Blockchain to provide opportunities for developing economies

Blockchain – the distributed-ledger technology that underpins cryptocurrencies such as Bitcoin – appears set to transform a wide variety of industries and perhaps fundamentally change the way business is conducted across the globe. While the technology is still taking off and its potential is not fully known, many emerging markets are hoping that it will allow them to leapfrog older infrastructure and tackle a range of challenges, including centralised database development, corruption and fraud, and persistently high transaction costs for electronic payments.

Blockchained Explained

A blockchain is a cryptographically protected, distributed and decentralised ledger of transactions. Rather than existing on a single computer, the ledger is replicated across locations, all of which are interlinked so that a change by one user – validated by his or her public key or password – is copied across the entire ledger. No individual user controls the blockchain, but each can change it to the extent that their own key allows, for example, by spending their units of cryptocurrency. Changes cannot be reversed unless a majority of users agree to a so-called fork of the blockchain, which essentially restores it to the version before the alteration being rescinded was made.

The technology is named after its structure: the ledger is made up of a series of files called “blocks” that each record transactions within the network, with every new block invalidating the previous one. For example, a Bitcoin block contains around 500 transactions. The technology rests upon various foundational elements, including the decades-old mathematical concepts of a Merkle tree and elliptical cryptography. However, the arrival of blockchain dates from the publication of a paper under the name Satoshi Nakamoto in 2008, which allowed for the creation of Bitcoin, with the cryptocurrency made publicly available the following year.

New Applications

While blockchain remains associated with cryptocurrencies, proponents argue that it has potential for considerably broader applications. The technology can be employed in any field that involves the recording of changing information – such as transactions – as well as the use of contracts. Interest in such non-cryptocurrency applications has spiked since 2015, when blockchain operator Ethereum released a platform allowing coders to build their own smart contracts without having to design one from scratch.

A potential example of such a smart contract is a self-executing agreement that sees payment automatically made to a supplier when a good – tracked by a technology such as GPS – arrives at the purchasers’ warehouse. Proponents argue that this ability could allow for the reduction or elimination of various intermediaries that currently act as guarantors for transactions, including banks or notaries providing escrow services or letters of credit. This is because payment is effectively guaranteed by the technology, eliminating the need for trusted third parties to underwrite a transaction, which could substantially reduce costs and time. It could also lower the potential for errors as multiple players work to reconcile their versions of a ledger.

Another advantage of blockchain is less potential for fraud, as the technology does not allow the retroactive alteration of records. Blockchain also arguably boosts transparency, as it contains a record of all transactions made on it. This is generally accessible – in anonymised form – to all users on the network, making them easy to audit. These features could help transform many sectors of the global economy: automated payment on delivery, for example, could prove revolutionary for trade, logistics and supply chain management.

In finance, supporters similarly suggest that blockchain could eliminate the need for intermediaries involved in the settlement of share purchases. David Shrier, associate fellow at the Said Business School, University of Oxford, and CEO of psychometric business profiling firm Distilled Analytics, described digital identity as potentially the most important application for blockchain. “Over 1bn people in the world lack an official identity, and the recent hacking of government databases shows the potential perils of creating old-fashioned centralised electronic identity registries,” Shrier told OBG. He went on to argue that blockchain-based databases, though not automatically secure, could be made to be more secure than centralised databases.

Many view health care as another fruitful domain. “Sharing data between different health care institutions and practitioners is a struggle in general for health care systems,” Casper Winther-Hansen, blockchain PhD fellow at Copenhagen Business School, told OBG. “Due to its interoperable nature, blockchain may provide infrastructure that makes this much easier. In the field of clinical trials, blockchain could also enable pharmaceuticals companies to gather and share data, and could help with tracking and tracing the movement of drugs.” Blockchain-enabled sharing of clinical trial data could halve the costs and time to bring a new drug to market.

Proponents also argue that blockchain can help solve data ownership issues, as highlighted in controversies regarding social media data transfer. “Blockchain-based social media options allow the user not only to own and control their own data, which is on an independent blockchain rather than controlled by a third party such as Google or Facebook, but also to easily monetise it,” Pandu Sastrowardoyo, spokesperson and member of the board of directors of Blockchain Zoo, an association of distributed ledger professionals, told OBG.

