Blockchain in a Post-Crisis Economy
Business & finance professor, digital lawyer, restaurant owner, board member & traveler.
Economies are in freefall. People are losing their jobs. Companies, large and small, are going out of business. Pension funds are taking a big hit. Consumer confidence is disappearing.
As the coronavirus affects more and more sectors, the obvious questions to ask are: What will the world look like after the crisis? How will we ever get back to normal? Are we facing a new economic and social reality?
For sure, nothing is certain. The only thing we do know is that with every extension of the lockdown, the call for a short-term rescue and, more importantly, long-term financial stimulus, gets louder.
Of course, health is the priority. But it would be a mistake not to think about the economic aftermath and recovery strategies as well.
“Re-Risking” the Economy
Economic rescue plans focus on saving small and medium-sized enterprises and protecting low-income and middle-class families and other persons without a financial cushion.
But governments shouldn’t only think about protecting people. They should also encourage them to take new risks. Over the last few decades, economic growth has been driven, in large part, by the innovators who “think different” and take a chance to launch a new business or support a new business. Risk-taking is a virtue that needs to be encouraged and appreciated.
My fear is that recent events will have a huge chilling effect on people’s willingness to be entrepreneurial. Think about it. Unlike the wars or natural disasters of the past, it will not be obvious when the coronavirus is “over.” The post-WWII economic boom — the “golden age” of capitalism — was kickstarted, in part, by a sense of optimism and hope that the war was over and the task of building a new world could begin.
A similar sense of hope seems difficult to imagine right now. Any illusions that things will immediately go back to normal quickly has disappeared as our political leaders and their scientific advisors warn us that some form of social distancing is here to stay for a long time. We will soon move into a transitional phase — a state of limbo — between emergency and normality.
Under such conditions, it is going to be difficult — but vital — to get people to start taking risks again.
And yet, we don’t have to start from scratch. There are some very interesting ideas out there.
From Protection and Paternalism to Empowerment and Re-Risking
Earlier this month, in a podcast
, angel investor Jason Calacanis came up with an interesting thought. He was discussing how to make “intelligent investment” decisions. I guess he meant, risky but smart, and he strongly believed we need to encourage this kind of behavior.
At one point during the show, he predicted that the “democratization of private company investing” is the future.
Today, everybody can put their money to work and invest directly or indirectly in companies whose shares are traded in public and open markets, such as NASDAQ and the New York Stock Exchange. You don’t have to be a professional investor or satisfy one or more requirements regarding income, net worth, or professional experience. Anyone can go online and buy shares in publicly listed companies.
But this isn’t sufficient if we want to rebuild the economy. Even if you believe that stock markets are going to rebound in the post-coronavirus economy, it will still be challenging for the general public, including individual and retail investors, to make money in these public markets.
Entrepreneur and investor Naval Ravikant described the problem in September 2019 as follows
“By the time a company goes public, you can bet anybody with connections, an appetite, investing skills, and capital got a bite at it. So, if you’re investing in a tech company’s initial public offering (IPO), you are literally last in line. That’s not to say you can’t make money — but the odds are lower because the fruit has been picked over many times.”
Investing in younger, private companies (whose shares aren’t publicly traded) can be much more lucrative. Even small investments in private companies can lead to significant returns. A 200x or more return isn’t unheard of.
However, private company investing is only available to the so-called accredited investors. Institutional investors, DLD (doctors, lawyers, dentists) investors, and other wealthy investors who meet the restrictive investment requirements. These legal rules and regulations are designed to protect the less wealthy by not letting them take any risk in less transparent private markets.
This seems wrong. Yes, equity-based crowdfunding initiatives allow investors to place bets and buy into private companies, regardless of their net worth or income. But the investment opportunities are still limited and subject to regulatory restrictions. If we want to rebuild the economy in the post-coronavirus world, we have to create more equal opportunities for prosperity and wealth for everybody. Allowing both accredited and non-accredited investors to invest and trade in private companies can bolster and empower the low-income and middle classes and help to re-risk the economy.
Of course, making bets in the private markets is risky and not every investment will be successful. Yet, we should realize that non-accredited investors may very well be “sophisticated” and not in need of protection. At least, for certain types of investments. They may have the skills and experience to make excellent investment decisions in fast-growing start-up companies at a relatively early stage.
