Intermediaries, Trust and Equity Crowdfunding

IMG_4341Intermediary-controlled trust has been the main game in selling shares and equity since the 1930’s. That is why regulators have latched onto intermediaries, and their existing regimes to regulate the emergence of crowdfunding.

However intermediary-less trust is on its way. A truism that is getting stronger and stronger is that “the crowd will catch a bad actor long before the regulator will”.

The persistent focus on intermediaries by regulators means that they have not empowered the assistance the crowd can give in keeping equity crowdfunding participants honest. If blockchains become the new way to evidence trusted equity crowdfunding transactions we will soon end up with the trust part of transactions separated from intermediaries. That will mean that the regulators and government policy makers will have to ponder how do they continue to regulate something that is gradually disappearing?

In this new era, shares or equity will be exchanged without the need of intermediaries. The internet has already replaced many intermediaries through companies like AirBNB and Uber. The scary thing for existing intermediaries is that the replacement companies are doing the job a lot better and consumers are voting with their dollars. The next group of intermediaries to be replaced will be by the blockchain.

In regard to equity crowdfunding the blockchain enables transactions to be fully handled on a peer to peer basis. No intermediaries, share registries or escrow accounts. A wealth of red tape is removed and of course costs reduce dramatically. What is even more surprising is that with trust embedded in the transaction the participants don’t even need to know each other at a transaction level but they will have established a relationship before they made the investment decision. When it comes to AML/KYC (Anti-Money Laundering / Know Your Customer) processes these will also be handled by the blockchain as the source of all funds is recorded in the blockchain history and wallet addresses. Smart contracts will enable the automatic recording of the appropriate information  required by regulators so they can access it on the blockchain if need be.

This will take time though. We already know that land titles and property transactions could be done far more effectively and efficiently on the blockchain but the problem is most regulatory bodies or custodians of trust at the moment are government owned or controlled. That means that they have to embrace the new way of doing things before blockchain implementation can truly be comprehensive. Some services like escrow, share registers, stock exchanges, clearing houses, notaries that are intermediaries handling the trust part of the transaction can start first but for the full chain to work the government departments and regulators need to jump on board as well.

Once you get your mind around this you wonder why we need trusted intermediaries at all. You may remember that the trust factor in banking was publicly displayed in large impressive buildings with columns and marble with large vaults to witness their role as the trusted intermediary. Check this out today. The banks public manifestation is shrinking into areas where you must do all the transactions yourself in an ATM crowded space with a banking person there to assist you to use the machine. What happens when physical money disappears? The blockchain will remove banks from any physical presence.

Trusted intermediaries will be no longer required because trust travels with the transaction from one peer to another through a network purpose built to transport embedded trust.

Trust is being decentralised so there is no need for a centralised intermediary. To achieve this trust is shifting from humans and collections of centralised humans to transactions carried by computer networks that are embedded with trust. The decentralised consensus protocol driving blockchain will also drive the delivery of trusted transactions.

When people lived in villages and went to their local bank it was the local manager that was the trusted authority. I can remember my father insisting I open a bank account at the same bank as he did, and his father did, because of the family reputation. This type of thinking is no longer relevant as even the local manager cant override “head office”. It is the perpetuation of this type of journey that will shift the trust factor entirely away from human decision makers or endorsers or intermediaries.

Equity Crowdfunding has not reached its potential largely due to the imposition of outdated regulatory structures to handle the trust factor. The sooner the policy makers and regulators realise that they need to embrace this new way of handling trust the sooner we will see real traction in friends of friends investing in innovative new businesses via equity crowdfunding. At the moment paying an intermediary $20k to $80k to raise say $300k doesn’t really stack up.