The reason is simple: access to finance is essential for an economy and, therefore, a key determinant of its productivity and economic growth. The problem is that the financing of productive activities, particularly small- and medium-sized enterprises (SMEs), can be jeopardized by issues related to the quality of information and contract execution, which hinder the tasks of credit selection, monitoring and asset recovery.
This, in turn, drives up financing costs and sometimes it makes financing inviable. This problem is particularly prevalent in Latin America and the Caribbean, where it’s critical development challenge that needs to be solved.
It is thus not surprising that over two years ago we got very intrigued, and eventually rather enthusiastic, about the potential of blockchain to address these problems. We became the first among multilateral development institutions to entertain the idea that if there was one strategic use case worth piloting, it was blockchain for asset registries.
Importantly, though, we were not restricting our thoughts to land registries. These class of registries have been one of the most discussed applications, but they face severe challenges in our region given the particular nature of that specific asset and the registry: blockchain cannot not solve the “original owner” problem should disputes arise.
We refer here to a broader class of assets, such as moveable assets, warehouse receipts, invoices, etc., that could be used as collateral to access finance but remain largely untapped because their registries are untrusted and costly to operate, the information is difficult to verify and are prone to fraud.
At a conceptual level, it is not difficult to see why the properties of blockchain make it particularly suitable candidate for the task of maintaining a collateral or asset registry:
- The system is resilient, without a single point of failure or corruption
- Cryptographic proofs provide integrity to the information contained in the ledger
- The information is traceable and auditable, thereby providing enhanced transparency.
Moreover, smart contracts can further contribute to the efficiency of asset registries by allowing automatic execution of pledged collateral or its automatic un-pledge and re-pledge. These properties can dramatically decrease the costs associated with collateral management and improve efficiency.
The premise then, seemed clear: More transparent and more efficient registries of assets pledged as collateral could diminish constraints rooted in information asymmetries and thus facilitate access to finance.
In other words, if blockchain could facilitate more accurate and trusted information regarding borrowers and contract execution, there would be many more SMEs in the economy that could access credit. This quickly evolved into a project with a vision: support the development of a foundation for a public, open-source infrastructure for asset registries using blockchain designed to support different applications for different type of assets, and implement a pilot to test it.
What ensued was a journey that, frankly, was very similar to the famous Gartner hype cycle in the sense that while we began intrigued, we quickly got very excited and eventually a bit disillusioned.
The certification problem
There were different drivers that took us to the “trough of disillusionment,” continuing with the analogy.
First, the avalanche of positive news that started in mid-2016 regarding the successful use of blockchain in different applications contributed to our inflated expectations.
But, we soon discovered that this news mostly referred to proof-of-concepts that were far from being piloted in real life, let alone in production. While this did not affect our intention to continue with the project, it showed us that there were not that many precedents we could built on.
Second, during the process of actually designing the project, we started to realize that the devil is in the details, and that very few people were talking about these details. For instance, the “garbage in-garbage out” problem is not easy to solve. The objective is to have more trusted and transparent asset registries, but it all depends on whether the initial information registered is correct or has not been altered…