Think of nurses who want to invest in a health tech company that offers services to hospitals. They have the skills, experience, and know-how necessary to understand the innovation. They certainly have more insight than the average non-healthcare workers or wealthy-but-less-knowledgeable investors.
A private company investment course might arguably make them even more sophisticated investors who are able to take “intelligent risks.”
Other examples are teachers who want to invest in an ed-tech company. Cooks who are interested in investing in food-tech. Also, wouldn’t it be great if legal secretaries or paralegals are allowed to invest an amount of their monthly income in a LegalTech start-up. Again, a relatively small amount would do the trick. The risk would then be relatively low, but the returns could be significant. And such investments would provide capital for new companies and founders that might otherwise not receive funding.
“New” Opportunities for an “Old” Technology
And this is where blockchain comes in. The blockchain was one of the top tech trends for 2017/18. Conferences. Workshops. Seminars. Blockchain was hot and attracted attention from governments, businesses, capital markets, and researchers. There wasn’t a problem that blockchain and its related technologies couldn’t solve.
A natural reaction to all the hype is fatigue. “Aren’t we all just fed up hearing about Bitcoin and Ethereum?” — as Scott Galloway wrote in his blog
post of April 17, 2020.
I think we all understand this sentiment.
By 2019, the hype slowed down, but the interest never disappeared.
Many of the earlier blockchain initiatives hoped to start a revolution. The idea was to challenge or disrupt existing centralized institutions and systems. This was ideological and political — a “blockchain revolution.”
Take the first decentralized autonomous organization (The DAO) that launched in 2016. This was a blockchain based effort to organize a new style company — a “software-run” corporation without managers, without a CEO or directors. While this project had the noble goal of introducing more radical forms of democracy and equality into corporate systems, it now seems overly naïve to believe that decentralized technology could ignore two hundred years of economic history and change the world.
But things may be different now. Solutions that leverage blockchain technology in more modest, yet practical ways, have the potential to become useful in the coronavirus world.
Last week, I participated in one of the biggest online blockchain conferences. We already see an increase in blockchain projects that are designed to provide more transparency and trust in healthcare and drug supply chains. Existing blockchain projects are being rebranded to help distinguish between reliable information and fake COVID-19 news. Blockchain-enabled technology is being introduced to securely store virus data and keep track of patients (while respecting their privacy).
Also, blockchains and smart contacts can be instrumental in the development of vibrant and sustainable markets for private company investments.
The idea of introducing blockchain technology to stimulate investments in private companies isn’t new. Distributed ledgers that hold a full record of the ownership and transaction history of the securities build trust in the private market and help streamline the investment process.
Introducing a blockchain-based trading and settlement infrastructure makes sense in the underdeveloped markets for private company shares. These markets aren’t captured by the centralized, server-based clearing and settlement platforms (which are the status quo in the established public and open markets).
The use of smart contracts (computer protocols) can further automate the investments and trade of private company shares without the need for intermediaries, thereby significantly reducing time, costs, and error.
The problem with the current approaches is that they focus on programming existing compliance rules into smart contract protocols, ensuring that only accredited investors can invest in private companies.
But in a post-coronavirus world, we will need to change the conversation and re-risk the economy. Blockchain technology and smart contracts have the potential to optimize the investment rules and regulations regarding private company investing. When we program the possibility of “intelligent risk-taking” by everybody (both accredited and traditionally non-credited investors) into the computer protocols for private company investments, we not only disintermediate the investment and trading process, we also create more liquidity in the market (making the risk-taking more intelligent in aggregate).
Smart contract protocols might then contain requirements regarding the obligation to follow an investment course (only “sophisticated” investors are allowed to buy into a private company). We can also think of other investment restrictions. For instance, non-accredited, but sophisticated individual investors can only invest in certain sectors (dependent on their expertise), Or investments are restricted to certain types of company or locations).
The economic downfall forces us to re-risk the economy. And, blockchain technology has the potential to play an essential role in building the next reality. It may not be the revolution envisaged by the blockchain evangelists of 2017/18, but it could still prove enormously significant in the post-virus recovery.
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