I believe people are happiest when they have access to the things they need or want. This is purchasing power and it’s what credit provides. Credit becomes debt when someone borrows. Today, we live in a world of over indebtedness and debt can be crippling when the money borrowed is used in unproductive ways.
Lenders gauge a borrower’s ability to repay debt by looking at his/her assets and expected future earnings. The largest reason for consumer default is loss of employment, which changes someone’s earnings. When income is consumed by existing debt service, especially for those without a job, it can feel like you are drowning. But not all debt is bad. Debt can be empowering.
Credit and debt have changed a lot over the years. In the post-World War II period, the widespread adoption of mortgage credit helped spur economic growth and led to the “American Dream” of home ownership. Credit cards, which really took off in the late 80s, made transacting easier and safer. More recently, financial innovation, central bank intervention and online P2P networks have sustained reasonably high levels of access to credit.
Through catchy jingles and offers of free services, the consumer, over the last decade, has learned to revere the mighty credit score. Now we’re all convinced that our financial freedom can be boiled down to this three digit number. Before 1995, this number had little meaning to anyone other than a bank’s loan officer.
Today, it’s different. A credit score is now something we anxiously monitor and worry about. Why? Because everyone borrows and everyone wants to maintain the ability to borrow. Screw up your credit score and you could end up living in your mom’s basement, driving a clunker of a car, or working as a pirate in a fish restaurant! (so the jingle goes…)
Blockchain, however, will change the credit landscape. Blockchain technology is driving the next evolution of consumer credit and the implications are going to be far more meaningful and widespread than prior financial innovations. Future lending decisions are going to be shifting away from credit analysis and moving heavily towards asset analysis. I see a future where people worry less about their credit score and spend more time recording and monetizing the assets they already have.
Blockchain companies will pioneer this change. In a similar way to how Uber made it possible to monetize your car, blockchains will enable you to monetization an ever increasing universe of assets.
In the not too distant future, ownership of all assets will be recorded and transferred on various blockchains. The increased recognition of personal assets, at a low cost and in a secure and immutable way, will offer consumers true financial freedom. We will be able to store and transfer energy credits, computation credits, reputation, and anything else you can think of on blockchains.
Credit scores will continue to play a role in helping banks determine the creditworthiness of borrowers for unsecured loans, but today’s narrow banking definition of an asset is undergoing a radical change. This is going to lead to much more secured, low cost credit availability - the empowering kind of credit. The kind that doesn’t steal from the future.
Ultimately, what we are talking about is providing a new source of money creation. Through blockchains, we can create a system that gives value to previously latent capital, “unlocking” the wealth of physical and social assets. Imagine a loan backed by your computer’s processing power, or collateralized by your reputation.
What would you program your money to do, if you could program it to do anything? It’s the Genie’s three wishes scenario. My first wish is always for more wishes. Can we program our digital assets to make them more productive, to allow for greater purchasing power? The credit market for digital assets is in its infancy, but I for one am excited about the opportunities ahead.
About Me:
I am an executive at SALT, a FinTech startup that is developing the blockchain-backed loan market. My background is in structured credit and I have over a decade of experience in capital markets, working at two multi-billion dollar hedge funds. I graduated from the Vanderbilt University School of Engineering. You can follow me on Twitter @GregoryLBell