Top tip: if you’re in a meeting discussing anything to do with finance, at some point look wise and say ‘you do realize, blockchain is likely to change everything.’ Of course, there is always a terrifying chance that someone will ask what you actually mean. Worry not, because IDS has produced a handy bluffer’s guide to help you respond. Blockchain for Development – Hope or Hype?, by Kevin Hernandez, is the latest in IDS’ ‘Rapid Response Briefings’ series, (which itself is a nice example of how research institutions can work better around critical junctures/windows of opportunity). It’s only four pages, but in case even that is too onerous, here are some excerpts (aka a bluffer’s guide to the bluffer’s guide).
‘What is blockchain technology?
At its heart, the blockchain is a ledger. It is a digital ledger of transactions that is distributed, verified and monitored by multiple sources simultaneously. It may be difficult to think of something as basic as the way we keep and maintain records as a technology, but this is because record-keeping is so ingrained in daily life, albeit often invisibly. The ubiquity of ledgers is in part the reason why blockchains are held as having so much disruptive potential. Traditionally, ledgers have enabled and facilitated vital functions, with the help of trusted third parties such as financial institutions and governments. These include: ensuring us of who owns what; validating transactions; or verifying that a given piece of information is true.
Table 1: Comparing traditional ledgers with the blockchain
The hype is not about the blockchain itself but what it enables. It has been called ‘the trust protocol’ because it facilitates trust between people without the need for an intermediary to verify and/or validate identities, funds, or ensure compliance. Since ledgers are so ubiquitous, blockchains can disrupt just about every sector. It goes beyond money. Any unit of value can be transacted on blockchains. Some are calling it ‘the second era of the internet’ or the ‘economic layer the internet never had’.
Potential development applications
Microfinance: Anyone using the blockchain application bitcoin has the equivalent to an online bank account in the form of a bitcoin wallet. Getting a bitcoin wallet is free and it is available to anyone with internet access. Some wallet providers are working on SMS solutions. No legal identification is required, just an email address or phone number, and there are no maintenance fees or minimum balance requirements. However, digital inequalities mean blockchain banking may be less accessible to those less likely to be online, such as poorer communities, women (especially in developing countries) and minorities.
Remittances and international payments: Blockchain transactions are borderless. The same minimal fee (a few US cents) is charged regardless of where the two sides of a transaction reside. Currently the average remittance cost is 7.6 per cent globally but can cost up to 20 per cent – depending on the sending and receiving country. The World Bank estimates that cutting the cost by 5 percentage points can save US$16bn per year.
Digital registries: As an immutable, time-stamped ledger, the blockchain is an attractive tool to prove ownership and existence. There are already initiatives aiming to use blockchains to register land and improve property rights, including Bitfury in Georgia and Factom in Honduras. Registering assets may allow people in developing countries to leverage up to US$20tn (as estimated by economist Hernando de Soto) for capital which they do not currently have proof of ownership for. Furthermore, the blockchain can be used to track assets from raw materials to the end user to ensure they meet standards (e.g. organic or fair trade).
Tracking aid: The blockchain can help give governments and taxpayers piece of mind as it makes it possible to track aid funds in near-real time through the aid chain, allowing donors to ensure money is being spent as intended and to crack down on misappropriated funds.
Smart-aid contracts: Smart contracts are essentially bank accounts for contracts that live on blockchains in the form of computer code with instructions that self-execute and automatically disperse funds once predetermined conditions are met. This can potentially streamline results-based finance. Funds can be automatically dispersed as objectives and milestones are reached, albeit such rigid forms of financing can make it even more difficult to adapt to complex contexts and issues. Smart contracts could also help improve response time to crises by automatically dispersing predetermined amounts of funds after a certain amount of deaths during an epidemic or if a natural disaster of a predetermined magnitude hits a vulnerable country.
P2P aid: Peer-to-peer (P2P) donations could be made via blockchain without the help of aid organisations, NGOs, community organisations, or any other intermediaries in the aid chain as well as financial institutions. This could ensure that a larger share of donations and loans reach beneficiaries, and smart contracts can be built into them to ensure money is used as intended (e.g. sending kids to school). However, overreliance on such models could leave out digitally poor groups unable to upload their stories onto P2P platforms.’
The report sets out a ten point checklist for policy makers, which I found a bit underwhelming, tbh, but this eminently sensible para did stand out:
‘Given that context is important in determining what will work, be sceptical of outsider blockchain solutions to local problems. Remote design or sending people for short periods of time to set up blockchain solutions is likely to be inadequate. Successful blockchain applications are likely to be those designed in developing countries putting the end user at the centre of the design process, not those designed for developing countries.’
One final suggestion. Blockchain lends itself to individual contracts (see ref to de Soto), but presumably it would be technically feasible, and probably politically worthwhile, to come up with some kind of collective version that could, for example, prove communal land ownership when communities are subject to land grabs? Anyone working on that?
And if you want more, here is a similar ‘blockchain for beginners’ piece from the World Economic Forum – maybe a bit more accessible, but fewer cautionary notes.
This post first appeared on From Poverty to Power.
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