Blockchain Revolution

Microfinance: Peer-to-Peer Aid with Picopayments
Microfinance is an industry that transcends both financial services and development
aid. Rather than delivering aid from the top down, microfinance institutions (MFIs)
try to empower individuals to save, invest, and build small businesses. More often
than not, they take the form of communal savings co-ops, where members of the
community come together to pool their funds and loan them out to one another for
short-term needs. When implemented and managed properly, microfinance outfits can
deliver a real benefit to struggling communities: they reduce chronic hunger, increase
savings and investment, and in many cases empower women.
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However, there are some problems with MFIs today: First, there is very little
oversight into how they are run and occasionally they enable predatory loans and
coercive loan recovery methods, straining communities and adding to their
desperation. Second, in light of this, governments in developing countries have found
that the best way to curb bad behavior is to outlaw or severely restrict MFIs
altogether, as was the case in India in 2010, following an MFI controversy.
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Third,
funds don’t always end up in the right hands. There is no way to ensure that the
community member who needs the money the most receives it. Fourth, they are still
largely regional, limiting both funds and also opportunity to invest and save.
So, people who are working on poverty will ask themselves, where does the
blockchain fit in the mix of tools? How can it improve on what we’re doing?
First, it will improve administrative accountability. As with corporate
transparency, donors will be similarly attracted to any nonprofit outfit that uses the
blockchain for greater transparency and accountability. Additionally, if microloans are
recorded to the blockchain and customers of an MFI are granted permission to access
them, then they can hold those outfits more accountable for bad behavior. What
would-be borrower or saver would choose the opaque and murky when she can
choose the open?
Second, it can mean better protection of women and children. Through smart
contracts, funds can be donated into escrow accounts, accessible only by women, say,
for accessing food, feminine products, health care, and other essentials. The men can’t
take it out of their hands to buy cigarettes or booze, or to gamble, which can be a
persistent problem with money from savings or microfinance.
Third, it will enable people to source funds and opportunity worldwide, and will
attract donors worldwide. Communities are typically limited by geography in which
MFI they use. In the future, a would-be borrower could go online and source the best
bids from a number of potential lenders, finding the one with the best rates, terms, and
reputation. Formal MFIs will continue to exist, of course, but there will be easier
ways to connect peers through blockchain that will make them less necessary.

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Finally, blockchain payment rails, such as bitcoin, are basically tailor-made for
small, disenfranchised borrowers by enabling tiny payments (picopayments, we call
them) and by dropping costs close to zero. In a world where every penny counts, users
should be able to pay back loans, withdraw funds, and save in tiny increments, all of
which was far more challenging in a preblockchain world. They should also be able to
do it instantly and efficiently, given that despite abject poverty in many parts of the
world, cell phone penetration and Internet connectivity are becoming commoditized.