We have been lucky to raise venture capital for Coderstrust, but the funding for my first startup was raised by mortgaging my apartment. Venture capital is for a very limited group of companies, whereas 64% of small business in the US are started using funds derived from their home equity. If a company fails to honour the debt, the bank can take the home and sell it off. However, if all goes well, the access to credit allows entrepreneurs to build and grow companies. Asset-backed lending is therefore a vital driver of capitalism.
A mind-boggling fact is that five-sixth of the world’s population actually have assets, but they lack the process to represent their assets, lend against them and institutions to enforce their property rights. In Denmark, where property rights work, I could sell my old car to a private individual where the buyer made a bank transfer to my account before actually getting the car. And more than 40 private individuals I have never met leant me money for CodersTrust on the crowdfunding platform www.lendino.dk. Both things could only happen because the buyer and the people lending me money knew that the legal system would ensure the enforcement of their property rights and repayment. But as long as assets in developing countries are not documented, registered and enforced by a legal system, they’re useless for asset-backed lending and capitalism fails to work.
So in the case of CodersTrust we have more than 50,000 qualified students applying who we know could become online freelancers, if they could just borrow the money for the required education. But since they have no collateral there is no way for them to pursue a better life. It’s impossible to get a loan for something as illiquid as an education without any collateral.
However, one of the innovations in cyber crime is the effective development of ransomware that threatens to delete the victim’s data unless a ransom is paid. The most advanced ransomware encrypts the victim’s files, blocks access to them and demands a ransom to decrypt them. Criminal activity is currently the “killer app” for this technology and it’s even being used by rogue states like North Korea to fund their bizarre country. But it could be used to solve a major problem for developing countries. This technology can be used to solve the problem of dead capital by providing an automated, scalable, cost-effective method of ensuring repayment of student loans. In theory, a well-functioning student lending system could unlock the world’s biggest investment market, since “human capital” represents 90% of the world’s wealth, and equity/stocks only 2%.
It could be used for loans to students looking to work locally, but it would be even better to use it for online education for remote freelancers. As opposed to the lack of ownership, registration, and recording in the informal economy in developing countries, the freelance market enables students to get ownership of a globally recognised freelance identity, a way to track income and a way to verify skills with ratings and reviews. Not only does the online freelance economy allow people in relatively poorer parts of the world to complete work for relatively richer parts of the world at wages higher than the local economy may bear, but it generates information about people’s skills and income. This information enables access to credit, insurance, issuing of shares and mortgage of property that all drive a modern market economy. The income from the freelance market opens up a potential debt market that could lift millions out of poverty by allowing people to invest in a computer, access to internet and an education that they otherwise couldn’t afford today, but can yield profits on the freelance market tomorrow.
The ransomware would not be used to hunt down unsuccessful freelancers, but simply to catch cheaters, freeriders and enforce repayment of debt for capital markets to work. The ransomware could in theory be used as a taxation system for states to both invest in and tax its citizens. Well-functioning countries with efficient tax systems have no problem attracting capital to finance the military for security, police for social order, education and healthcare systems. At the same time poor countries cannot attract capital, since no institutions are in place to enforce taxation and secure a return on their government bonds. In other words, the very essence of human freedom, education and a healthy life heavily depend on taxation.
Not surprisingly, taxation problems date back to the earliest recorded history of civilisation and it’s nothing short of ingenuity and innovation to either collect or evade taxation. The Egyptians had to live with household audits of tax on cooking oil. The French and British had to pay “Danegaeld” — Danish Tax — to buy off Viking attackers and to pay for defensive forces. The Romans instituted inheritance tax to finance the military. The great city of Paris built a wall around the city to tax inflows of goods into the city, and citizens created tunnels in order to avoid the toll. Denmark had artillery on two side of the narrow strait of Øresund to enforce taxation on ships going into the Baltic. It was taxation that led Americans to revolt against the British in 1773. Income tax was later introduced by the British to finance their war against Napoleon. However, the problems with taxation in Greece and recently the Panama papers have demonstrated the major problems of today’s tax system. Tax evasion in the EU alone amounts to a trillion euros.
Ransomware could be the technology of our time to enable markets to flourish and civilisation to progress analogue to the historical examples of measuring cooking oil, building walls, or using artillery. As the cost of hardware drops, and more education and economic activity moves onto the computer or smartphones, ransomware could be used to create a system which is transparent, measurable and impossible to cheat. Ransomware might just be exactly what the world needs right now to get things on track again and enable capitalism to work in developing countries.