In light of such advantages, many see the technology as having the potential to transform the global economy. For example, a 2017 article in the Harvard Business Review compared blockchain and its potential to that of the transmission control protocol/internet protocol technology, which laid the groundwork for the internet’s development, stating that it “has the potential to become the system of record for all transactions”.

Criticisms

Nevertheless, not all are convinced by the claims of the technology’s applications. Aspects cited as benefits have also been criticised, including the lack of intermediaries and difficulties in reversing transactions. While a credit card company can, for example, reverse a fraudulent payment, it could be much harder to reverse a blockchain-based payment. Furthermore, while it could increase efficiency, some argue that blockchain is highly inefficient in some respects: a given ledger is fully replicated across the computers of many or all users, with each instance taking up storage and requiring energy to process. Furthermore, the technology, for the time being at least, is slower than some centralised transaction processing technologies. According to international media, the Ethereum blockchain platform can process around 15 transactions per second, while credit card operator VISA can process 2000.

Another common criticism is that blockchain can be a solution in search of a problem. “In health care there is always a drive towards promising progress in care and casting about for solutions,” Winther-Hansen told OBG. “However, some features of blockchain such as full transparency do not always benefit patients, and we need to ask ourselves detailed questions about what kind of problems we are trying to solve before treating it as the ultimate solution to data-sharing issues,” he said, adding that pharmaceuticals players would likely be reluctant to open their systems.

Others argue that the technology does not need to replace existing institutions and infrastructure, but rather can be used as a supplement. “Blockchain is not a panacea; it is good for some things and not for others,” Shrier told OBG. “However, in instances where there is no trusted authority, blockchain can deliver trust.”

Development

To date, the technology has yet to become widespread. According to “The 2018 Chief Investment Officer (CIO) Agenda”, published by business research and advisory firm Gartner, less than 1% of 3000 CIOs interviewed invested in or used a blockchain-based solution. However, many think it will take off soon. “The year 2018 is when everyone says blockchain will pass from proof of concept and experimental technology to actual deployment,” Shrier told OBG, though he added that the most interesting applications were still at least three to five years from widespread commercial adoption.

Nevertheless, there are indications that the technology may be on the verge of a breakthrough, particularly in financial services. In May 2018 HSBC announced that it had carried out the world’s first commercially viable trade finance deal using blockchain, namely a credit letter for a soybean shipment. Furthermore, because of the technology’s connection with cryptocurrency, the blockchain development community has access to substantial amounts of liquidity, which could help finance the implementation of the technology in other areas.

Implications for Emerging Economies

It is hoped that blockchain technology will enable emerging economies to leapfrog infrastructure and institutions in developed countries, allowing them to reach similar levels of development at lower costs and higher speeds. Of particular relevance to many emerging markets is the potential application of blockchain technology to track resources, as well as combat corruption and fraud. “In developing countries in particular, benefits meant to flow to the needy are sometimes misappropriated,” Shrier told OBG. “Therefore, having an immutable transparent digital record becomes an attractive solution.” Additionally, the adoption of blockchain could also be faster in emerging markets than in developed ones, because there are often fewer existing technologies in place with established institutions using them.

Middle East

Of the emerging markets exploring the applications of the technology, the UAE and Dubai in particular have arguably taken one of the most proactive approaches. In late 2016 the public bodies Smart Dubai and the Dubai Future Foundation launched the Dubai Blockchain Strategy to support take up. Following the strategy, in June 2017 Smart Dubai office announced plans for every government service and transaction that can be conducted on the blockchain to be moved to it by 2020, making it the first blockchain-powered government in the world. In addition, the emirate’s Department of Tourism and Commerce Marketing launched Tourism 2.0, a blockchain-based marketplace, in April 2018. The application allows local hotels and tour operators to connect directly with potential customers. Other government entities in the emirate, including its Customs services and land registry, are also reportedly examining potential applications. The UAE government followed suit in April 2018 with the launch of UAE Blockchain Strategy 2021, under which it aims to carry out half of all government transactions using blockchain by 2021. The authorities estimate that this will save Dh11bn ($3bn) per year in document-based transaction spending and 77m hours of work.

