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May 30, 2018

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Allocating to Impact Investments - how this looks in reality

November 2, 2018

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Why Blockchain can cause real change for impact investing

December 16, 2017

 

So, Blockchain. I'm sure you have all heard a million different excited/sceptical/wild claims on this amidst the whole crypto hype of the year, BUT!

 

The potential for blockchain in impact investing is real. I have zero interest in claiming expertise in this area, but given the lack of a real, entry level discussion on this topic, here goes - 

 

Blockchain is a distributed ledger for information that cannot be copied or corrupted - thereby creating transparency and accountability - but for no fees!! Obviously, there have also been lots of discussion on the environmental impact of mining coins, so real costs are underestimated, but let's just talk theory first:

 

>> Can cryptocurrencies benefit the needy?

 

When discussing cryptocurrencies such as bitcoin, what we are talking about is replacing the need for an institutionalised banking system (from Central Banks to bank branches) because the ledger keeps a record of everywhere the coin goes. This might seem overly nihilistic to us in developed markets, but in some emerging or frontier markets, IF a stable, globally accepted, transaction-friendly cryptocurrency emerges, this could have significant value preservation implications for bottom-of-pyramid (BOP) populations with no access to trusted financial institutions.

 

Additionally, all data can be shared and monitored through blockchain. This is not restricted to the storage of value (bitcoin), but also things like birth certificates, proof of address etc. Coming up with a cost-effective way to get everyone registered would have huge implications for public social welfare systems.

 

But both of these are longer term macro ideas. So -

 

>> Facilitating impact investing deals

 

Focusing on impact investing, the implications are still enormous:

  • Following on from the "all data" point - this includes trackable data, such as attendance - an ex-convict showing up to work on time every day, a child in rural villages attending school - with digital & GPS technology becoming so much more affordable, the ability to generate incorruptible data records would vastly reduce the maintenance costs of impact measurement.

  • Initial Coin Offerings (ICOs). Fundraising through ICOs improve liquidity and value of private investments, thereby improving the overall risk profile. 

  • Combining these two - when you then link the value of coins to KPIs that are tracked by the coins, you can quite easily structure a Pay-for-Success model that would not be costly to maintain. The Holy Grail!!

An example. You have a Pay-for-Success social impact bond that aims to get children to stay in school. You have lined up a private investor to pay for the costs for running the programme, and a guarantee from the government that they would issue a cost-plus return to the investor subject to project KPIs being met - say, keeping 100 kids in school for 1 full academic year. You give each child a tag that they use to beep in and out of school (and maybe CCTV monitoring to discourage fraud), and this data is immediately stored and reviewed. At the end of the year, the government buys back relevant coins at a predetermined price. Once the initial setup costs are done, the whole system basically maintains itself - a dramatic improvement from current standards.

 

To conclude - whenever we have a radically new and versatile technology, initial applications may always underwhelm. Remember when all we had was AOL and Yahoo? What is clear, even now, is that the longer term implications of global transparency and accountability are huge.

 

Have I missed something? PLEASE let me know!

 

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