September 1, 2017    7 minute read

Blockchain: How It Could Bolster Emerging Markets

Innovative Technology    September 1, 2017    7 minute read

Blockchain: How It Could Bolster Emerging Markets

“It is antiquated- a kludge of industrial technologies and paper-based processes dressed up in a digital wrapper.”

That is how Don Tapscott, the co-founder of the Blockchain Research Institute, describes the global financial system. And he is far from wrong. Today, we have financial systems that are barely keeping up with the revolutions that are happening in different technologies. These systems fall prey to hackers and financial terrorists. Crises afflict them with devastating and worldwide consequences. These failures have led many to search for ways and mechanisms that would revolutionize the whole world of finance. One example of such is Blockchain.

Examining Blockchain

It is a decentralized, and continuously growing, list of records that are called blocks. It is a global ledger, available to anyone, on which transactions, money, assets, contracts and anything of value, can be stored. Blockchain is generally associated with cryptocurrencies, especially Bitcoin, which is the most known. However, the uses and potential of Blockchain are far greater.

While its primary users have mostly been developed countries, Blockchain presents an opportunity for emerging markets to not only reach, but also surpass, more developed economies. A country that is experiencing a transition from one economic system to another, and lacks the standards of developed markets, is generally called an emerging market. They have not reached a mature and stable point yet, and thus are very vulnerable to financial or economic shocks.

In this category, BICS, South Korea and Argentina can all be included. What makes these markets attractive is their incredible growth with respect to consolidated economies, low-cost labour and untapped capital. On the other hand, they also have very high risks. Usually, there are large political uncertainties, with unstable governments and weak legal systems due to the fragile nature or even the lack of democracy. Moreover, currency and economic risks are also present. Blockchain is seen as a potential solution to all these uncertainties.

In emerging markets, the market structures are less defined and have high transaction costs. The financial infrastructure in these countries is underdeveloped. So, instead of trying to improve these existing systems and copying the models of their developed counterparts, they could leapfrog and adopt the Blockchain technology. This analysis will focus on several areas upon which Blockchain technology can greatly improve on, facilitating the lives of citizens, the ease of doing business and the overall economy of these countries.

How It Can Help Developing Economies

Firstly, it will help decrease corruption. Since every transaction leaves a unique digital footprint, it is easier to track it down. On this technology, it is possible to store contracts, property deeds and other valuable documents, thus increasing transparency. As the International Finance Corporation reports, these are called smart contracts and can take actions based on predefined rules. This solves the problem of property grabbing and ownership meddling through falsification of documents or contracts. Records cannot be changed retroactively, so any attempts at manipulation will be noticed immediately. A country that mitigates the problem of corruption is more attractive in the eyes of investors.

In these countries, remittances – which are transfers of money made by individuals who work abroad – are one of the largest inflows of capital. However, a considerable proportion of the sums of money is taken by banks or other financial institutions that charge a fee for the facilitation of the transfer. According to the Overseas Development Institute, in 2015 12% of every $200 sent was lost in fees. Blockchain can help by allowing these individuals to transform their money into a virtual currency and transfer it online, with very small fees. Not only is this instantaneous, but it is also straightforward. In Africa, this is currently being implemented. BitPesa, the online payment platform, facilitates the flow of money with very little cost.

Moreover, Bitcoin makes it easier for everyone to access the financial system. Since it is a decentralized structure, anyone can use it. Currently, most – if not all – financial transactions are carried out by banks or other similar institutions. Blockchain changes this radically. It has the capability of replicating the functions of commercial and investment banks or asset management firms. Many financial organizations decide to stay away from certain countries due to the regulations in place, or difficult political situations, thus leaving these countries without proper financial access. But if respectable banks abandon emerging economies, then there will be a lack of banking competition- potentially creating black market dealings and unsafe financial firms. This can lead to instability in these countries, criminal money and corruption.

Financial Inclusion

Through ensuring financial inclusion, Blockchain tries to avoid this, thus improving the lives of the citizens in these countries. Therefore, banks can use this technology to remove the entry barriers in emerging markets, easily move assets across countries and verify each transaction made.  This helps to lower the risks and uncertainties for them and their counterparties in these economies. The private sector can benefit as well, by receiving the financial support they need and making it easier for them to transact with foreign customers and suppliers.

Furthermore, according to the American Banker, Blockchain technology automates the matchmaking between the investors and those seeking the money. This is generally the work of venture capital firms, investment banking and other financial institutions that serve as intermediaries. Through Blockchain, this matchmaking is more transparent, accurate and efficient, also actualizing the payment of coupons and dividends. Using the same logic, other activities such as loans, insurance, accounting and risk management can be performed through this technology.

Financial institutions that see an attractive opportunity in emerging markets should seriously begin considering the use of Blockchain technology, which would result in the mitigation, or even the elimination, of the main threats that come from these countries. On the other hand, countries themselves should start applying this technology, which could ensure a remarkable decrease in corruption, increase in growth and further progress.

Nevertheless, Blockchain is still in its early phases of development, little known to many emerging countries; similar to the Internet in its very early beginnings. As such, it has its drawbacks and risks.

Potential Costs and Drawbacks

Undoubtedly, there will be high costs in its implementation, which will predominantly be financial and organisational. For some companies, it may be a gamble to implement this technology. Since it is relatively new, it has an uncertain future. Its potential is huge, and one needs to believe that this potential will be tapped into, much like the Internet. If that is not the case, it will be a big waste of time and money. There are costs of testing the technology, but also training people. Currently, there is a limited qualified human capital.

Secondly, there can also be security breaches. In its report, the International Finance Corporation correctly mentions the 2016 cyber-attacks on the  Distributed Autonomous Organization as a result of the vulnerability of smart contracts. The amount stolen was worth $50 million. Evidently, cybersecurity is an issue. As technology gets more sophisticated, so too do the thieves and hackers.

Lastly, the issue of regulation needs to be addressed too. These countries do not have stable and trustworthy legal systems. Their regulatory frameworks leave a lot to be desired. As such, the question arises as to how they will regulate this technology. Regulation is a tricky subject even with the current systems in developed countries.

Conclusion

Blockchain, as part of the Fourth Industrial Revolution, represents a drastic change in the way we perceive finance today. For the emerging economies, it would revolutionize their whole way of life. Of course, there is the need for more thorough research in order to accurately assess the benefits and setbacks of implementing this technology. Only time will tell if it is “a mathematical framework, free of politics and human error” or an over-valued technological experiment.

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