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Securitised potential

Securitised potential

In 1997, famed musician David Bowie had an idea. He would sell the rights to future royalties from his extensive body of work. He wanted to do this by bringing Wall Street financing techniques into the music industry. The brilliance of the securitisation concept is that you can apply it to anything - including potential.

We call this process “securitisation”. It is a financial process where we take a group of assets, group them and transform them into a single security. We can then register the security and divide it into smaller pieces. After this, we can sell it in the open market in small chunks to dozens of buyers.

In Bowie’s case, he was “securitising” any future music royalties to create Bowie Bonds - instead of selling his masters. Bowie Bonds at the time were boundary-pushing, allowing fans to own a piece of their favourite rock stars.

The brilliance of the securitisation concept is that you can apply it to anything. All you need is something that can generate a predictable return. It is common for financial firms to package any debts owed in a securitisation. For example:

  • Your student loan
  • Your rent
  • Your credit card debt
  • Your mortgage

Lambda School (now BloomTech) is one company that has introduced securitisation into education through its Income Share Agreements (ISA). The pitch is simple: they will train you remotely for nothing upfront, and you only start repayments once you are earning $50k or more.

The ISA terms can sometimes work out steeper than your typical $10,000 coding boot camp. Once you make at least $50,000 a year working in technology, you pay 17% of your income (a minimum of $708 per month). They cap the total at $30,000, or after 24 months of payments. However, even if you still don’t have a tech job five years after graduation, your payment obligations end.

These ideas are not new. Milton Friedman, a renowned economist, first proposed them in the 1950s as a “human capital contract”. It offered students another option to pay for their education should they need additional resources or favour a more income-flexible funding alternative. In addition, it was an alternative to debt. Debt can create substantial risks for students if they cannot afford their payments during and after college. ISA payments adjust according to levels of income.

With web3, we’re now seeing tokenised time and Income Sharing Agreements (ISAs) that fall under the bucket of “human capital contracts”. Investors can buy a share in an individual’s earning prospects and provide the funds needed to finance their training. However, the individual must pay the lender a specified fraction of their earnings. A lender would get back more than his initial investment from relatively successful individuals, which would be enough compensation for any losses made.

De-fi protocols currently allow you to lend out your crypto without requiring an intermediary. When lending crypto, your assets are no longer in your possession: you send them to a smart contract. Following this, you can earn interest from these lent assets.

Eventually, these protocols will form the basis of most human capital contracts. A group of investors might:

  • Set up a smart contract;
  • Pool their investment together;
  • Securitise someone’s potential by sponsoring an educational opportunity, determining annual repayment criteria.

As with any innovation, it comes with risks:

  • Human capital contracts can discourage learners from maximising their income and encourage them to focus on non-wage based forms of compensation. If you need to make at least $50k to meet your payment criteria that expire after 24 months, what is stopping you from seeking a lighter work schedule?
  • There are still issues around real-world discrimination that could filter through. However, the pseudonymous nature of blockchain might reduce any instances of this. If I know nothing about who you are (race, gender, religion), it could introduce an ounce of merit into the process.
  • Security is a concern. Most well known De-Fi lending protocols are audited by a third-party and public so that everyone can verify them manually. While that won’t exclude potential vulnerabilities, it gives reassurance.

There are likely more socioeconomic issues beyond the scope of this article. What do you think? Would you want to invest in someone’s potential? Would you want someone to invest in your potential?

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