By: Derek Manuge
“Why blockchain?” is a question often posed by engrossed bystanders, midway through a discussion about Corl’s vision and business model. After some explanation, on occasion this question is often followed up using another question, “What is blockchain?”, however I’ll assume that if you’ve made it far enough into the depths of the internet to read this post, you already have a minimal understanding of blockchain, so we’ll omit any explanation of the fundamental technology from this discussion.
So “why blockchain?”. Those of us in the financial services and securities industry can see the obvious allure of using a digital ledger for securities to provide proof-of-ownership and rapid, verifiable, peer-to-peer transactions, but these aren’t the only benefits of the technology, as least not for Corl.
To understand the benefits, one must understand what we’re accomplishing at Corl. At its core, Corl aims to introduce a new method of financing and investing in startups, through offering revenue sharing — aka revenue-based financing (RBF) — to startups and crowdfunding these investments by offering a digital token on the blockchain. Revenue-sharing provides a continuous stream of cashflow to investors, and we’re offering ownership in the RBF fund which houses these investments via a digital token (“RBF Token”) on the blockchain, whereby token holders (“holder”) can transfer peer-to-peer, in the usual blockchain fashion.
From this, it becomes evident why blockchain was selected as the fundamental technology for Corl’s business model:
1. Execution Risk
By their inherent design, blockchains eliminate the existence of a central point of failure. Although generally speaking centralized systems are easy to maintain, they are prone to attack, failure, and ultimately execution risk. By relying on a decentralized consensus mechanism to determine the historical and future state of the network, transactions (whether trades or dividend distributions) can persist uninterrupted because the network is more stable when transaction authenticators are removed (e.g. as an investor, if our servers are down, this doesn’t affect your ability to transact). Thus, using a fault-tolerant architecture provides greater reliability to the platform and confidence to users.
2. Process Efficiency
We abide by the mantra “less (intervention) is more (efficient)”. After the launch of RBF, token holders will obtain a continuous stream of quarterly payments that will be distributed via smart contracts. The public key where tokens are held is proof-of-ownership of units in the RBF fund, and will determine which key will receive tokenized dividends when payments are due. With minimal human or manual intervention, funds are distributed accurately, consistently, and punctually, thus improving process efficiency.
3. Monetary Velocity
Unsurprisingly, the rate at which money is exchanged from one party to another is a catalyst for economic growth (the faster you receive money, the faster you can deploy it). Unlike traditional startup financing arrangements, revenue-sharing offers a continuous stream of cashflows to token holders. When these cashflows are issued in the form of a tokenized dividend via smart contracts on a quarterly basis, the token holders receive them instantly (less the latency of the network). In other words, the trade is the settlement, and there’s no more waiting 3–5 days for a wire to clear or third-party financial institutions to release funds.
4. Financial Liquidity
Have you ever tried exiting a startup investment? Finding a buyer is one of many pitfalls you might encounter, and marketplaces to find buyers for early-stage investments are small, centralized, and fragmented. Corl offers a digital token that is tradable from day one of issuance, providing instant liquidity; there is no need to wait until the startup exits or find a buyer prior to a liquidation event. The alternative to issuing a digital token through a proof-of-ownership model on the blockchain is to issue a security for the fund on a centralized stock exchange. So why not do this? While today stock exchanges offer higher liquidity than decentralized peer-to-peer networks or exchanges, it is our belief that this trend will not persist. Given the barriers and costs of entry for centralized stock exchanges, decentralized peer-to-peer exchanges will have the capacity to offer equal or greater liquidity (i.e. higher stability of prices for buyers and sellers) as the globalization and adoption of crypto assets continue to scale.
5. Global Accessibility
Under traditional methods of startup investing, deal flow is often only accessible to private, accredited, high-reputation, individuals or firms. This hierarchical structure of deal flow and the startup investment culture is not conducive to outside participation. Under a blockchain-based business model, investors that traditionally would not have access to the startup investment marketplace (i.e. retail and unaccredited investors) can now participate in the growth of emerging high-growth companies through the RBF token. The barriers to investment are lower under a blockchain business model, because digital tokens offer seamless P2P transactions and a market environment that is accessible by global participants.
6. Financial Independence
Proof-of-ownership is determined through consensus of the network, rather than a central party. This transference of power to token holders implies that Corl has no direct influence over how tokens are managed or transacted on the network, and hence we are independent. We do not act as a brokerage or bank account whereby investors hold their tokens; tokens are the property of the investor and we have no oversight in how they are managed; hence, unlike traditional financial counter-parties, we have no right to freeze funds, reject transactions, or place a hold on dividend distribution. Through the democratization of financial assets, token holders have the freedom to securely transfer and manage their assets as they wish.
7. Auditable Transparency
Blockchains offer an immutable log of all transactions in the history of the network. For investment firms, regulators, or individuals requiring transaction logs for strategic, tax, or audit purposes, blockchains offer significantly higher levels of reliability and transparency than traditional forms of record-keeping.
8. Fraud Risk
A fixed number of tokens will be generated during the Initial Token Offering (ITO) and by the “Law of Conservation of (Blockchain) Mass”, it is not feasible to (i) generate duplicate tokens since blockchains inhibit double-spending, and (ii) transfer tokens without the unrivalled consensus of the nodes on the network, which is computationally impractical. This reduces the incidence of fraud and transaction tampering.
9. Compliance
To purchase tokens and be eligible for tokenized dividends, users must undergo know-your-customer (KYC), anti-money laundering (AML), and counter-terrorist financing (CTF) screening. Compliance with local KYC, AML, and CTF regulatory requirements are integral components of our investment policy and ensures that Corl complies with the strictest of industry standards. Each public key on the network will be vetted by passing through a compliance layer, which verifies public keys against a registry for personal and business identities, and only public keys that meet regulatory standards will be eligible for token ownership.
10. Regulatory Acceptance
Canadian regulators have been supportive of the FinTech and crowdfunding movement, and have instituted regulation that offers alternative regulatory support for FinTech startups that aim to use crowdfunding to raise capital and invest. Digital tokens are the conduit through which Corl will crowdfund because of the benefits of the technology from a regulatory and cyber risk standpoint (embedded KYC layer, enhanced auditability, attack and collusion resistance).
Whether blockchain or another similar distributed ledger technology (DLT), there are numerous benefits to relying on a decentralized business model, beyond those stated above. For example, in the specific use case of investments, decentralization can (i) increase investment capacity, (ii) generate higher global participation rates, (iii) reduce funding concentration risk, (iv) increase the number of investors (leading to deeper and more reliable consumer insights), and through the aforementioned, (v) enhance market efficiency.
Whether minimizing execution risk, maximizing process efficiency, increasing monetary velocity, providing financial liquidity, enhancing global accessibility, fostering financial independence, providing auditable transparency to the network, eliminating fraud risk, enabling KYC, AML, and CTF compliance requirements, or realizing regulatory efficiencies, blockchain is the fundamental technology that makes all of this possible.
At Corl, we are excited by the benefits that leveraging advanced technologies such as blockchain can provide. We remain strong advocates for the advancement of crypto assets and digital finance and are proud to be members of this growing community.
About the Author: Derek Manuge is the Co-Founder and Chief Credit & Investment Officer at Corl. Derek has over 5 years of experience as a financial risk manager at KMPG and Scotia Bank. Derek is also FRM chartholder and steering committee member of the blockchain risk research group at GARP.
For more tips and information, visit www.corl.io and connect with us on Twitter & Facebook.
