once mature, will eventually be the source of truth for capital in developing countries. It will create low-cost, scalable access to capital synonymous to other technologies in different verticals such as mobile communications (WhatsApp), Mobile Payments (M-Pesa), and the smartphone (Android). Blockchain can unlock the billions of dollars in dead capital around the world and finally, after nearly two decades, solve De Soto’s mystery of capital.
AirFox Brings Mobile Capital Access to Emerging Markets
AirFox understands this innovation. As a player in the digital and mobile space, it is well poised to partake in this revolution by being the pioneer of mobile capital access to the masses. Our next vision is to make the financial capital more affordable and accessible to the unbanked and underbanked. Today, the biggest limitation for our customers is access to capital.
We have done this first with the mobile internet by using advertising as a currency to enable access to over 2 million unique prepaid subscribers across our wireless carrier partners. This month we are proud to announce our Ethereum blockchain project, the AirToken. We are now capturing the power of the blockchain to unlock unrealized mobile capital through a new cryptocurrency — The AirToken. Through AirToken, AirFox will put micro-loans on the blockchain, tapping into a global pool of lenders to finance the bottom of the pyramid.
Here’s how it works: The AirToken blockchain uses a digital ledger of the user’s mobile phone data, social history, and proprietary machine learning “credit-score” algorithms to finance users with AirTokens. AirTokens are then redeemable for real currency that can be translated into goods and services within our ecosystem.
We are excited for the future. Different innovations surging from blockchain technologies will solve capital access problems in emerging markets. We don’t have a silver bullet solution to all of these issues, but we hope to make a dent in the mobile capital market. At the same time, we’ll build a cascading effect for other entrepreneurs to pursue their ideas and innovations. Together, we will disrupt emerging market economies and propagate the future of capitalism abroad.
Founded by Ex-Googlers Victor Santos and Sara Choi and incubated at Harvard’s Innovation Launch Lab, AirFox is a TechStars Boston alumni and venture backed by Project 11, Launch Capital, and NXT Ventures, among others.