Renting an apartment or buying a car requires an income and good credit. Getting a legal job generally requires a permanent residence and a vehicle. Millions of Americans are caught up in this chicken/egg dilemma. But what if it were much easier for folks with bad credit to gain access to the bare necessities to work toward entry to the middle-class? And what if it could actually be done with less risk or burden to lenders and rental agencies than under the current system? Enter Smart Property.
Risk is what makes it difficult for people with blemished credit records to rent apartments or buy cars. Renting or lending to someone who’s shown a propensity to not make payments on time is a risk. Even worse, various consumer protection regulations make recouping losses more difficult than necessary. For this reason, leasing offices and car salespeople are forced to either decline high-risk individuals, or charge them extraordinary rents or interest rates. The same is true for lending money. A bad credit score generally means you either don’t get the chance to prove you’ve changed, or you do, but pay dearly for it.
Imperfect credit (scores)
And while credit scores are the best way lenders and their ilk have to determine someone’s risk level, they are far from perfect.
The Electronic Privacy Information Center has a great report on some of the limitations of credit scores. They point to an extensive study conducted by the National Credit Reporting Agency and the Consumer Federal of America, which revealed that 29% of individuals had significant errors in their credit report that translated into a 50-point or more error in their credit score.
In fact, according to a study the Consumer Financial Protection Bureau, one out of five consumers will see a meaningfully different score on their purchased credit report than their lender sees. This is in part due to things like banks withholding positive information about their customers so that competitor banks would not offer them better credit terms. It’s also not helped by the fact that, according to EPIC, “Credit scoring models have long been shrouded in secrecy. Individuals and consumer advocates have found it difficult to ascertain information regarding what factors the models consider, and to what degree.”
Unfortunately as well, correcting those errors is a long and tedious process. Credit reporting agencies do not devote the resources necessary to properly address complaints.
Lastly, there’s evidence that the outright discrimination on the basis of sex and race of the past has simply been replaced with a more subtle form of discrimination. Somehow the way in programmers have chosen which factors to consider, and the amount of weight assigned to these factors, has resulted in little change in who is discriminated against.
Protecting consumers (from opportunities)
Well-meaning consumer protection regulations further increase risk for landlords and lenders. It’s extraordinarily difficult to evict a renter, even for obvious lease violations such as not paying rent. Failing to follow all steps and in the correct order will likely mean your case is thrown out and you will get sued by your renter. Even repossessing a car, already a costly endeavor, is made more difficult throughconsumer protection laws. The result of all this of course is that it further disincentivizes landlords and lenders renting and lending to “risky” propositions.
Promise of smart property
Now, imagine if we could take someone’s, better yet, anyone’s, risk level down to near-zero? That’s the promise of Smart Property.
Both credit scores and consumer protections exist due to historic and ongoing power imbalances, both real and perceived. A shortage of housing relative to demand, especially in cities, required laws which helped shield renters from racist, abusive and mercurial landlords. Credit scores are how lenders discriminate when using race, sex and other factors is illegal.
But Smart Property obviates the need for trust, and its proxy, discrimination.
Smart Property makes it possible for locks to change automatically the moment a renter violates their lease agreement. And makes it possible for a car to refuse to start the moment a payment is late. Most importantly, it does so on a trustless basis. Because the Bitcoin protocol distributes transactions across the web, it offers transactions in which it’s nearly impossible to falsify who owns what and why.
With smart contracts, the consequences for violating the agreement are implemented automatically, with no need for human judgment. Essentially, it doesn’t matter that the landlord can’t trust a renter to pay. And it doesn’t matter that a renter can’t trust a landlord not to kick her out without good reason. Both parties are fully aware of both the terms of the contract and the immediate consequences of violation. The promise of this innovation should be clear to anyone, but it will impact people who have traditionally suffered from a paucity of trust the most.
Barriers to entry
Computer Scientist Philihp Busby describes some of the obstacles Smart Property will need to overcome for mass adoption. “There are two big barriers in the way of this going mainstream,” Busby said.
He describes a social barrier. Like with most things, the Americans with the most sway, the early adopters, aren’t particularly plagued by the limitations of the current system. Even though “It’s hard to find a notary on a weekend, handwritten signatures can be forged, lawyers are needed to draw up contracts and even better lawyers can be paid to find holes within contracts to circumvent them,” Busby explains, these aren’t exactly issues clearly dying for innovation.
Busby goes on, “This is somewhat a marketing problem too, since most people have been promoting Bitcoin as either a Ponzi scheme or as electronic gold. Instead of what it really is, which is a decentralized payments and contracts network whose unit of currency happens to be a bitcoin.”
He also refers to the shrinking technological barrier. “There aren’t any “Smart” cars that talk to your smartphone to ask it if you’re the owner,” Busby said. “We have RFID key fobs that do this, but what if my key fob is lost or stolen? The dealership would be happy to mint a new set of keys for a few hundred dollars. With a “Smart” car, I could just transfer ownership to a new Bitcoin address. For free. While sitting at home in my underpants.”
When imagining what Smart Property could do for a generation of Americans currently shut out of the rental, job and car market, it’s difficult to not get excited. This could represent waves of people finally offered the opportunity to succeed. Indeed, separating the ability to obtain property from one’s birth or social station is the very foundation of the American Dream. Smart Property may just make that Dream more possible for more people than ever before.
This post originally appeared at Bitcoin Magazine.
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