Use of the technology is also taking off in Saudi Arabia. In February 2018 the kingdom’s central bank signed an agreement with Ripple, an international settlements and remittances platform, for a pilot project to create a blockchain-based cross-border interbank settlement system. In late April 2018 a blockchain event was held in the capital, Decoding Blockchain KSA, where officials from national energy firm Saudi Aramco – the world’s largest oil and gas company – said they were exploring potential uses for the technology. Also in April 2018 the government and blockchain design studio Consensys held a blockchain-focused “boot camp”, offering training on building decentralised applications and smart contracts. That same month Consensys signed a memorandum of understanding (MoU) with Saudi Telecom Company to develop blockchain in sectors such as financial services, health care and real estate.

Latin America

The technology is also seeing wider use in Latin America. According to IBM-cited research, the blockchain solutions market is set to grow by more than 125% by 2021. In Mexico the authorities are working to leverage the increased accountability that blockchain can provide. In April 2018 the government announced the Blockchain HACKMX project, which will use the technology to track bids on public contracts. The initiative could boost transparency in the bidding process and facilitate the later auditing of bids.

Health care applications could also play a significant role in Mexico. “In the distribution of pharmaceutical products, there have been inefficiencies in the value chain, especially involving a lack of transparency and visibility,” Carlos de la Fuente, president and CEO of domestic firm Medistik, told OBG. “Even though technologies exist to optimise these processes, they are still in their infancy. However, over the medium term new technologies will drastically change the system, allowing for greater efficiency, transparency and real-time tracking of products.” Similar sentiments were echoed by other players. “Compared to many other OECD countries, transparency in Mexico’s health care sector is low,” Jorge Moran, CEO of Genetics & Health, told OBG. “Blockchain technology can change this through its ability to rigorously manage and process information.”

Nonetheless, the country faces potential bottlenecks in health care solutions, as the technology remains too advanced for institutions outside major urban centres. Moreover, with five different health care systems operating in the country, it would be difficult to manage the health data of all customers through one blockchain.

South-East Asia

One region that appears ripe for application of the technology, particularly in terms of digital identity, is South-east Asia. “Some countries such as Singapore have centralised government identity and health databases, but overall there is a great deal of data fragmentation in the region,“ Sastrowardoyo told OBG. “Blockchain will be able to solve this without the need to build centralised data repositories,” she added.

Blockchain-related commercial activities are starting to take off in financial services. In April 2018 Indonesian start-up Online Pajak launched a blockchain-based mobile app enabling people to securely share data with institutions such as the tax office and central bank, providing advantages including clear proof of tax payments. In addition, the Financial Services Authority is examining ways in which blockchain could be used to improve the functioning of the country’s finance sector.

Financial services are also acting as a driver of blockchain-related activity in Thailand. In February 2018 the country’s Ministry of Digital Economy and Society signed an MoU with Asian financial inclusion-focused start-up Omise to develop a national blockchain-based payment and digital identity system.

Africa

The African continent has arguably led the world in the development of mobile payments, particularly micropayments. Unsurprisingly, such transactions have become a main focus of applications for blockchain. Kenya has emerged as a leading player in this, building on its previous success in mobile payments through M-Pesa to launch BitPesa in 2013, a platform that uses blockchain to settle business payments within sub-Saharan Africa and between the continent and the rest of the world. Furthermore, the country hosts Bitsoko, a blockchain-based mobile platform for merchants and services that won a $100,000 grant from the Bill and Melinda Gates Foundation in 2015. A key selling point of blockchain is its ability to reduce costs, with it lowering remittances in Africa from 10-15% of the transaction value to 0.1-0.2%. Kenya is also home to BitHub Africa, a private sector accelerator for startups using blockchain technology, established in 2015.

The authorities are working to support further development of this. In April 2018 the country’s Capital Markets Authority sponsored the World Blockchain Summit, a regional conference on the technology. This move followed an announcement in early 2018 that it was setting up a blockchain task force headed by Joe Mucheru, the ICT Cabinet secretary, to establish a roadmap for potential uses of the technology, with education and land ownership earmarked as promising areas.

Indeed, the use of blockchain as an alternative to centralised land registries has been touted as a prime application. Proving title to land is a global issue, but land fraud is a particular problem in less-developed countries with poorer record-keeping. This makes the security of blockchain particularly appealing.

In Ghana the government is piloting a project with Bitland to record title deeds in the Kumasi region using blockchain to reduce fraud and allow for more efficient mortgage lending. Addressing these issues could be key to Africa’s sustained development. “Blockchain can increase confidence in real estate transactions, opening up a significant asset class,” Schrier told OBG.