It was just under a year ago that the blockchain really came to the fore among promising new technologies. Startups working in this area are showing plenty of creativity as they seek to extend its field of application beyond financial services. Some even argue that the blockchain will provide a means of driving overall economic growth in developing countries.

Blockchain: In Search of Lost Capital

In 2000, Peruvian economist Hernando de Soto published his iconic work The Mystery of Capital. His thesis runs contrary to traditional thinking as regards the wealth gap between the OECD states and developing countries. One telling remark from the book is that “the poor have houses but no title deeds; land and crops, but no land registry; companies, but no legal status.”  Thus de Soto argues that the key to development is not just about basic economics or cultural and social factors, it is largely a legal question – i.e. about having a mechanism that enables people to demonstrate their title to the wealth they possess.

Couverture de l'ouvrage d'Hernando de Soto, Le Mystère du Capital

So how can this transition be brought about? Writing some sixteen years ago, de Soto sketched some broad outlines, but was unable to suggest a really effective tool. What if the tool we have been waiting for is called the blockchain?

The great blockchain ledger

The great blockchain book is now open. In principle, anyone can write in it. Unlike traditional books however, the blockchain is in reality a whole series of books, which are to be found all over the world. The content is not fixed, but increases over time in a simultaneous and coordinated way. The advantage of shared information is that it is more secure against fraud than information held by a single person.  

The blockchain, in other words, is a vast ledger in which all the transactions that pass through its system over time are recorded. A ‘transaction’ may be a flow of funds, but the word can also refer to valuable consideration such as a title deed. In fact the full range of ‘items’ which can be registered in the blockchain is huge and is increasing on a daily basis.  L’Atelier has already published a number of articles on the subject – click here to view them.

A data recording venture

Factom is an Austin, Texas-based startup that did not even exist two years ago, but which is now starting to make a name for itself in the blockchain world. However, Factom is positioning itself rather differently from its peers.

 “Most startups in the blockchain ecosystem have been focusing on a single issue – how to transfer money faster between two entities,” points out Factom Chief Marketing Officer Tiana Laurence, explaining: “Factom didn’t want to get into that competitive game. We reckoned that this issue would be solved by someone other than ourselves.”

So Factom decided to use the blockchain to record data. From a purely technological viewpoint the company uses its own network, but is also able to integrate into blockchain networks used by Bitcoin and Ethereum, another startup working in the same field.

Factom offers its registration service to commercial companies and also to government departments. Tiana Laurence explains that “a lack of reliable databases, plus corruption” are among the problems to be overcome in order to help people out of poverty. Without proper ownership title to his/her property, a person living in a developing country is always faced with the threat of expropriation. If you do not have legal proof that the assets in question belong to you, you cannot take out a bank loan to finance a business or even buy professional insurance.

It is against this background of legal uncertainty that Factom started working with the authorities in Honduras on a project to register in the permanent and immutable system that is the blockchain all land titles and deed transfers pertaining to a huge smart city currently under construction. The technology is seen as an infallible means of combating falsification of official documents and fighting corruption.  The potential consequences of this ground-breaking project are enormous.

Making invisible capital visible

Hernando de Soto’s stated aim is to make visible the assets and the capital that people in developing countries already own. But the Peruvian economist is also a pragmatist. He is not looking to change reality on the ground but he wants to see these countries amend their legislative systems so as to legalise ‘the grey economy’.

So, in practical terms, what should be done? Should officials be dispatched to a given area, notebook in hand, to officialise property titles, land registry documents and other assets owned by the local people? And even if the authorities did decide to carry out this kind of campaign, how could everyone be sure that the information had not been corrupted before, during or after registration?

The opening up of the countries of the former Soviet Union to the world economy in the 1990s, following the fall of the Berlin Wall, provides us with a telling case study. There was widespread corruption and racketeering. State assets were sold off to cronies at knock-down prices. The economies of these countries all suffered badly from the initial wave of unrestrained capitalism.

Image d'une favela à Rio de Janeiro au Brésil

Technology such as the system being developed by Factom cannot of course solve all these issues. However, the Texan company is able to guarantee that a title registered in the blockchain constitutes inviolable proof of ownership, although the validity of the property title still ultimately remains a matter of government policy.
In fact the initiative that Factom is hoping to undertake in Honduras steers clear of this issue. The aim is to register property title deeds – and, in the longer term, property transfer documents – for the new houses of the smart city which is being built. Given that Factom’s approach will enable registration of ownership from the very beginning of the chain, the issue of information validity should never arise.

First chapter in a long success story?

What Factom is hoping to achieve in Honduras is only the first step in what looks to be a promising initiative. The company is also working with Chinese officials and the technology consulting firm iSoftStone to develop blockchain applications for smart cities in China.

One could also see the advantages of this kind of tech company linking up with financial institutions in order to extend its range of products and services. Reading de Soto’s book helps us understand that registering property ownership is only a first step on the road to widening prosperity. Once assets have been registered they can be exchanged, they become liquid capital. This capital then becomes visible to financial institutions – banks, micro-loan providers etc. – which can then open up their range of products to areas of the population that were previously excluded from such services. Another telling example from Hernand de Soto: in the United States, in 2000's, “close to 70% of all loans granted to companies were secured using property title deeds as collateral.

Finally, those who entertain serious doubts about the benefits of expanding the reach of capitalism still further might be interested in another telling quote from de Soto’s ‘The Mystery of Capital’: I am not a die-hard capitalist. I do not view capitalism as a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal opportunity. But for the moment, to achieve those goals, capitalism is the only game in town. It is the only system we know that provides us with the tools required to create massive surplus value.”

By Pierre Pariente
Strategic Analyst chez L'Atelier BNP Paribas