A blockchain use case: Unlocking ‘Dead Capital’

Dead capital is made up of assets that are not recognized in the financial economy. It is an economic term used to describe property which has no legal recognition.

It is a world where the ownership of assets is difficult to trace
and validate. It is governed by no legally recognizable set of
rules; where the assets’ potentially useful economic attributes
have not been described or organized; where they cannot be used
to obtain surplus value through multiple transactions because
their unfixed nature and uncertainty leave too much room for
misunderstanding, faulty recollection and reversal of agreement.
Where most assets, in short, are dead capital.

Hernando De Soto, The Mystery of Capital

Agriculture is not just a food-producing industry. It is the backbone of the
rural livelihood system and a major source of employment. Moreover, smallholder farmers fill the major share of the global food production.

But, many rural farmers may not even have a savings account. They are located in remote areas and are not high income earners. Banks find it inconvenient and costly to provide services to those unbanked.

When they are denied financing to fund better fertilizer and higher grade grains, for example, they loose the opportunity to lift them out of poverty. This is the cost for not being creditworthy according to the financial economy.

The unbanked may not be poor. They have informal assets that can’t be formalized such as land title deeds and cows.

According cgap.org (A global partnership of more than 30 leading development organizations that works to advance the lives of poor people through financial inclusion.) one of the primary barriers to private-sector credit to smallholders is the lack of physical collateral – the economic value of their physical asset such as livestock is not recognized as ‘capital’ in the financial economy. The problem of ‘dead capital’ leaves the smallholders in an unfortunate position of low financial capability.

In addition to that, not having credit history, employment histroy and identity verification makes the creditors find them untrustworthy and uncreditworthy.

The use of blockchain as a secure, immutable, public and verifiable data store could provide solutions to these problems.

One of the solutions is to transform livestock from ‘dead capital’ to a fungible asset with transparent and clearly defined value. This could be done by tagging NFC chip on cows that carry the data of each cow which is recorded on the blockchain. So now, the cows are verifiable assets of the farmer. The farmers ownership data and the assets he owns are securely stored and made available on the blockchain.

This solves the problem of identity verification and provenance or prove of ownership. But, this won’t be adequate to convince the banks. What is required now is a third party in the form of insurance provider. The role of the insurance provider is to actually verify and acknowledge the data on the blockchain and provide valuation of the assets.

When the assets have their valuation and insured, the insurance data will be available to banks. So, the banks could create collaterals and would be willing to provide loans. Now, the ‘dead capital’ is unlocked and gains legal recognition in the financial economy where the unbanked get a chance to connect to the liquidity pool of financial players.

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