One of the ways blockchain technology functions as a disrupter of intermediaries can be seen through the lens of reputation. Within the developed economies citizens can spend their entire lives crafting a reputation that allows them to pursue lives that provide for themselves and their families. A desired reputation can be based on employment history, professional licenses, personal references, and a lack of negative interaction with law enforcement. A desired reputation can be an extremely fragile vehicle that, if altered in any way counter to our selected course, can have a profound impact on our lives and those around us. This is true for individuals, corporate entities, and even world capitals. In the book How Global Currencies Work: Past, Present and Future, the authors explain that throughout history reputation was a primary factor driving the rise of the financial centers of Florence, Venice, Genoa, Amsterdam, and Paris. Throughout this post I will refer to desired reputation rather than “good” or “bad” reputation. The dark website Silk Road, which provided users with access to drugs such as cocaine and heroin and documents such as forged passports, was able to flourish due to the pseudo-anonymous nature of its currency of choice bitcoin, and because of the reputation crafted by vendors who operated on the site. Purchasing an illegal substance over the Internet versus in person was revolutionary. Customers were no longer putting themselves in personal danger by meeting drug dealers and others in back alleys, and as long as customers took safeguards ensuring trouble-free delivery, the entire transaction could take place from the safety of the customer’s home. A reputation was established by the vendor based upon his/her reliability and quality of product. The following quote was taken from the highly recommended book by Nathaniel Popper, Digital Gold: “Silk Road provided a demonstration of how the market could work to keep an unpoliced community in check, even one where the members of the community went by screen names like nomad bloodbath, libertas, and drdeepwood.” Similar to Amazon, customers were asked to rank the service and product on a scale of 1 to 5; a bad review would sour a provider’s reputation and possibly destroy their entire business. Within this shadow economy a reputation deemed to be “bad” by the majority of society drives success.
To illustrate the rise and fall of a reputation on a corporate level, Wells Fargo’s recent public relations problem is a dramatic example. In 2010 as a result of the financial crisis, trust in banks dropped to an all-time low of 18% (Gallup Poll). Forbes reported in 2013 that Wells Fargo had made significant strides in improving its image with the general public; the company pointed to improved regulatory relationships, corporate social responsibility, and a formal code of ethics as a few of the reasons for the turnaround. (Forbes 2013). It was under this new “cultural” identity that in August 2017, Wells was forced to announce that 1.4 million additional fraudulently created accounts had been identified, bringing the total number of accounts created to improve internal business metrics up to 3.5 million. It was because of the growing population of fake accounts and the subsequent mishandling of the matter by Wells Fargo management that Fortune Magazine was compelled to publish an opinion piece, Why Wells Fargo Might Not Survive its Fake Accounts Scandal. (Fortune 2017). This episode highlighted the fragility of corporate reputation. In the past I’ve written about the way blockchain technology can assist in improving the allocation of humanitarian aid by tracking and accounting for international relief. It is certainly possible for the transparency facilitated by the application of blockchain technology to improve the way a firm’s reputation can be restored. The auditability of immutable transactions taking place within the blockchain will allow corporate entities to broadcast (authentically) the steps they have taken to preserve or even resurrect their reputation from the proverbial ashes.
A tarnished reputation for an established financial institution can have a greater detrimental impact on that entity than a severe economic downturn. Financial service institutions will go to great economic expense to protect their reputation from negative consequences in the eyes of the investing public.
In working with entities based within established economies and developing economies, I often reflect upon my time as a financial services compliance officer. The amount of expense dedicated to bringing my prior firm’s Latin American investor population up to US and European regulatory standards was significant, not to mention the strain our demands placed on long-term client relationships. The amount of capital invested in these large and cumbersome systems that would assist in reputation preservation is significant. A May 2016 survey of 800 financial institutions conducted by Thomson Reuters found that the average amount spent by financial firms on meeting their Know Your Customer (KYC)/Customer Due Diligence (CDD) compliance obligations was $60 million per year, with some spending as much as $500 million on KYC/CDD compliance alone. (Thomson Reuters Survey). If corporations, with their vast amounts of resources, are prone to the destructive nature of reputational failure, the impact to individuals can be just as toxic and perhaps even more devastating.
To center something as fragile as reputation around personal references that can be subjective and easily influenced and documentation that can be doctored or prone to counterfeit is reckless. Until now, technology did not lend itself to radically improving the safeguards around something as fragile as reputation. This is precisely why global-north-based financial institutions classify areas in the developing world as high-risk jurisdictions and, therefore, not economically feasible to pursue business opportunities. The inconvenience to the underlying investors in high-risk jurisdictions is profound. Take for example an investor living in the rural portion of Uruguay, where transportation to a major city is limited. The process of certifying the documentation attesting to the identity and preferred standing of these investors can be (to say the least) challenging. Because the financial institution considers that investor to be high-risk, not only is a voluminous amount of certified documentation required, but this process of validation must be repeated annually. One document considered to be out-of-standard can derail the entire vetting process and separate the investor from their funds indefinitely. Needless to say the process significantly frustrates the underlying investor and can tarnish the reputation of the financial institution and also has the potential to lead to civil action on the part of the investor against the financial institution.
