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Tech to finance social change

We help build more equal, sustainable, and resilient communities by enabling new forms of shared ownership.

Let’s suppose local government bodies and associated third sector organisations had enough money to do everything they wanted to reduce poverty / inequality and increase sustainability / resilience locally.  The costs of health, welfare, policing, justice, energy, and transport would go down. Tax and other revenues would go up. In a few years, the initial outlay would be recovered plus more. So, from one perspective, local government cashflow is a challenge.  From another way of looking at things, it’s an opportunity - local government is potentially a good option for investment.

By contrast, other investment options are not so good at the moment. The property market is in a downturn. Bond yields are at historic lows. And most commentators expect another stock market crash at some point.

So, there is a real opportunity for local government - to capture investors dissatisfied with other options.  This would suit businesses with a legal / ethical obligation to put money back into the community. It would suit charities and other funding organisations who need to spend their money in a robust way. It would suit members of the public looking for somewhere to put their savings, since they would get the extra benefit of improvements to the place where they live.  And local government would not only be able to get funds for the social changes it wants to implement, but gain greater buy in for those changes by allowing organisations and individuals to invest in them.

The closest thing to a way of doing this right now is Social Impact Bonds (SIBs), an idea that emerged in the UK after the 2008 crash.  In the developing world, they are called Development Impact Bonds (DIBs), and in the US “pay for success contracts”. A SIB is a bond that investors buy to fund a specific social change project, which pays out if and when the project delivers its expected outcomes.

SIBs seem like a great idea, but at present are very expensive to setup and run in their current form as investment instruments. Since they must comply with financial regulations governing security and administration, but are based on complex projects, a SIB to raise $25m may cost another $25m in management fees.  As a result, there are only a few SIBs, all of high value, and many people think the idea is limited.

This is where smart contracts come in.  If a SIB was a smart contract, it would live in the blockchain. The blockchain is a shared database in which no-one can alter data surreptitiously, now available with 2nd generation tools that make it both greener and easier to manage. Since security is built into the blockchain, the cost of demonstrating compliance with regulations is reduced.  In fact, current Financial Conduct Authority guidance suggests that in our case compliance with their regulations may not be required at all, since a smart contract SIB would not be a “specified investment” but a “contract made for commercial purposes”.  A smart contract SIB would also be able to report on project progress automatically (including when it has met targets and is ready for pay out), which would reduce the costs of both administration for the SIB and project management for the associated social change.

Stakeitback is a new social enterprise that provides a simple Web platform for local governments to offer smart contract SIBs.

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