Blockchain finding applications that could revolutionise global trade and provide opportunities for the developing world

 

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 global economy.

While the technology is still taking off, and not everyone is convinced about its potential, many emerging markets are hoping that it will allow them to leapfrog older infrastructure and tackle a wide range of challenges. These include the costs and risks involved in developing centralised databases, issues of corruption and fraud in supply chains and land registries, and persistently high transaction costs for electronic payments.

Blockchain Explained

A blockchain is a cryptographically protected, distributed and decentralised ledger of transactions. Rather than existing on a single computer, or a handful of computers or servers, the ledger is replicated across numerous locations, all of which are interlinked so that a change by one user – validated by his or her public key or password – is replicated across the entire ledger. No individual user controls the blockchain, but each can make changes to it to the extent that their own key allows; for example, spending the units of cryptocurrency that they own. Such changes are permanent and 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 change in question was made.

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

New Applications

While blockchain remains widely associated with cryptocurrencies, proponents argue that it has the potential for considerably broader applications. The technology can be extended to multiple uses across 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 being made to a supplier when a good – tracked by a technology such as GPS – arrives at the purchasers’ warehouse. Proponents argue that this ability to automate contracts gives rise to the possibility of reducing or eliminating the need for various intermediaries that currently act as guarantors for transactions. These include banks or notaries providing escrow services or letters of credit. The reason for this is that payment is effectively guaranteed by the technology, as such there is no need for trusted third parties to underwrite the transaction. Reducing the involvement of such intermediaries in business transactions could substantially reduce costs and time, as well as the scope for errors that can arise as multiple individuals or businesses work to reconcile their versions of a ledger.

A further widely cited advantage of blockchain use is reduced potential for fraud, as the technology eliminates the possibility of retroactively altering transaction records. Blockchain technology 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 the world of finance, supporters of the technology similarly suggest that blockchain could eliminate the need for the long chain of intermediaries involved in the settlement of share purchases. David Shrier, associate fellow at the Saïd 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 observers view health care as another possible domain in which the technology could be fruitfully put to use. “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 pharmaceutical companies to gather and share data, and could also help with tracking and tracing the movement of drugs.” In addition, blockchain-enabled sharing of clinical trial data could halve both the costs and time involved in bringing a new drug to market.

Proponents also argue that blockchain can help to solve problems related to data ownership, as highlighted in recent controversies regarding the transfer of social media data. “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 observers see the technology as having the potential to radically transform the global economy. For example, a 2017 article in the Harvard Business Review compared the blockchain and its transformative potential to that of the transmission control protocol/internet protocol technology, which laid the groundwork for the development of the internet, stating that blockchain “has the potential to become the system of record for all transactions”.

Criticisms

Nevertheless, not all observers are convinced by the claims made regarding the disruptive applications of the technology. Aspects that are often cited as benefits have also been criticised, including the lack of intermediaries involved and difficulties in reversing transactions. While a credit card company can, for example, reverse a fraudulent payment, critics argue it could be much harder to reverse a blockchain-based payment in the event of someone’s password being stolen. Although applications of the technology could facilitate greater business efficiency, some argue that it is highly inefficient in some respects. A given blockchain ledger is fully replicated across the computers of many or all users, with each instance taking up storage space and requiring energy to process. Furthermore, the technology, for the time being at least, is also slower than some existing centralised transaction-processing technologies. For instance, 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 is often used as 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 are not always to the advantage of 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 stated, adding that the pharmaceuticals industry would likely be reluctant to invest in opening up its systems to a brand-new infrastructure.

Nonetheless, others argue that the technology does not necessarily need to replace existing institutions and infrastructure, but rather can be used in cases where they are lacking. “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 technology can deliver trust.”

Development

However, use of the technology has yet to become widespread. According to “The 2018 Chief Investment Officer (CIO) Agenda”, published by business research and advisory company Gartner, of 3000 CIOs interviewed less than 1% had invested in or used a blockchain-based solution. Nevertheless, many observers think that the technology will start to 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 he believed the most interesting applications of the technology were still 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 terms of its application within financial services. This observation was bolstered by HSBC’s announcement in May 2018 that it had carried out the world’s first commercially viable trade finance deal using blockchain, namely a letter of credit for a soybean shipment. Furthermore, because of the technology’s connection with cryptocurrency, the blockchain development community currently has access to substantial amounts of liquidity, which could help finance the implementation of the technology in other areas.

Implications for Emerging Economies

One key hope being pinned on the emergence of blockchain technology is that it will enable developing countries to leapfrog infrastructure and institutions that are in place in developed countries, allowing them to reach similar levels of development at lower costs and at higher speeds. Of particular relevance to many emerging markets is the potential application of blockchain technology for the tracking of resources and the combatting of 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. This is because there are often fewer existing technologies in place with established institutions using them.

