Research

Is Bitcoin a Game-Changer for Social Impact Investing?

Bitcoin is a Potent Tool in a Socially Conscious ESG Framework

By   Christopher Bendiksen 21st September 2021


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Environmental, Social and Governance (ESG) concerns have become an increasingly important decision factor for those concerned with the ethical implications of their investment. Often bucketed together under the umbrella term of impact investing, ESG concerns are at this point a common feature in the process flow of many investment committees. Unfortunately, more or less the entire discussion regarding Bitcoin and ESG has revolved around Environmental concerns, leaving investors with only a fraction of the necessary analytical ground covered in order to make holistic ESG-based investment evaluation.


We have already laid out our views of the E-part of Bitcoin’s ESG qualities in detail here. In this piece, we carry on along a similar path by making a case for Bitcoin’s unmatched ability to safeguard freedom and human rights, particularly in locations and environments where traditional investments cannot make an impact. To help us address this complex topic, we have teamed up with Alex Gladstein, Chief Strategy Officer of the Human Rights Foundation.

As we make our way through this topic, we will make the following broader points:

  1. The ESG framework considers three broad categories of ethical concerns: Environmental, Social, and Governance—this paper focuses on Social impact
  2. There is no consensus on what specific concerns are to be addressed in Socially-oriented investment decisions, and while some pre-curated frameworks exist, none are entirely free of challenges, necessitating a fair bit of critical thinking on the part of the ethical investor
  3. While there are some similarities in the way one can evaluate corporates and Bitcoin from a Social Concern standpoint, there are also key differences of which investors should be aware
  4. Bitcoin and corporates are also radically different in their ability to create positive social impact in areas where they are most needed, but where conditions are typically hostile, such as inside countries ruled by authoritarian regimes
  5. The world is currently experiencing a litany of serious Social issues and many of these issues are extremely challenging to positively impact through traditional investments
  6. Bitcoin offers a unique way of addressing Social Concerns such as Human Rights, Privacy, Inequality, Discrimination, and Freedom in ways that no other investments can hope to emulate


Current Social Concern Frameworks tend to Leave out Freedom and Human Rights

In line with its increasing credence in investment circles, leading organisations have developed measurable criteria and aspirational goals to help investors make informed decisions on ESG grounds. These criteria are split between the three components of ESG, Environmental, Social and Governance.

As an example of social concern frameworks, organisations like MSCI generate ratings that in turn designate indices, mutual funds, and companies into tranches as a means of tiering their societal impact. Alternatively, and on a sovereign level, the United Nations releases sustainable development goals (SDGs) crafted by constituent countries as a ‘call to action’ and means to promote global prosperity. Other educational organisations in the investment sphere such as the CFA Institute also issue their own guidance on how to evaluate investments based on social concerns, and all these frameworks differ materially in their approach.

concepts of obvious importance such as freedom, democracy, free expression, and civil liberties are all conspicuously missing from some frameworks like the UN’s SDGs

In other words, there is no consensus on how to apply ESG principles. And while there is some common ground to be found in social concern concepts that are agreed across all frameworks, such as promoting gender and economic equality, other concepts of obvious importance such as freedom, democracy, free expression, and civil liberties are all conspicuously missing from some frameworks like the UN’s SDGs.

This is perhaps not very surprising considering that many of their creator member nations are themselves authoritarian regimes with rich histories of human rights abuse. As Gladstein explains: “There are about 10,000 words that make up the SDGs and some terms do not appear a single time: democracy; civil liberties; free and fair elections; press freedom; free expression; journalism; independent judiciary; or separation of powers. Corruption and freedom get one mention each; human rights gets four mentions.”

Investors, depending on their individual impact goals, therefore need to apply some critical thinking, either via direct evaluation of investments themselves or via evaluation of third party frameworks doing ESG scoring on their behalf. And if you have freedom and human rights as a part of your understanding of important Social Concerns, you will almost certainly appreciate Bitcoin as a driver of positive impact.


The World is Abound in Major Social Problems

We live in a world teeming with urgent and large-scale social problems. Censorship, discrimination, exploitation, and suppression of basic property rights are all major problems facing a large proportion of the global population. These problems are explicit in authoritarian regimes, but are by no means confined to them. For example, racial and gender discrimination and general lack of diversity are issues present in pretty much every nation and have all become a major focus points for improvement in Western societies.

Access to banking, saving, and investment opportunities is also lacking for billions of people, most of whom have little hope of future access. In the legacy financial system all such services strictly require KYC, making them unattainable for all people unable or unwilling to obtain a government ID. Furthermore, privacy is not even possible under a KYC regime, making data protection an enormous and unsolvable problem which we will return to later.

We tend to leave issues of access unconsidered in Western societies. The common perception is that these issues mostly do not apply to us, or at the very least, they do not apply to those of us who have the ability to influence political power. Most, but by no means all, citizens in Europe and North America can access excellent financial services. But as Gladstein points out “for the average person on this planet—especially if they end up living like 53% of the population: in an authoritarian regime—none of these avenues are open. Their local stock markets are not very good. Most people don't even have the luxury of getting any sort of dollar-denominated anything.”

