Blockchain and legal but repugnant markets--a guest post by Stephanie Hurder

Below is a guest post, by Stephanie Hurder — a Harvard Economics Ph.D. (who I've blogged about before, here, and here) and a founder of blockchain economics startup Prysm Group (that I’ve blogged about here). She discusses how blockchain may impact repugnant markets.

As Al has written about for years, repugnance -- the distaste for certain kinds of transactions -- can be a serious constraint on markets.   Repugnance can stem from numerous sources, such as a fear of coercion or of a slippery slope.  And while the constraints created by repugnance sometimes end up incorporated in to law, they do not need to be legal to have significant impact.  Businesses may voluntarily choose not to provide services that some set of consumers might find repugnant, in order to maintain their brand reputation and prevent a loss of those customers.

Firms that engage in legal, adult activities -- such as pornography and the sale of sex toys -- have significant issues accessing financial services due to the constraints imposed by repugnance.  Most commercial banks include “morality clauses” forbidding service of businesses engaging in adult activities, for reputational reasons.   Newer payment services that would like to serve “repugnant” industries are constrained by these more conservative organizations, with whom they must do business in order to effectively process payments and offer services.

Stripe, the payments processor, has publicly discussed this phenomenon on their blog.  Stripe was approached by OMGYes, a website that provides actionable, research-backed information on sex.  They write:

The business approached us and we were eager to work with them, but after a month of deliberations, our financial partners did not agree. Instead, because the website has explicit tutorials, it still falls under the umbrella of unsupportable businesses. While we were not able to persuade our financial partners this time around, we will continue to holistically look at and advocate for businesses that sell adult products and services.

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By now, almost all industries are exploring how to leverage the economic benefits of blockchain, especially those arising from blockchain’s ease of verification and decentralization.  One type of use case with significant potential is using blockchain to provide services to markets constrained by repugnance. 

Cryptocurrencies such as Bitcoin are a potential payments solution for industries not served by traditional financial service providers.  However, a payment system by itself is not enough -- the anonymity of some cryptocurrencies can increase the probability that genuinely coercive or even illegal activities will take place.  Effective platforms serving repugnance markets will need to combine the decentralized benefits of blockchain and cryptocurrencies with more traditional levers of market design, such as reputation.

An example of a company doing exactly this is intimate.io.  intimate.io is an Ethereum-based platform for individuals engaged in the adult industry.  It provides secure, decentralized transfer of payments for adult services.  It also includes pseudonymous reputation and user information (such as age verification and relevant health information) to help service providers vet customers and vice versa.  Two-party escrow provides financial incentives for users to behave cooperatively.  

intimate.io CEO, Leah Callon-Butler, writes:

Blockchain is a technology crying out for a use-case and intimate.io brings together several different blockchain-based technologies, to demonstrate unprecedented real-world utility through application to an industry that is sorely in need of emancipation from centralised bodies who have assumed the role of moral arbiter for too long.

While platforms like intimate.io open the possibility for market participants to work around roadblocks imposed by repugnance, they face many of  the same market design and data management challenges as other industries.  How will sensitive information (such as health data) be verified and provided to the market, while preserving privacy?  How will the platform ensure that users banned for poor behavior do not create new identities?  Innovative solutions to these issues can inform market design more broadly.

It will also be interesting to see how the “traditional” financial system reacts to blockchain platforms like intimate.io.  Luke Coffman at Harvard has shown that introducing an intermediary in a business transaction can lessen the punishments for “immoral” behavior that consumers give to companies.  How many steps of separation -- and of what kind -- will be required between traditional banks and platforms like intimate.io so that markets constrained by repugnance can finally be served?