Why blockchain's impact will be biggest in EM and how to pick the winners

Why blockchain's impact will be biggest in EM and how to pick the winners

  • Bigger challenges and weaker existing solutions mean that blockchain technology’s impact will be biggest in EM
  • Digital currencies, whether cryptocurrencies or central bank digital currencies, are only the tip of the iceberg
  • Successful projects will really need blockchain technology, use it well, and address both human and tech challenges

Several years ago, as Head of Research at Tellimer, I was sitting with a junior analyst over lunch in Dubai. He did what you always should do when you have lunch with your boss’s boss and read up on my background to develop a good question to ask: “I see that you’ve done a lot of work on innovation. How do you think that we should apply this to our work on emerging markets?” I explained that new innovations take hold not because they seize the entire market at once, but rather because the new technology finds a particular segment where it is good enough to displace the dominant technology. Having occupied that segment, the new technology then grows market share as it improves and becomes good enough for additional use cases. Crucially, those initial markets where the technology is good enough are often in applications where the current technology either has not been deployed or is a poor fit, and one often finds those applications in emerging markets.

From trains to mobile wallets, when new technologies arrive in developed markets, there is often an acceptable solution already in place (canals and credit cards, respectively). By contrast, when trains arrived in many emerging markets, they replaced overland treks, and when mobile wallets arrived, they replaced insecure access to cash. The new technology did not have to be particularly affordable, sophisticated or easy to use to be a big improvement on what came before. And, because these new technologies often take root in emerging markets first, emerging markets are often able to leapfrog a generation of technology, whether that means skipping canals, skipping landlines or skipping credit cards. But what major new technology could be the next to be good enough to gain a foothold in emerging markets? Where should we look for the next leapfrogging? The answer is blockchain. Indeed, that conversation led me to write Tellimer’s first-ever piece on blockchain – now a golden oldie.

Several years, and more than 9,000km of overland travel across Africa later, that piece has grown into my new, co-authored book on why blockchain technology will have its biggest impact in the developing world.

All of you are invited to join our launch webinar on 2 June at 5pm UK/noon New York. Arunma Oteh, who was Treasurer of the World Bank when it launched the world’s first blockchain bond, will join as our keynote speaker.

Figure 1: Distributed Ledger Technology Index shows digital currency is alive and well in many EM

Distributed Ledger Technology Index shows digital currency is alive and well in many EM

Bitcoin is only the first blockbuster application of this distributed database technology

To understand why blockchain technology will have its biggest impact in emerging markets, we first need to understand what it is and how it is different from its most famous use case: Bitcoin. In essence, a blockchain is a distributed database. A traditional database is stored in a central computer (or many of them acting as a cloud computer), and the validity of transactions on the database is determined by the permissions that systems and users have to alter records in that database. By contrast, a blockchain is a distributed database, operating across many nodes, and the rules for the validity of transactions are hard coded in the rules governing the database. In traditional database applications, users trust in the central authority maintaining the database to maintain its security and veracity. In a blockchain-based system, however, users trust in the rules encoded in the blockchain to ensure security and veracity. Contrary to much ill-informed commentary, blockchain-based systems are not “trustless”, but rather the locus on trust shifts from the central authority to the software code of the system itself.

Consider the example of digital currencies, which I discussed in detail in Tellimer’s Themes for 2021. The digital yuan, which China is currently trialling, like earlier trials in Uruguay, is underpinned by a centralised database operated by the central bank. Effectively, the holders of these central bank digital currencies are operating a deposit account at the central bank, rather than holding an asset with intrinsic value. To transfer those funds, the holder of the e-yuan needs the involvement of the central bank, and the recipient needs an account, presumably their own e-yuan account at the central bank, that can receive the transfer. This limits who can participate in the system and the ability of the digital currency to be used in cross-border transactions. By contrast, Bitcoin and other cryptocurrencies (although it might make sense to think about them instead as cryptoassets) operate across a distributed blockchain without the policing by, and reliance upon, a central bank or other central authority. As such, they can be exchanged across borders easily and can be considered an asset with intrinsic value. There are good reasons, from wanting to displace big tech and the dominance of the dollar to wanting to enhance monetary policy credibility and privacy, for central banks to consider issuing genuinely blockchain-based digital currency that can be freely exchanged in the same manner as Bitcoin.

Indeed, many of these issues are more pressing in emerging markets than developed ones. Developed markets generally have credible central banks, well-established means of digital payments and ubiquitous bank accounts, whereas emerging markets are more likely to benefit from central bank digital currencies that include constraints on the money supply or that allow a larger number of people to access reliable and affordable digital payments. China, with a highly credible central bank and ubiquitous legacy digital finance options, is more like a developed market in this regard: citizens will be happy to trust management of the e-yuan to the People’s Bank, and indeed having a deposit account at the People’s Bank is part of the attraction. In many other developing economies, however, the central bank lacks this degree of credibility. These are the countries where blockchain-based digital currencies are most likely to take hold.

Beyond Bitcoin

The same dynamic is true for a much wider range of blockchain-based solutions. Consider moveable property registration – bikes, phones, laptops and so forth – an example we discuss at length in the book. Here in the UK, I am very happy to register my property in a database maintained by the UK police. In many developing countries, however, there would be at least three problems with such a database. First, the police are likely to have bigger, more immediate priorities than setting up such a database. Second, the police may lack the expertise to operate such a database securely and reliably. Third, one might be concerned about giving details of one’s property to the police, especially in countries with high levels of corruption. Thus, while a traditional database may suffice in a developed country, a blockchain-based system would be more appropriate in a developing one.

