Forget the West — blockchain will have the biggest impact in emerging markets

Blockchain explained

Blockchain technology, also known as distributed ledger tech, was first popularised by bitcoin, the digital currency created in 2009. It allows for a shared database that is near instantly updated, meaning all parties can see the same version of that database. It uses complex cryptography and group authentication to police the editing of the ledger.

Usually people have a central database to record things like trade. That way an impartial middleman can make sure everyone is playing by the rules. Blockchain removes the need for that middleman.

The technology was originally developed to do away with the need for a central bank for bitcoin, meaning it could be totally independent. But this feature has almost endless applications for other industries and processes that involve a trusted middleman or central authorities.

Banks are particularly keen to adopt blockchain, as its inbuilt security and trust checks cut out the need for middlemen in processes like settlement and clearing. This, in turn, cuts down costs. Santander estimated in a 2015 report that the technology could save banks as much as $20 billion.

Sceptics argue that blockchain simply replicates processes and systems that already work relatively well, without enough of a payoff to warrant the costs.

Domjan says: “Due its distributed nature, recording new assets on a blockchain can be quite slow, with transaction times measured in hours or even days rather than the seconds that are typical of e-commerce. As such, blockchain technology is a poor substitute for existing ownership records in developed or even emerging economies.”

‘We see this advantage across the developing world’

That’s not the case in emerging markets, Domjan says, where there is often only a poorly developed and unreliable system for recording property ownership.

“Whereas some emerging markets, such as Russia and China, have property registration systems on par with those in the high-income OECD countries, frontier markets in Latin America, Sub-Saharan Africa, and South Asia lag far behind, with average performance less than half that of the best performing economies,” he writes.

While it is a developed nation, Sweden is looking at a blockchain-based land registry system. Others looking at the solution include Ukraine and Georgia.

Domjan writes: “Indeed, blockchain technology can be used to maintain a clear, reliable record of anything. For example, Estonia has implemented the BitNation public notary services, including recognising marriages recorded in the BitNation blockchain, and Ukraine is developing an election platform based on the blockchain.”

It’s a similar case for contracts. Ethereum’s blockchain allows people to write rules based commands: if a payment is received, then release the deed to a property, for example. It’s not that powerful in developed nations where processes are already established for this type of thing but it could be transformational in developing economies.

“The same principle can be used for transactions ranging from financial derivatives to international trade,” he writes.

Finally, Domjan also argues that the ease of transfer of cryptocurrencies, which are built on blockchain technology, is also most useful to developing nations.

“In countries with capital controls, highly volatile currencies, and high inflation, the governance problems, payments transaction costs, and volatility of their domestic currency may seem worse than those of cryptocurrencies, or at least bad enough that cryptocurrencies represent an attractive hedge against their domestic currency,” he writes.

“We see this advantage across the developing world, from foreign investors in Brazil looking to move money to brokers in Zimbabwe looking for an alternative store of value.”

Goldman Sachs recently made a similar argument, saying that cryptocurrencies like bitcoin could become a legitimate currency in parts of the global financial system where the traditional functions of money don’t work as well.