Blockchain for SME Finance: Call for Empirical Testing

Mariya Yesseleva-Pionka - Excelsia College, International Council for Small Business

-- For many countries worldwide, small and medium enterprises (SMEs) are the backbone of their economies; more than half of the overall world population is working for SMEs. Historically, research studies on SME lending have emphasised that SMEs are less transparent and have an information advantage in comparison to external lenders, as many businesses are owner-managed and privately owned. Distributed Ledger Technology (DLT), also known as a blockchain, opens new opportunities to SMEs. It could be used as a network system to exchange financial and non-financial data for assessing SMEs' creditworthiness. My recent paper titled, Blockchain for SME Finance: Call for Empirical Testing, provides a theoretical overview of the policy developments for blockchain and DLTs with the final recommendations for empirical testing.

The introduction of the Blockchain Network System (BNS) can potentially lead to the introduction of a single digital record for SMEs, giving them the opportunity of being in charge of their proprietary data, which comes from verified sources and could be supplied to external lenders to maximise their chances and speed of accessing debt financing. BNS could exchange SMEs' vast data needed for the lenders to assess their creditworthiness.

Historically, smaller enterprises have been considered less transparent and more costly to service. As a result, they received less capital and had to pay higher costs on borrowing in comparison to larger enterprises, as it was more costly for them to resolve information asymmetry with financial institutions/lenders. The BNS could be introduced as a solution to information asymmetry. The proposed decentralised permissioned BNS is a digital space to which records/information could be added in partnership with significant participants (e.g., financial institutions, taxation office, land and real estate registries, credit bureaus and alternative lenders, among others). The model should follow a hybrid approach "…where both Blockchain technology and a data storage solution are both pursued, which provide the ability to link Blockchain transactions with data held off the chain and stored elsewhere."

The final creation of a single digital record for each SME could track digital footprints and overcome the information asymmetry between the lenders and SMEs. The Business Digital Footprint (BDF) Account will have a set of validated and, most importantly, immutable records/transactions, which will appear in chronological order with the details accessible by the authorised participants in the blockchain network. All the blocks are linked in linear and sequential order and hence, resemble the chain concept. For millions of SMEs in Australia and globally, this could mean receiving access to finance within minutes.

Blockchain and DLT are rapidly evolving, and the adoption rate is expected to increase exponentially across various industries and countries. Data privacy and protection is of utmost importance for all future participants in the BNS. From the government perspective, it is essential to improve policies surrounding data access and usage, privacy, accountability and data auditing of all the stakeholders in the blockchain network. Thus, there is a necessity to introduce a common International Standard to regulate blockchain and DLTs across the globe.

In 2016, the International Organisation for Standardisation (ISO) created the ISO Technical Committee 307 Blockchain and DLTs. The ISO is a legal association, which is comprised of National Standards Bodies (NSBs) from 164 countries, with direct support from a Central Secretariat in Geneva, Switzerland. The Australian Government has provided $350,000 to Standards Australia, which is the principal National Standards Body, to lead the development of common International Standard through the ISO. The call for empirical testing presented in my article is related to the ISO Technical Committee 307 Blockchain and DLTs "SG 2 Use cases" urging Standards Australia, National Blockchain Roadmap Advisory Committee, Department of Industry, Sciences, Energy, Resources to apply BDF Account as a "use case" and start applicable testing of the concept to achieve the proof-of-concept stage.

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