Counterfeiting is a similar example. In the UK, I trust the regulator to ensure the medicine I receive is genuine. In the developing world, however, authenticity is far from guaranteed. Counterfeit malaria tablets alone are responsible for 120,000 childhood deaths every year in Africa. Given that manufacturers and importers of genuine medicine have a stake in their authenticity, a blockchain-based system could be implemented where manufacturers or importers register a unique QR code for each genuine pack and consumers validate authenticity by scanning a QR code, which in turn would mark the pack as sold. Such a system would not perfect – QR codes could be reused by counterfeiters if the final buyer never scanned the code, and medicine is often sold without the packaging – but it would still do a great deal of good.

Figure 2: Spot the fake: Do you know what colour the packaging of this malaria treatment is meant to be?

Source: Interpol

Figure 3: How is one to know whether these antibiotics, which I bought at a pharmacy in Kabale, Uganda, are genuine?

Source: Interpol

Finally, there are areas where the state is deeply embedded in most developed countries, but largely or wholly absent in many developing ones. Registering a building or piece of land is a clear example. Most developed countries have well-established systems for managing who owns what, but they are missing in many developing countries. As such, schemes abound where fraudsters sell land and property they do not own[1], leading savvy owners to post notices that their property is not for sale. Where the state is absent, a blockchain-based system can give some confidence. There is no guarantee that a record in a blockchain property registration system itself is not fraudulent, but the relative immutability[2] of the blockchain at least captures the history of the registration entry to corroborate the sign.

Figure 4: A beautiful spot for a new hotel that I visited in Sipi Falls, Uganda, could easily fall prey to a property scam...

Figure 5: ...so the astute owner has posted a notice warning off potential victims


Block-washing or building blocks: What makes a good blockchain solution?

These examples give just a hint of how blockchain-based solutions can be good enough to succeed in emerging markets today. Unsurprisingly, companies across the emerging world are aggressively deploying blockchain technology, but how can we tell which are ‘block-washing’ and which are using the blockchain as building blocks for practical, and potentially commercially successful, solutions? Based on the many examples in the book, I offer a few simple tests:

Does the system need to be decentralised? The fact that a problem can be solved with a decentralised, blockchain-based database does not mean that it needs to be. Where there is a central authority with the credibility and skill to design and operate a system using a traditional, permissioned database, that is likely to be a simpler and more cost-effective option. Just because you can use a blockchain does not mean that you should.

How important is verification and transparency? Verification and transparency are easily baked into blockchain-based systems. You can clearly see when records were created, and how they have been altered. For some use cases, like property registration and counterfeit detection, this is tremendously valuable. For other use cases – we give the example of the much-needed digitisation of bus ticketing in Africa in the book – it would be overkill. I need to know what seat on the bus will be available, but I don’t need an immutable record of who sat in it yesterday, let alone last month or last year.

Have you overcomplicated your blockchain implementation? Several of the projects we explore in the book failed to gain traction because they simply got too complicated, funding themselves with tokens or introducing new digital currencies. Whatever the domain of the innovation, innovators are more likely to succeed by keeping their innovation as simple as possible. Layers of additional complexity may appeal to blockchain maximalists, but they also create additional ways that the project can fail.

How much garbage-in will you get, and how much can you tolerate? Blockchain-based systems suffer from the same garbage-in, garbage-out problem of any other system. Blockchain-based systems are good at maintaining and documenting the history of the data, but they are no better than any other database at making sure that the data is correct in the first place. In the book, we discuss a range of attempts to set up blockchain-based national land registries. Most of them struggled to succeed not because the technology was not suitable, but rather because there was no suitable starting point. In Ghana, for example, the government has no ownership records for 78% of land. Where do you start? A voluntary blockchain-based system, like the hypothetical one discussed above, would be preferable to just a “This Property is Not for Sale” sign, but there is a big gap between such a system and a functioning, blockchain-based national land registry. Moreover, as this example shows, many innovations could deliver some value even if there is a certain amount of garbage-in, and blockchain innovators need to be careful not to let the great be the enemy of the good.

Does the project need government support? The institutional failings that beset many emerging markets often persist because of the self-interest of officials and their cronies, who benefit from a lack of transparency. The book is filled with examples of innovations that address real problems, but that ultimately stall because they are unable to secure a necessary license, permit or regulatory approval. The problem is similar to the garbage-in, garbage-out problem: even the best technical solution will fail if it does not address the human side of the problem. The book explores this issue in detail through two scenarios for the future role of blockchain in the developing world, The Big Bet, in which governments embrace blockchain-based solutions, and The Devil You Know, in which governments and incumbent companies stick to current systems, and try to push out blockchain-based solutions, leading society to use such solutions in a more bottom-up, under-the-radar fashion. But that will be a story for a future Weekend Reading.

My new book Chain Reaction: How Blockchain Will Transform the Developing World, co-authored with Gavin Serkin, Brandon Thomas and John Toshack, is available now. Tellimer readers can receive a 20% discount if they order direct from Palgrave Macmillan in the US, UK or EU using the code “PPM2021”.

[1] Such scams are often referred to as 419 fraud, and their perpetrators as 419ers, after section 419 of the Nigerian Penal Code, which criminalises fraud.

[2] As we discuss in the book, although blockchain-based systems are difficult to alter, they are not immutable, as the decision to roll back the Ethereum blockchain in 2016 showed.

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