They're dealing with currencies that are oftentimes losing 10%, 15%, 20%, 30%, 40% of value every year—that's what they're earning in.

“In total, there’s about 90 countries, or 4.3 billion people living under these conditions. They are controlled, in many ways, by finance and economics. They're dealing with the Nigerian Naira, or the Mexican Peso, the Sudanese Pound, or the Turkish Lira. They're dealing with currencies that are oftentimes losing 10%, 15%, 20%, 30%, 40% of value every year—that's what they're earning in.” All that value, in a classic example of a Cantillon effect, is of course siphoned off by the ruling elites sitting close to the money spigot. They do this by lavishly paying themselves and their cronies with printed money, while simultaneously inflating the prices of their own assets via that same debasement. All paid for by an often cash-bound and largely asset-less citizenry with no say in the matter.

Only 13% of humans live in a liberal democracy with a reserve currency. That means 87% of the world's population either lives under a weaker currency or an authoritarian regime.

He continues, “the vast majority of people in this world do not have access to a reserve currency and do not live in a liberal democracy. Only 13% of humans live in a liberal democracy with a reserve currency. That means 87% of the world's population either lives under a weaker currency or an authoritarian regime.”

“How do you reach them with your impact investment initiatives? It's very hard because these investments are all tied to companies, and these companies are effectively controlled by the resident government. Those governments don't really allow companies to come in and improve the lives of their citizens. It's not really something that they allow to happen. Investments abroad, especially in the emerging markets, really only benefit the top 1%.”

His point is an unpleasant one. In countries where the local monetary system is explicitly designed to extract wealth from the oppressed to the oppressors, there really is no way of investing without ending up benefitting the very people running the system you want to dismantle.

This means that there is no realistic avenue of positively impacting the social conditions of people living in authoritarian states through traditional investments. All such projects are explicitly permissioned by the ruling regimes who can trivially block or root out any attempts at subverting them.


Traditional Investments Struggle to Impart Social Change Where it is Most Needed

almost all socially conscious investment projects exist inside of countries where citizens already enjoy considerable rights and civil liberties

Social concerns are arguably the hardest of the three ESG concerns to address via impact investment. Generating positive social impact via investment has traditionally been, and remains, extremely challenging given the lack of investable opportunities to address the most important issues in the areas where they are most pressing. In fact, almost all socially conscious investment projects exist inside of countries where citizens already enjoy considerable rights and civil liberties. Gladstein elaborates: “There are a lot of themes—areas that you can invest in to make money and change the world at the same time. But, there is no freedom tech or democracy tech—it doesn't exist.”

“Part of this problem likely arises from the problem that companies cannot really go into a country and try to make money through activities that directly oppose its authoritarian governments—they would immediately get censored by their hosts who have unilateral control over their banking relationships.”

And by the look of it, things are about to get even worse.


Central Bank Digital Currencies Threaten to Further Tighten Financial Oppression

81 countries representing 90% of global GDP are now researching so-called Central Bank Digital Currencies (CBDCs). Furthest along among principal industrialised nations we find the Chinese initiative called the Digital Currency Electronic Payment (DCEP). China, the world’s most powerful police state, has developed a digital currency which builds authoritarian control over behaviour directly into its citizens' money and is already busy integrating it into its economy.

Gladstein explains, “We don't know how successful they'll be but the Chinese government is trying to encourage, across many different municipalities, districts, regions and with different corporate partners, this idea of your abilities to do things in life being tied to your patriotism and your unquestioning belief in the party.”

In other words, the future of state-sponsored money for billions of people offers no privacy whatsoever, comes with conditional spending clauses, can have a programmatic expiry date, can be trivially censored and removed from accounts, and will be tied directly to chilling concepts such as a social credit score.

It would be naive to think that the Chinese Communist Party will not market and even pressure the use of this digital currency to its vast network of global trading partners and client states. And while there is reason to hope they will be less dystopian than the DCEP, Western CBDCs will come with all of the same capabilities.

Permissioned money systems like these are perfect tools for entrenching systems of top-down perpetuated inequality. Equality can by definition not be achieved in systems where the rules are unpredictably and arbitrarily set by undemocratic elites lording over powerless subjects. The very foundation of freedom, civil liberties and equality is equal rules for everyone and no special privileges for anyone.

“So here's where Bitcoin comes in: Bitcoin is the S-est of the S.”


Bitcoin can Impart Change in Areas Where Traditional Investments Cannot

Bitcoin is not a company. It doesn’t have a management team. There are no major decision makers, no employees and no customers.

Let’s explore Gladstein’s above statement a little further. How is it that Bitcoin can uniquely promote positive social impact where other investments struggle?

The answer lies in Bitcoin’s unique structure. Bitcoin is not a company. It doesn’t have a management team. There are no major decision makers, no employees and no customers. If you want Bitcoin to change, stop operating or otherwise follow your orders there’s no one to contact and no one with the power to make it happen.

