Scaling Impact Investing Using Blockchain Technology
There are over 1,340 organizations worldwide that manage more than $500 billion in related assets
Impact investing, the channeling of investments towards socio-environmental initiatives, has seen considerable growth over the last few years. The asset class has been on the rise globally and offers a legitimate and pragmatic way to address pressing social and environmental causes. According to the Global Impact Investing Network, there are over 1,340 organizations worldwide that manage more than $500 billion in related assets in the present day.
However, even though it holds much promise as a means to solve real world problems and improve the quality of life in underdeveloped regions, there are fundamental challenges holding back this asset class from gaining mainstream adoption. Key barriers to adoption are keeping legitimate financial and regulatory institutions from recognizing the true potential of impact investing.
Most opportunities empower socio-environmental causes in developing or underdeveloped nations where typically there are no standards and norms to regulate this sector. This creates transparency challenges for investors who lack visibility into how their patient capital is being used (or potentially misused).
Additionally, limited access to investment opportunities, few innovative institutional-grade products and low-liquidity with virtually no secondary market has resulted in market participants failing to see impact investing as a genuine way to generate meaningful financial ROI and promote sustainable growth of social enterprises.
Meanwhile, blockchain, a cryptographic ledger comprising of a digital log of transactions shared across a public or private network, has emerged as a transformative force in mainstream finance. The native digital technology that powers cryptocurrencies and is lending itself to use cases for digital transformation across industries, offers exciting opportunities for impact capital too. With new models and emerging ecosystem approaches, distributed ledger technology could allow impact investing to become a promising asset class, attracting many conventional investors and social enterprises alike.
Decentralization Drives Trust and Transparency
The basic premise of a blockchain network lies in its decentralized model. In such a network, trust is democratized and becomes an equally shared responsibility among all participating nodes or members. The concept of a powerful, centralized, controlling authority can be done away with, allowing for new community-based consensus models with control handed back to individual users.
In the world of impact investing, this benefit is of the essence, where trust and transparency are among the key challenges that withhold mainstream acceptance of investing in socio-environmental initiatives. Blockchain-enabled impact investing systems can democratize trust and ensure complete transparency in each and every transaction performed within the network—be it in receiving funds, managing them or tracking how these funds are utilized. Every transaction made is stored via immutable logs and all updates are visible across the network.
Automation Drives Down Transaction Time and Cost of Capital
In a decentralized ecosystem, such as one powered by a blockchain network, the elimination of middlemen can significantly reduce transaction time and associated service charges. This results in notable reduction in the overall cost of capital and allows more of the actual capital earmarked for investment to be used for the socio-environmental initiative it was intended for.
Tokenizing Impact Investment Vehicles for Wider Access
Tokenization, the process of issuing a blockchain-based “security” token that digitally represents a real world tradable asset, can considerably democratize impact investment opportunities. This will allow for easy scaling and make the asset class available to a much larger pool of conscious investors. Offering fractional ownership will allow for interested investors to put in micro, small or large sums of capital – as per their interest and risk appetite, and contribute as much or as little as they want towards funding socio-environmental initiatives that matter most to them. By issuing tokens, social impact ventures can gain access to a larger pool of capital, effectively manage costs and offer new institutional and retail investors a chance to actively participate via a transparent, secure and decentralized ecosystem.
Tokenizing impact assets can help create new innovative investment products, build adequate pools of liquidity and create vibrant secondary markets for this previously illiquid asset class—all factors that can immensely contribute to its mainstream adoption.
Flexible to Adapt to Regulatory Standards in Future
Blockchain-based networks when integrated with robust KYC-AML systems can be easily audited with information of all transactions stored in immutable, tamper-proof and encrypted logs. This can help all parties involved to meet compliance requirement/comply with relevant regulation. Even though most jurisdictions have not yet enforced any standards or regulations on socio-environmental initiatives, it is only a matter of time before governments begin to regulate this sector.
Emerging technologies like blockchain offer the promise of trust, transparency, and accountability to impact investments, along with bringing democratization and effective disintermediation to the world of patient capital. While it’s still early days, collaboration within the broader impact ecosystem can quickly bring blockchain-powered platforms and related marketplaces to the core along with the opportunity to significantly scale socio-environmental impact globally.
Floyd DCosta is Co-founder of Block Armour, a Mumbai- and Singapore-based startup focused on harnessing the potential of blockchain technology to counter growing cybersecurity challenges in a bold new way. Its flagship IoTArmour solution is designed explicitly to provide military-grade security for connected devices and critical infrastructure in the Internet of Things (IoT).