Middle East

Of the emerging markets exploring the application of the technology, the UAE in general and Dubai in particular have arguably taken one of the most proactive approaches. In late-2016 the government-backed bodies Smart Dubai initiative and the Dubai Future Foundation launched the Dubai Blockchain Strategy to support the development of the technology. Following this, 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 already examining potential uses of the technology. The government of the UAE followed suit in April 2018 with the launch of a strategy for the technology of its own, UAE Blockchain Strategy 2021, under which it aims to carry out half of all government transactions using blockchain technology by 2021. The authorities estimate that this could allow them to save Dh11bn ($3bn) a year in expenditure on document-based transactions and 77m hours of work.

Use of the technology is also starting to take off in Saudi Arabia. In February 2018 the country’s central bank signed an agreement with blockchain-based international settlements and remittances platform Ripple for a pilot project to create a blockchain-based cross-border interbank settlement system.

In late April 2018 the capital Riyadh held a blockchain-focused event, Decoding Blockchain KSA, at which officials from national energy firm Saudi Aramco – the world’s largest oil and gas company – said they were exploring potential uses for blockchain and smart contracts. Also in April 2018 the Saudi government and blockchain design studio Consensys held a blockchain-focused “boot camp” in the country, which included training on how to build decentralised applications and smart contracts. Additionally, in the same month, Consensys signed a memorandum of understanding (MoU) with Saudi Telecom Company to develop blockchain applications in a range of sectors.

Latin America

The technology is also showing signs of taking off in Latin America. According to research cited by IBM, the blockchain solutions market is set to grow by more than 125% by 2021. For example, 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 make it easier to audit bids later.

In line with international interest in the application of the technology in health care, the Mexican health care industry has suggested that the technology could come to play a significant role in the sector. “In the distribution of pharmaceutical products, there have been a lot of 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 in the country. However, over the medium term new technologies like blockchain and virtual reality will drastically change the system, allowing for greater efficiency, transparency and the real-time tracking of products.” Similar sentiments were echoed by other industry 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 to adopting the technology for health care solutions, as it remains too advanced for many institutions outside of the major urban centres. Moreover, given that there are around five different health care systems operating in the country, it would prove difficult to manage the health data of all customers through one blockchain.

South-East Asia

One region of the global economy 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, stating that this would likely occur before 2019 or 2020.

Blockchain-related commercial activities are starting to take off in the regional financial services industry. 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 country’s tax office and central bank, providing advantages such as clear proof of tax payments. In addition, the country’s Financial Services Authority is currently 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 key driver of blockchain-related activity in Thailand. In February 2018 the country’s Ministry of Digital Economy and Society signed an MoU with financial inclusion-focused start-up Omise to develop a national blockchain-based payment and digital identity checking system. In March 2018 the chairman of the Bank of Thailand announced that the institution planned to start using blockchain to help with underwriting bonds, stating that this would significantly shorten the process. During the same month, a group of 14 local banks launched the Thailand Blockchain Community, to improve interoperability between financial institutions. The initial focus is for use in generating letters of credit, with the aim of reducing the time it takes to issue the instruments.

Africa

The African continent has arguably led the world in terms of the development of mobile payments, particularly in terms of micropayments. Therefore, such transactions have, unsurprisingly, become one of the main focuses of applications for blockchain on the continent. Kenya has emerged as a leading player in this regard, building on its prior success in the development of mobile payments through M-Pesa to launch BitPesa in 2013, a platform that uses blockchain to settle business payments both within sub-Saharan Africa and between the continent and the rest of the world. Furthermore, the country plays host to 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 using the technology in the region is the reduction of costs, with blockchain lowering the cost of remittances in Africa from 10%-15% of transaction value to around 0.1%-0.2%. Kenya is also home to BitHub Africa, a private sector accelerator for start-ups using blockchain technology, which was established in 2015.

The Kenyan national authorities are now also working to support further development in this field. In April 2018 the country’s Capital Markets Authority sponsored the World Blockchain Summit, a regional conference on the technology. This move followed a government announcement in February 2018 that it was setting up a blockchain task force headed by Joseph Mucheru, the ICT Cabinet secretary, to establish a roadmap for potential uses of the technology. Mucheru cited education and land as some of the domains where the technology might have the highest potential.

Indeed, the use of blockchain as an alternative to centralised land registries has been one of the main touted applications for the technology in Africa. Proving title to land can present a problem worldwide, but land fraud is a particular problem in less-developed countries with poorer record-keeping infrastructure. This makes the secure nature of the blockchain particularly appealing.

In Ghana the government is working with an organisation called Bitland on a pilot project to record title deeds in the Kumasi region of the country using blockchain.It argues that this will reduce fraud and allow for increased and more efficient mortgage lending. Addressing these issues could prove vital to ensuring Ghana’s sustained development and paves the way for similar projects to be rolled out across Africa. “Using blockchain can increase confidence in real estate transactions, opening up a huge asset class,” Shrier told OBG.

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The Report: Indonesia 2019

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