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February 23, 2022 |
Can Blockchain Help Alleviate Poverty? Part 1.
Defining a Broader Purpose for Blockchain
A significant question
I recently helped organize an event called the Intersection of Artificial Intelligence (AI) and Blockchain. During one of the sessions, I met Frank Martinez, co-founder of BlockXStudio, a company that provides Blockchain engineering services.
During our conversation, Frank posed an important question:
“How can blockchain and crypto improve the lives of people living in poverty?”
Clearly, poverty is an overtly complex problem with many intertangled causations.
Blockchain itself will not cure poverty, but I wondered - could it alleviate it?
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The challenge and a potential solution
Our world is configured to bestow trust to people who have money.
It is well documented that there is a poverty tax in America which disproportionately impacts people of color. Low income citizens are often:
- Deemed untrustworthy borrowers simply because they lack resources.
- Forced to pay higher rates for finance and loans due to meager credit or the inability to establish credit.
A potential bridge to the poverty tax gap is to allow people the ability to appeal to alternative credit if they don’t qualify for credit under traditional credit systems.
Blockchain can be utilized to create alternative credit systems. These systems allow the opportunity to extend credit based on data other than what is used by traditional credit rating agencies. Instead of power belonging to one single decision maker or group, such as a traditional credit rating agency, Blockchain requires collaboration from different but legitimate and trustworthy sources of creditworthiness data, with radical transparency.
Bad credit or no credit can be seen as the inability to build trust. It is in building trust where blockchain’s potential shines.
What is alternative credit?
Currently, data is collected to substantiate credit. Artificial intelligence (AI) is applied to discern patterns of risk. When the bank locks a credit card due to a fraud threat, their AI is at work determining that there is an uncharacteristic purchase. In general, companies, such as banks, already make use of data sources other than credit rating agencies to evaluate risk and trustworthiness.
Things get particularly interesting when defining what data is used to establish credit and expanding on what is current practice.
In 2019, top U.S. regulators approved the use of alternative data to establish and improve credit ratings including:
- The Federal Reserve
- CFPB
- FDIC
- OCC
- NCUA
The idea was to expand on the use of income and credit history as the sole determiners of a person’s creditworthiness.
The approved alternative data did not include social data, but focused on financial data such as a person’s track record on paying utility bills. However, there has been a push to use social data to create alternative credit scores. In fact, China implemented a social credit system nationally and Facebook patented a similar approach in the United States.
While social data does not currently have regulatory approval for the use of credit establishment, the prospect illustrates what is possible.
“Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.”
Blockchain’s potential
Combining social data and other sources on a blockchain allows for the establishment of alternative credit data, which can be converted into alternative credit scores.
Several fintech companies such as Colendi are currently trying to build blockchain protocols in this space and I believe more companies should continue to do this work.
As James Baldwin famously said,
“Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.”
The cycle of poverty is perpetuated as we repeat the same systems of credit assessment and resource distribution.
This is what we need to consider as we work on solutions. Click here to read Part 2!
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