While cryptocurrency has established itself as an investment, maximising the positive impact of this limited resource remains a mystery.

 

 

The expression ‘there’s nothing new under the sun’ is one which is used quite a bit – for many reasons, including the fact that it’s true. Everything you can think of is essentially a variant on something that’s already been done before.

Going back to the 1600s, people used something called ‘tally sticks’: money was borrowed, and both borrower and lender got a piece of wood which was cracked – both got one side of the wood. When it was repaid, the borrower brought along his piece of wood and gave it back to the lender, and it was all settled. A tally stick was a physical validation that the transaction had taken place. 

Though more straightforward, this idea is, according to impact investing specialist Barry Palte, the same principle as blockchain. 

“An electronic repository of trust and validation, blockchain is a mechanism to independently validate something as what someone else says it is,” Palte says. “The core underlying technologies for cryptocurrency is blockchain, and everything a blockchain enables.

“Cryptocurrency is a unit of value; which is utilising that electronic repository. The basis for underpinning that cryptocurrency or any other type of asset really depends on what of value is underpinning it.”

 

Underpinning the value of…anything

The process of unpacking and demystifying cryptocurrency is an area of great interest to Palte, as he sees great potential in blockchain and cryptocurrency to bring about the same degree of social good as his investment strategies do.

“Some Central American governments are working with technology-based businesses to put their land titles on a blockchain system, critical for the whole economy,” he reflects. “It’s something we take for granted in Australia. In the Central American case, blockchain is enabling the electronic system to underpin property ownership – a fundamental issue.”

For Palte, Bitcoin is one application on top of the blockchain, underpinned by its scarcity. “It’s effectively a mathematical algorithm, which says that over time, there’s only so many Bitcoins that can ever be created; once you reach that figure, that’s it.” 

He says that when you compare that to the global currencies and current circumstances in financial markets, it’s almost a perfect proof point.  

“We have central banks printing money left, right and centre,” he says. “The value of currency is declining because you can just print more of it, compared to Bitcoin, for which there’s only so much. With a finite amount, there’s higher demand for it around the world.”

 

Endless potential

Every single asset in the world has, according to Palte, the potential ability to be securitised. 

“Go back to 2007-2008 and the GFC, and mortgages were securitised. You could potentially issue all sorts of cryptocurrencies backed by all sorts of things.” 

He noted that in a Harvard Business School presentation, electronic currency and everything behind it was regarded as the final missing component of the internet, ie; a real-time method of measuring and exchanging value.  

“We’ve yet to fully see the democratisation of the assessment of ‘value’. People were initially reluctant to use credit cards on the internet because it was seen as too risky. Then along came PayPal, which provided a centrally stored facility of information to enable payments to happen.  The team behind Bitcoin said it was all about libertarianism; that no organisation like a central bank, got to define how many bitcoins there could be.” 

The fact that the democratisation of ‘setting of value’ does not exist fully and is an information asymmetry. This means that professionals in financial markets who trade currency and for example say the Australian dollar is worth so many US cents, are in fact depriving the broader population of having a direct say in the value of that currency. 

“The libertarian promise has been the democratisation of the assessment of money and value.” 

“The technology behind Bitcoin could have some wonderful impacts. Eventually, all financial markets will be running off blockchain-enabled systems. It’s independent validation, like the Australian stock exchange essentially putting in blockchain-enabled systems to validate their technology.” 

 

Value changes, as do people’s fears

In the early days of cryptocurrencies, many thought these constructs were bordering on outright fraud. Regulators were concerned, feeling they were Ponzi schemes. This, to Palte, was justified, but now the technology can be used for greater, more noble ends.

“I’ve done quite a bit of work on a cryptocurrency backed by diamonds. There’s a company called EverLedger, a blockchain-enabled inventory repository of diamonds. People don’t want to buy blood diamonds coming from child slave labour. You could use blockchain to track each diamond from the moment it gets pulled out of the ground, all the way through to its purchase and placement in an engagement ring.” 

That is, what Palte labels a great social impact: being able to validate the diamond a consumer bought for their fiancé is not a blood diamond. 

 

The question remains as to how society gets to the point where the assessment of value around an investment incorporates explicit social impact metrics, and potentially is captured in a currency of investment. 

 

Another example is that, throughout the supply chain of food, consumers could track food through the chain to know that its use-by date is accurate, knowing that someone hasn’t gone and changed it. 

The question remains as to how society gets to the point where the assessment of value around an investment incorporates explicit social impact metrics, and potentially is captured in a currency of investment. 

This is the cornerstone of Palte’s investment ‘philosophy’.

“Investment shouldn’t just be about financial returns,” he says. “Just imagine if we had investors investing into projects where the value of the financial returns were balanced with an explicit mapping of the value of the social impact created.” 

“A group based out of Western Australia called Huber Social is about to get Australian standards certification to become a key standard for measuring social impact metrics. By creating a currency called ‘the Huber’, the value it holds will inextricably be tied to the value created for the community through the individual project. 

Palte’s ambition is for there to be a point when investors will assess investment opportunities on both their financial returns and social impact metrics. Not only to build their portfolios but have some impact at the same time. 

“We will co-invest with them in projects whose social impact have been explicitly measured and mapped, and captured in a currency like a Huber.” 

 

The potential for a greater good

Palte foresees the possibility of a currency or currencies created off the back of social impact measurements, where the social impact value becomes a tradable item.

“Governments, private investors want to show they’re actually very focused on reducing carbon emissions. Let us go buy some Hubers, which are backed by a carbon reduction project. 

“Then, if the democratised markets set the value of it, the purchaser of these Huber’s can see that if they buy it, they win.”  

It is Palte’s contention, as an industry leader in impact investing, that with the blockchain phenomenon exploding, investors, corporations and governments alike should be using the innovation unleashed by this phenomenon for the greater good, and not just for profit. 

 

 

 

 

 

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