Groups Need an Easier Way to Hold Funds
The Internet has enabled individuals to share their ideas. Smart Contract networks enable groups to pool their funds.
PROBLEM: Groups of people cannot spontaneously form to hold money. Sites like GoFundMe allow people to quickly raise funds for their causes. These funds must then be entrusted to one member of the community. Without forming a nonprofit, funds cannot be held in joint custody. Formation of a nonprofit involves excessive costs of time and money, this is an inadequate solution to the problem of joint custody. There should be a better way to enable joint custody of funds without the huge costs associated with incorporation.
The Best-Laid Plans of Mice and Men
It’s Saturday. In the cold winter weather, the protesters are heading out to the protest site. This event is months in the making. When planning began in September, the group knew there would be the possibility of some of the protesters needing to post bail. Many of them have jobs, families and other responsibilities. No one can afford to remain in jail beyond the weekend.
The police may keep someone in jail, but they have the right to post bail immediately. Many people arrested at protests are never charged and are released without going to court. If someone is never charged, they haven’t technically been arrested. The police department may choose to issue someone a certificate saying they were merely detained.
There is little chance that anyone will be charged with civil disobedience since the group isn’t planning to block an intersection or lie on the ground. In spite of this, the group plans to block the entrance to a private facility. It is possible that someone could be detained and arrested for disrupting the peace or failing to disperse.
The intention is that everyone will be back with their families no later than Sunday night, ready to take care of all their responsibilities come Monday.
It’s 2019 and We Still Have to Trust Bob
One person needed to be entrusted to stay behind with the bail funds. The group decided the best person for this task was Bob. Bob is trustworthy, methodical, and not easily intimidated when speaking to the police. He is a paralegal who works downtown for a corporate firm and knows the law. He was the best choice when the group considered who should be entrusted with the funds needed to bail out the protesters. A total of $10,000 was entrusted to Bob for this purpose.
Over the course of five hours, there was no conflict. With an hour left to go, it seemed like the protest would end without any struggle with the police. The planning and preparation around the group posting bail had been a necessary precaution, but thankfully one the group had not needed to rely upon. Bob is at work but will soon join up with the protesters at a local bar to celebrate their victory. That’s when he gets a text.
Things getting ugly here, we may need to end early.
Followed by another text:
I saw James with blood on his shirt. Maybe just a broken nose? They have him.
It was clear that Bob needed to head over to bail James out. It was just after 6:20 pm. Although the sun was setting, it was already dark enough that Bob needed to use his headlights to navigate his way across town. Two days prior, it had been unclear if the protest would need to be canceled on account of the weather. It had been very windy during the protest, but now the sky was occupied with dark clouds blocking out the remaining daylight.
Suddenly there was a heavy downpour of rain. Bob was considering the road conditions and wondered if he should just pull over and wait for it to subside. This was the last thing that Bob remembered before he woke up.
“Did you text Bob?” Alice asked, “Maybe something happened; he should be here by now.” It had been a few hours. Most of the protesters had already gone home but a few were waiting for Bob to show up and post bail for James.
Finally a call from Bob’s spouse. There was an accident. Bob is OK but he has a few broken ribs and is currently being monitored in the hospital for headaches. It seems like James will need to spend a night or two in jail until things can be sorted out.
The Way Nonprofits Hold Funds
Perhaps it would have been better if the group had formed a nonprofit with a joint checking account. If two or three officers were authorized to sign checks on behalf of the nonprofit then someone could have still posted bail for James while Bob was in the hospital.
Here is why this doesn’t make any sense:
- Typically, IRS 501(c)3 approval takes between 2 and 12 months
- Applying for 501(c)3 nonprofit status is a serious undertaking which requires the submission of several forms and can initially cost a few thousand dollars.
- The organization needs to maintain proper accounting standards.
- They may need to consult with a lawyer to see if the activities of the group impose any legal liability.
- If the group is actually underwriting any type of risk, they may need an insurance license. For example, the members contributing into a bail fund with the group’s implicit or explicit promise that funds will be used for the express purpose of posting bail for the members.
- The group may need to create a web portal so that the members can:
* Make payments
* See their contribution
* See the status of the group - They may need to integrate with an online payment provider such as stripe or similar.
The costs involved with incorporating these types of groups is several thousands of dollars, and they could potentially exceeds tens of thousands of dollars. What will the group do with the funds? If members are paying contributions with the guarantee that the group will provide indemnity for future risks then they need an insurance license. Before the group can begin to pool its funds, it must wait several months before it is granted status as a nonprofit.
