As the hype surrounding cryptocurrencies is behind us, this does not mean that the technology underlying the functioning of those currencies is a force to be reckoned with. Don and Alex Tapscott gave a good summary of the promises of the technology: “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
While the applications in already tech-intensive developed economies are obvious, the technology may hold even greater promise for the developing world by allowing them to leapfrog some of the institutions that they are lacking and to rely only on the power of algorithms to foster trust and transactions. The most visible example of leapfrogging today is in nations like Kenya and South Africa, which have rolled out near-universal telephone access using 3G networks instead of laying down copper cables, and provided internet access by smartphone rather than with desktop PCs.
The father of Institutionalism Douglas North said that one of the missions of institutions is to lower uncertainty about one another. And this is where the blockchain technology comes into play; public registry transaction history are unforgeable blocks of data. In developing countries the lack of functioning institutions is a major problem, and blockchain is bound to provide a solution for some of the problems holding back the developing world.
Money transfer giant Western Union has recently sent mixed signals about their position toward cryptocurrencies and blockchain. First, by banning any transaction involving digital currency, then by announcing it might use Ripple technology as the basis for its money transfer activities. The international money transfer giant could well be one of the first to be impacted by the blockchain technology.
Remittances, which totalled $429 billion in 2016, are worth three times as much as all the foreign aid distributed by various governmental institutions worldwide, and they are likely to be more effective dollar-for-dollar. Unlike aid, notoriously passing through corrupt politicians and inept bureaucracies, remittances go directly to recipients, where they pay for actual needs such as schooling or medical expenses.
But this valuable if not vital flow is dried up by the money transfer institutions that charge a so called super tax for money transfers going toward Africa and Asia, where the cost of sending money is from 2 to 5 times higher than sending money between developed countries. According to the British Overseas Development Institute, Western Union and MoneyGram account for $586 million of the loss associated with the super tax.
Here the blockchain technology would be very valuable in making the middle man redundant and allowing millions of dollars to reach people in need. According to Jeremy Allaire, CEO of a blockchain-based service new to the remittance market called Circle, “In 5 years or 10 years, the whole idea of a remittance or cross-border payments will be gone, just like we don’t have cross-border email, or cross-border web browsing. It’s just the internet.”
But experts believe the business and regulatory issues are still holding back the development of those solutions. Most of these have to do with keeping out criminal and terrorist networks out the system making for a pretty high barrier to enter the market. Western Union is not dead but it is making its way through future turbulence.
Don’t trust your governments, trust the tech.
Blockchain has been coined by many as an antidote for corruption. An Executive Opinion Survey carried out annually by the World Economic Forum, and covering almost 6,000 enterprises in over 100 countries, found that firms consider misgovernance and corruption as major obstacles to their operations. In turn fewer companies coming to those countries to do business is holding back other swathes of the economy. Myanmar and Indonesia are setting up some a blockchain system that could help monitor the use of public funds on a public ledger open to public scrutiny. Some African countries could also have a lot to gain—in terms of preventing the portion of their budgets that go down the corruption drain—from more transparent and therefore accountable government.
Another concern voiced by many NGOs is that financial flows of aid will be dried by corruption and administration mismanagement before reaching the project it was intended to back. There are plenty of examples of gently labelled “misuse” of World Bank loans that are intended to build schools and hospitals but which end up building a football stadium or renovating a politician’s mansion.
Because the core of the technology is to keep track of transactions, a widespread use of a blockchain technology would make for an easier monitoring of the use of public funds by anyone as the records would be available to anyone. In a more distant future, we can even imagine a world where foreign aid did not get consumed in the bureaucracy but went directly to the beneficiary under a smart contract.
Worldwide, seventy percent of all people who own land have a tenuous title to that land. Land grabbing is a major problem in developing countries where a well-directed bribe can make land change hands in a matter of minutes. Because of this uncertainty, many people do not make proper investment on their property for fear that it will be seized by unscrupulous businesses or persons close to the power if they become too attractive. Another interesting consequence would be to allow them to use this well-secured title to land as a collateral to a loan and be able to make larger magnitude investments. This leads us to the potential contribution of blockchain technology on the long road to financial inclusion.
Accessing financial services is one of the key issues hindering development in the poorer part of the globe. Because the current financial institutions have very high transaction cost, many poor people do not have access to formal financial services because it would not be profitable for banks to serve them. This is where the blockchain can provide some interesting solution to the two billion people worldwide who currently do not have access to banking services by reducing the need for a costly middle man.
Many people and businesses are currently held back from expanding because they cannot get access to credit or even basic financial services such as a bank account. As seen before, getting appropriate land title to use it as collateral is one of the ways it could help people get credit. However, without assets and a stable income, most poor people are often denied by traditional lenders.
Blockchain would allow poor people to have a publicly available unforgeable record for their past transactions, making up for a lack of credit credentials if they wanted to access credit through traditional banking institutions. But in the longer term, blockchain would also allow people to be able to finance themselves without even going through current financial institutions.
Research funded by the Bill and Melinda Gates Foundation has found that mobile money services have lifted 194,000 Kenyans out of poverty, with a particularly large impact in female-headed households. With a widely used blockchain-based financial platform, the consequences could be of unprecedented scale allowing potentially millions to be lifted out of poverty.
Amongst the reasons cited for the lack of access to the formal economy, two are key. The first one is the lack of reliable record keeping systems in developing countries, the second being the reluctance of people to give information about themselves and their transactions for lack of trust towards their government. With blockchain, people have to trust the technology, but they do not have to trust their governments and it provides solutions to those two major problems holding back the developing world.
As Steve Jobs used to say “technology should be either beautiful or invisible” and blockchain technology right now is neither, but it holds great potential to become so and have great repercussions on the developing world.
By Arthur Hill