A peculiar aspect of crypto has been the speed at which it has evolved, the polarised discussions around it and the incredible slowness of regulations as well as policy in contrast. It has also gone into pathways not originally envisaged. The dominant narrative about programmatic money remains centred on stablecoins at the moment. All this is likely to happen-or not. There are any number of trials occurring across the world and some leading markets are putting together regulatory frameworks. But as discussions evolve, the commercial breadcrumbs are creating trails familiar to fintech veterans. How do we ensure that programmatic money can be deployed at scale into community financial systems to catalyze equitable economic growth?
I would like to propose we need to focus on smart contracts and predictive programming. Let us focus less on the protocol, which would lead us down our favourite rabbit hole where many of us have sheltered for years. Instead, let’s go into the sunlight and create prosperity. Why smart contracts and what will these do? At a customer level, the argument is simple. A small business owner is looking for a loan. He/she downloads an app and queries for that. The particulars of the customer lead to a loan offering being packaged. This happens after the SME application(the query) and accompanying documents/claims(KYB) are processed. That step is followed by decisioning, with accompanying underwriting conditions. This is predictive programming. The lender has decided to give a line of credit to a small business based partly on it’s historical track but essentially depends upon the signals for the future. That signal is created through machine learning algorithms at the back-office. The more data available to the lender, the richer the outcome. We will come back to data later. We propose a different approach to the lending process now. Instead of a standard digital agreement being generated, a smart contract is created Now, when an offer is made and the customer wants to accept, he/she presses a button on the app. That leads to the borrower signing on the smart contract. The lender signs and it’s done. The money is in the bank. It comes with conditions attached, written into the contract. All eyes can see the same thing. The process overheads for audits and compliance are cut significantly.
But lets pause for second. As a community bank, you have immense historical knowledge about who wants what. Let us make it encoded and scaleable. If Mr Rodrigues is one of 300 business owners who may look for a loan to expand business, you should get a sense in advance. Your loan officers’ inputs and your data (not limited to credit scores) will talk to you. We will make it algorithmic. Let’s start building loan portfolios well in advance. On the basis of data and the trails it takes us to.
Where can we go with tokenization from here? As far as we want. The important qualifiers are the policy design of the regulator, the legislative guardrails and the on-off ramps. Tokenization of collateral(land, produce, properties, other assets) can create interesting scenarios. Asset owners can fractionalize what they own. Some can be used for collateral and others liquidated through sales. Integration of predictive pricing in real-time, based on data available, can add a significant offer dimension to these. When tokens become potential collateral (for secured loans)or assessable metrics for deciding on credit (unsecured loans) and the value of these tokens can be indexed( as input variables see change in values), we can shape a dynamic financing market. Given the nature of weather(a key variable) and the fluctuations in global trade(another key variable), this helps borrowers and lenders create flexibility and opportunity using real-time insights and predictability.
Read more on Finextra Research