I was recently approved for and received a new generation of identification that will eventually dismantle this cumbersome process of authenticating identity and reputation. The government of Estonia provided me with their e-Residency card (the photograph accompanying this piece is a photo of my card interacting with my laptop). When you’re approved to receive this card from the Estonian Government, you must submit copies of your passport and various documents as well as photographs that establish that you are who you say you are. The Estonian government will not send the card to a desired location; you must pick up the card in person either in Estonia or at the Estonian Embassy or Consulate of your choice in order for you to submit your biometric information and for the Estonian authorities to match you with the documentation you previously supplied. The card comes with a reader that can be inserted into your computer to interact with the software that must be downloaded in order to initiate activation. When this card is activated on my computer, I can interact seamlessly with the Estonian government around the opening and maintaining of my small business within Estonia. If the card is activated on my computer when I am corresponding with the Estonian government, I do not need an intermediary such as a notary to validate the information I am providing to the government.
My card activated on my computer while corresponding with the government provides the airtight verification required in order to conduct official government business. My identification and all transactions made using my card are and will be a permanent entry into the blockchain. My reputation (with positive and possibly negative attributes) will be recorded and preserved on the blockchain for relevant authorities to review with no questions surrounding its authenticity. It is precisely this model of identification authentication that will revolutionize the KYC/CDD process now taking place within high-risk jurisdictions and dramatically improve the capture and real-time update of personal information that will buttress the reputation of underlying investors, regardless of location.
Identification systems based upon the same principle as the Estonian e-Residency protocol will provide major US, European and Asian financial institutions with a way to filter out any potential clients who expose those entities to regulatory or reputational risk. You will notice that my Estonian identity card does not contain a photograph, as appearances displayed through photographs naturally change over time or are unnaturally manipulated, not to mention the subjectivity involved in the photographic analysis. The biometric information I provided to the Estonian government at the point of pick-up provides a much more secure level of authentication, and as the collection of biometric data improves over time, photographs as a source of authentication could become a novelty of the past.
I alone am responsible for creating and maintaining my reputation through this type of identification, and providing access to that verification does not depend upon where I am physically located, such as a “permanent” address. My ownership and maintenance of the data displayed on the blockchain via this form of identity card means that I am not dependent upon a third party such as Equifax or Experian to supply information on my behalf that will vouch for my reputation. Over time, as more and more citizens control the foundations of their own reputations, centralized companies specializing in the archiving and maintenance of millions of individual records will cease to exist. This will take away a major target for hackers who seek to breach the systems of these companies and financially benefit from the resale of this information on the black market. There will be no more centralized storage locations for hackers to compromise.
This form of identification will have a dramatic impact on the refugee community and their ability to cross international borders with their reputational histories intact. Hamse Warfa deeply understands this dynamic. Hamse is a former Somali refugee who established BanQu, a Minneapolis-based technology company that labels itself as a “fintech company with a social cause.” Hamse realized that events he was able to accomplish as a refugee were disappearing from collective memory. For example, if he built on a loan he received from a sponsoring non-governmental organization (NGO), there was no proof of this accomplishment. Refugees living stateless basically have to start all over when they land in their final residential destination. The benefits of using identification tools built on the blockchain extend to issues of national security, which is pointed to as justification for not allowing refugees into various countries due to a lack of information verifying the claims made by the person in question.
Blockchain technology has facilitated change that provides a high level of protection and authentication of reputations of all kinds. Tim Wu in his December 2017 Op-Ed piece for the New York Times pointed to a massive shift “away from human institutions backed by government and to systems reliant on well-tested computer code.” (New York Times 2017). The human element previously responsible for the creation, maintenance, and selective distribution of reputational building blocks has let down society. Revelations made public through the release of the Panama and Paradise Papers have pointed to the personal greed of heads of state. Aggressive investigations on the part of media organizations have uncovered systemic sexual abuse on the part of religious institutions. Legends in the worlds of Major League Baseball, track and field, and international cycling have been sustained by chemical substances that create the illusion of superhuman capabilities. An unprecedented level of fraudulent behavior in this day and age of global interconnectivity has dramatically fueled the need to remove human interaction from any transaction requiring trust on the part of human-centered institutions. Computer coding has provided for blockchain technology to sign, seal and deliver the validity of all transactions.