Does your company use worst-case scenario planning? What will you do as the rule of law erodes and corruption accelerates?
The year 2024 will be one of the biggest and most important election years in history. It comes at a time of global instability, when war is once again raging in Europe and the post-World War II international order itself is under pressure. While decentralized technology cannot provide meaningful protection against a total collapse of the rule of law, such a scenario remains unlikely.
Nevertheless, erosion of the rule of law is still possible. There are several areas where extreme political actions could undermine companies and investors that rely on predictable and stable environments, causing significant problems for companies. I identify three risks in particular that can at least be offset by careful application of decentralized technology:
The thing that most blockchain boosters immediately think of is currency manipulation. From printing money to financing deficits to spending in the run-up to elections, central banks and government finances face many political risks. Switching from volatile local currencies to stablecoins is the most practical alternative for businesses. It is advisable to hold as little volatile local currency as possible, where permitted by law.
Another major risk is political interference in the judiciary. Courts are where people settle disputes, and if the referees are corrupt, the risk of a bad or unfair outcome is high. The best option is to stay out of politically compromised courts as much as possible. Moving from paper contracts to transparent, blockchain-based smart contracts that are automatically enforced offers the opportunity to reduce the risk of non-payment or disputes. Moreover, it increases the likelihood of automated and fact-based dispute resolution.
Corruption at all levels is another major risk, both internally and externally. Corrupt officials often take arbitrary regulatory actions or selective and extreme enforcement against companies that don’t want to play along. Their best ally in this process is opacity. Corruption is never popular, and bad actors rely on the silence of others to get away with their behavior. The best protection against this kind of rent-seeking is extreme and total transparency. If all your orders, shipments, purchases and prices are public, theft is immediately visible to everyone.
This last practice, extreme transparency, is something that companies in mature economies would hesitate to embrace, but it is a real and proven strategic option. Cooperative farmers are active in the Indian state of Maharashtra Sahyadri Farmers Producer Company, frustrated by wildly variable prices and vastly different markups by middlemen, posted all their shipments and prices on the Polygon blockchain with the help of a local startup, Emertech. The result: lower overhead costs and fairer prices for everyone involved.
Most companies, especially the big ones, have little choice but to follow the rules, no matter how arbitrary they are. This is one reason why consumer adoption of cryptocurrency has far surpassed corporate adoption in many countries. Governments generally do not have the power to prosecute every consumer for every violation. Exchanging your local currency for crypto or stablecoins may not be legal, but individuals can often fly under the radar. However, companies have real assets, such as real estate and factories of enormous value, that can be seized as a penalty.
Blockchains and cryptocurrency can mitigate just some of the major political risks that companies will face in the coming years. But to make money you have to take risks, and that means having assets, people and resources in the market, and accepting the ups and downs that come with it. No risk, no reward.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