The costs associated with regulatory compliance are substantial in both time and money.
No small groups can afford these huge up-front costs. This may mean that collective action by small groups is extremely limited because groups are required to entrust their funds to a single member. The result is that small groups are effectively denied access to the power of collectively pooling funds. Undeniably, that has prevented small groups from entering into collective agreements. Agreements that could empower the group to provide each other specialized types of mutual insurance coverage.
Innovative Breakthroughs in Technology
Innovative Breakthroughs in Communications
We have seen how technology has provided groups new ways to organize and communicate. Here are just a few examples:
- The Arab Spring enabled by apps such as Facebook
- The #metoo movement enabled by apps like Twitter
- 2014 Hong Kong protests enabled by decentralized apps like FireChat
Breakthroughs in technology have provided groups with new ways to share their ideas and coordinate their actions. If groups want to organize without pooling their financial resources, the technology we already have is sufficient for them to do so. If groups want to take collective action by pooling their money, how can they do it cheaply and efficiently? To lay the groundwork for joint custody of digital funds, financial technology has enabled innovations in payments and in crowdfunding.
Innovative Breakthroughs in Payments
The following excerpts from the Rubin Report’s interview of Peter Thiel show how Paypal used technology to revolutionize the world of payments:
Thiel (31:54): The big picture with PayPal was to revolutionize money and payments.
Rubin (5:00): What did you do … to [make people] understand that you could work with money differently? How did you train people to realize this is something that’s real?
This is where Peter points out that Paypal’s roots were grounded in the need for auctions such as Ebay to enable buyers to pay sellers via credit cards. Without credit cards, the only option was for users to transact via check. The payment friction of having to use checks resulted in delays in excess of one week.
Thiel (5:51): A natural place to start was on the eBay auction site where [there was a need to send] small dollar transactions. Maybe $40 was the typical amount. And if you send check across the country, that’s like a 7 to 10 day delay. This delay was because most people couldn’t process credit cards but you could make PayPal payments with a credit card.
Thiel (6:27): There was a 150 million people with emails in the US at the time, but there were maybe three million small businesses that were set up to process credit cards so we expanded the ability to process credit cards by 147 million.
Thiel (9:18): We had the sense that we were going to change the world and we were going to give people more control over their money. We had all these ideas about getting rid of central banks and creating a new currency. We never quite got to the Bitcoin stage of [development] but certainly these ideas were incredibly motivational in [creating PayPal].
Thiel (9:41): the PayPal hack was a way where we were going to change the world and we were not going to ask for permission. [it would just be] technology over politics.
Without Paypal providing a way for users to send money, Ebay was a very different experience.
Innovative Breakthroughs in Crowdfunding
On the back of Paypal came innovations such as P2P lending and fundraising. Paypal had blazed a path that allowed money to flow more easily between people on the internet. Initially, people were given greater ability to purchase things on Ebay. By 2008, P2P payments enabled people to crowdfund projects on sites such as Kickstarter. By 2010, P2P payments enabled people to crowdfund causes on sites such as GoFundMe.
Sites like GoFundMe automate away the burdensome bureaucratic process that was previously required for causes to raise funds. GoFundMe provides an umbrella framework for multiple communities to use them as a vehicle for nonprofit fundraising. This allows communities to raise funds with greater efficiency and lower costs.
Decentralized payments provided a path for groups to realize decentralized fundraising. We already have decentralized transport (Uber, Lyft), decentralized hospitality (Airbnb), and various examples of decentralized delivery. Why don’t we have a technology that could automate the creation of nonprofit entities? What is holding us back from using decentralization to bypass bureaucratic restrictions that prevent groups from pooling funds? Why can’t individuals use an app which allows them to form groups which then provide mutual insurance coverage?
Innovative Breakthroughs in Escrows?
The Internet and decentralized technology has provided us with the following categories of innovations:
- Communications enabling users to organize
- Payments enabling users to send money
- Lending enabling users to raise money and fund causes
It has yet to give us a way to enable groups to hold money. One of the most obvious use cases of such a technology would be mutual insurance cooperatives. TandaPay’s architecture enables this type of innovative breakthrough.
Without TandaPay allowing groups to hold money, organizing movements is a very different experience.
The next post will review exactly how TandaPay’s architecture enables this type of breakthrough. It will discuss the benefits and challenges of using decentralized technology to allow groups to take joint custody of funds.