On the one hand this means that there’s no way of evaluating Bitcoin on traditional Social Concern criteria like management policies, employee treatment or customer satisfaction—there are none. On the other hand it also means that Bitcoin can operate in hostile environments and bring its human rights and freedom-promoting benefits to its users even if their governments oppose it.

In Gladstein’s words: “At the end of the day, all the other impact investing efforts we make are negotiations with human rights abusers.” Bitcoin changes that. An investment in Bitcoin deepens its network effect, improves its ability to function as a monetary alternative for those who need it the most, and directly contributes to improving their situation on the ground, no matter what their ruling elites may think about it.

Bitcoin exists entirely outside the control of any regime. An authoritarian government cannot restrict the use of Bitcoin any more than they can restrict file sharing or illegal streaming of football games—it is just not realistically feasible to prevent motivated people from using apps on the Internet.

Practically for the first time then, investors are presented with an investment that offers a real possibility to positively impact billions of people living under authoritarian oppression. Bitcoin does this in an entirely automated fashion through native enforcement of property rights, built-in privacy, an inability to discriminate based on gender, race, religion or any other characteristic, and its ability to offer full monetary sovereignty for end users, regardless of where they happened to be born. And it does it without the need for anyone’s permission.


Bitcoin’s Structure Inherently Addresses Major Social Concerns

Bitcoin doesn’t have to do anything special to address important issues. Through its unique structure, Bitcoin organically solves a whole host of problems that are at the core of many of our most pressing social concerns:

Unequal access is not possible. The system is not permissioned and can be freely used by anyone. Bitcoin is not aware of the real world identities of its users and therefore cannot discriminate based on gender, race, sexual orientation, religion or any other characteristic.

There is no requirement of ID—all you need is a smartphone. This immediately grants access to non-dilutable long-term savings and electronic money transfers for the billions of people unable or unwilling to comply with KYC rules.

Bitcoin’s non-reliance on any data linked to real-world identities also solves the issue of privacy and data protection. There is no privacy data collected by the system and therefore none to lose.

The rules of Bitcoin are the same for every single participant. There are no privileged users able to enrich themselves by diluting others.

The rules of Bitcoin are the same for every single participant. There are no privileged users able to enrich themselves by diluting others. No one can censor or seize other users’ funds, and no one can prevent others from accessing the system. Every single issued coin is earned—the system has never awarded a single coin to anyone for free.

Gladstein elaborates, “every single actor in the Bitcoin network is equal. The amount of bitcoin you own does not give you special powers to stop other people or to change the rules to benefit you. There is no Cantillon effect. There is no sort of people who are closest to the money spigot who can benefit at the expense of everybody else.” In Bitcoin, equality is not merely an aspirational goal—it is a hardcoded property.

Entry into the Bitcoin monetary system opens users up to a whole world of financial products and services. Everything ranging from saving and borrowing to international money transfers are made available to anyone with internet access. Gladstein mentioned several examples of real-world use cases involving human rights activists and entrepreneurs in political exile:

“I was just speaking yesterday with someone who's Eritrean. She's based in Europe. She had to flee this horrible dictatorship and now she's paying her translators, back in the Horn of Africa, using bitcoin. And there's no other way to do it for her. And then, they get to store their value in bitcoin as opposed to the Ethiopian birr which has a 20% inflation rate, in a country where holding dollars is illegal.”

“The wealthy in these countries denominate in dollars and they own dollar assets. They don't bother with the birr—That's for the people. So the people outside the cities are stuck with the birr, their living standards fall with the birr, and their wages fall with the birr.” The system is explicitly rigged to favour the elites.

Addressing most of these concerns is simply not feasible with any other investment. Unequal access based on user characteristics can be somewhat alleviated in democratic states with competent regulators through selective investment in companies who are diligent in implementing ethical policies. However, if unequal access is a policy of the state, there is nothing to be done via traditional investments.

The same is true of privacy, and the systemic inequality created by inflation. So long as these problems are explicit state policies, no traditional investments can hope to alleviate them since they all rely on permission to operate from the offenders themselves.


Investment in Bitcoin Strengthens its Ability to Generate Positive Social Impact

The more people use Bitcoin, the more useful it becomes. The more liquid bitcoin markets are, the more useful bitcoin is as money. Widening Bitcoin’s network effect through usage strengthens its ability to help alleviate pressing social problems in the most hard-to-reach jurisdictions of the world.

Helpful investment can take many forms. One can invest in funding Bitcoin’s volunteer army of open source developers. One can invest in companies providing software infrastructure that helps global citizens access bitcoin through their smartphones. Even an investment into the asset itself deepens its liquidity and strengthens its network effect.

In Gladstein’s words, “Here's your opportunity to invest in something, or invest in the infrastructure of something that is fundamentally disruptive, that can deliver a real empowerment tool to anyone who has internet access.”

“Bitcoin is so fundamentally disruptive to human rights abusers that my argument to you would be that you should be going out of your way to include some sort of Bitcoin exposure so that you can sleep more soundly knowing that you're promoting something that is actually disrupting authoritarianism and tyranny around the world.”

And that seems like a good thought on which to end.



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