Written byAnthony Collins SolicitorsPublished1st November 2021 TopicFinanceShare

Photo: Rodion Kutsaev via UnSplash

Anthony Collins Solicitors outline what blockchain is, and how and why co-operatives might start to incorporate blockchain into their governance and operations.

Using the simplest terms, blockchain is a digital tool enabling every agreement, process, task and payment to be identified, validated, stored and shared on a public network, where no single person controls the transaction.

In this article we take a look at the co-operative principles and use cases for this peer-to-peer network and how co-operatives might start to incorporate blockchain into their governance and operations.

Inherently co-operative in nature

It is easy to see that co-operatives and blockchain share a lot in common. Both are:

• Owned and controlled by their members
• De-centralised, not controlled by one entity
• Operating through a democratic, consensus mechanism
• Not just operating for profit but existing to serve its members – bringing value to them and their communities.

Both are centred around democratic member control and self-organise to fulfil their purpose. Co-operatives operate on the principle of ‘one member one vote’ and actively engage in the affairs or their co-operative. Similarly, blockchain is governed by its miners, users and developers who all vote on the future of the network.

Both systems embody the values of integrity and equality when engaging with their stakeholders, nobody is denied membership based on any inherent characteristic. Consequently, blockchain presents an opportunity to develop a new digital economy, built on co-operative principles; introducing new audiences to the benefits of the co-operative model.

What benefits might blockchain bring?

By operating on a digital platform, blockchain has the potential to draw members from all around the world, growing cooperatives from local communities to global movements.

Co-operatives can engage their members in new and innovative ways: increasing participation without the barrier of physical co-location. Co-operatives can be governed remotely and reach new groups of people who are looking for a business community with shared social, cultural or economic goals.

Blockchain works as a tamper proof ledger of transactions, with the ability to increase openness, transparency and accountability. Traditional records and functions such as proof of membership, voting records, rules and rule changes, proposals and voting can all be written onto the blockchain, providing an irrefutable history of all legal and administrative procedures.

Proof of ownership and decision-making records are no longer created, kept and reported by one person. Provided it is set up correctly, this should reduce errors and eliminate corruption whilst simultaneously building a network built on trust.

For those co-operatives looking to evidence their green credentials blockchain can verify each stage in the supply chain and communicate the impact of environmentally friendly practices. Provenance is one example of a software solution built on blockchain.

Used by the Co-op Group , Provenance helps verify the sustainability of products by proving that products have been recycled, are organic, carbon neutral or sourced locally. By documenting each stage in the supply chain, customers can be assured of the origin and quality of the product, as well as the environmental and social impacts of the business. This will help to increase brand value and fulfil your ethical purpose, whilst avoiding accusations of ‘green washing’.

Going a step further, transactions and functions can be automated, reducing the risk that any one member, customer or supplier can break the rules – the blockchain will not allow for deviation. The technology can automatically manage and account for all exchanges, enabling peer-to-peer transactions to run without third-party intervention or adjudication. Without the need for Escrow, blockchain presents a solution to countries and communities with under-developed banking systems and expensive intermediaries.

One of the largest challenges for the co-operative community is accessing capital and funding initial investment. Blockchain makes crowdfunding a tangible solution to this problem by allowing communities to invest direct through web-based platforms. Blockchain enables members to legally raise funds in a transparent and accountable way, with built-in legal compliance.

One example is Moeda, a transparent impact investment platform which connects ethical investors with “previously unbanked entrepreneurs”, grassroots-based co-operatives and local sustainable projects around the world.

Similarly, Resonate (the ethical music streaming platform) uses blockchain to ensure payments to artists are transparent and properly distributed. This sits in stark contrast to Spotify which has come under criticism for its royalty distribution and now trying to better communicate how Spotify streams are determined and paid out.

Co-creation, properly recorded on the blockchain can create new opportunities for intellectual property and increase the fairness of profits generated from creative materials.

As governance structures become streamlined and transactions are automated, there will be fewer opportunities for disputes to arise. Where they do occur, justice can also be crowdsourced on the blockchain.

Kleros and Jur are examples of blockchain technology which use crowdsourcing and game-theoretic incentives to arbitrate disputes – selected jurors participate in the process and adjudicate based on the evidence submitted. These affordable justice systems are built on a community ecosystem.

By using a combination of ‘trial by peers’ and independent experts, blockchain dispute resolution can be much cheaper and quicker than the Courts, with the power to ensure agreements are actioned and funds settled without delay. This should help empower small to medium co-operatives that struggle to cover the cost of large Court fees.

As a platform which is designed around democratic decision making, and with the potential to form thriving communities built on peer-to-peer trust, it is clear that blockchain has the potential to operate as a cooperative economy.

Practical steps and future plans

Blockchain is a rapidly growing industry where members are incentivized to run and maintain the network and is likely to be transforming in many industries such as financial services, energy, travel, healthcare, retail, agriculture, education and entertainment.

Whilst many uses of blockchain are still in their early stages, we have outlined some very real and tangible benefits that already exist. So, before you start your journey into technology, what should you consider before implementing blockchain?

1. Decide on your priorities

With so many possibilities, you will need to decide if your primary focus is on transparency & traceability, de-decentralisation, automating transactions, accessing new finance, or collecting and analysing more data.

Consider which use-cases are of most interest to your customers, suppliers & members and keep a clear focus on your desired outcomes so that you don’t get distracted by all the possibilities.

2. Review whether your governance arrangements can adapt to new technologies

The pandemic highlighted the need for agile decision-making. As we move towards the Web 3.0, it would be right to consider whether your rules are flexible enough to seize new opportunities without delay and to govern through digital mediums.

3. Be alive to the risk of security breaches.

As with any new technology, blockchain has security weaknesses. Fraudulent transactions cannot be reversed and currency exchanges can be ‘hacked’. Human failure will always present a risk and the network is only as secure as the architects make it. It may be worth reviewing your existing data security strategy and tools to make sure your foundation is secure before start using blockchain.

4. Use the right people to plugs your skills gap

Whilst you consider your security infrastructure, it is also the right time to consider whether you have the people and digital skills necessary to keep up with emerging technologies.

As customers and suppliers start to automate their processes and we move towards the ‘Internet of Things’, co-operatives will need to consider what role they have to play and make sure they have the colleagues alongside to navigate that journey. Amongst all the unknowns, blockchain presents a real opportunity to build co-operative principles into the fabric of our future economy.