170913 Hernando de Soto

HandshakeIn May 2015, ($3948) Hernando de Soto attended the first annual Blockchain Summit, hosted by British billionaire Richard Branson.  de Soto is the author of a 2000 non-fiction work entitled: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. ISBN 0-465-01614-6 It’s a fascinating read.

He has been advocating the need to have secure documents that memorialize property.  He gives the example of a young couple, here in the U.S., buying property, putting as little as 20% down in cash and going to the bank to borrow the rest, 80%. The couple now has a mortgage, which allows them time and capital to spend on improving the property, among other pursuits they may have, such as starting a family or business.  In a sense, they created capital by taking that mortgage loan.

The bank feels safe and secure knowing the couple is the rightful deed-holders of that property.  Moreover, the bank knows they have the support of an excellent legal system, police department, judges, and lawyers should they have some entanglement with the loan.  Furthermore, they know there is a host of other systems in place that will help secure the property such as a fire department, utilities, and local government.  Trash will be collected and should the need arise, the couple has the support of a local hospital and doctor.  There is a Building Department to ensure good practices are followed, a health inspector, and government planning for roads and bridges.  All of this helps the bank to feel safe in making the loan.

Now, de Soto continues, imagine the same couple wanting to purchase a similar property of similar value in Guatemala.  They go to a bank and ask for a loan.  The bank says, “How can we be sure that you are the owners? Just yesterday a man who claims to own the same property came to see us.”  No loan.  Without all of the various systems in place that helps ensure the value of the property by insuring ownership and more importantly TRUST, that couple cannot leverage their cash to buy property or invest in a business or all of the other things capital makes possible.

Blockchain technology, what Bitcoin and other cryptocurrencies are based on, does just that.  It ensures trust between trading partners.  Even strangers are able to trust each other in a Bitcoin transaction.  It’s no wonder Branson invited de Soto to speak at the Blockchain conference.  de Soto understands how important TRUST is to capitalism.  Blockchain technology holds great promise for any system that requires trust.