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 around the globe. While the technology is still taking off, many emerging markets are hoping that it will allow them to leapfrog older infrastructure and tackle a range of challenges, including centralised database development, corruption and fraud, and persistently high transaction costs for electronic payments.
A blockchain is a cryptographically protected, distributed and decentralised ledger of transactions. Rather than existing on a single computer, the ledger is replicated across locations, all of which are interlinked so that a change by one user – validated by his or her public key or password – is copied across the entire ledger. No individual user controls the blockchain, but each can change it to the extent that their own key allows, for example, by spending their units of cryptocurrency. Changes 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agree to a so-called fork of the blockchain, which essentially restores it to the version before the alteration being rescinded was made.
While blockchain remains associated with cryptocurrencies, proponents argue that it has potential for considerably broader applications. The technology can be employed in 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 made to a supplier when a good – tracked by a technology such as GPS – arrives at the purchasers’ warehouse. Proponents argue that this ability could allow for the reduction or elimination of various intermediaries that currently act as guarantors for transactions, including banks or notaries providing escrow services or letters of credit. This is because payment is effectively guaranteed by the technology, eliminating the need for trusted third parties. Another advantage of blockchain is less potential for fraud, as the technology does not allow the retroactive alteration of records. Blockchain 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.
In finance, supporters similarly suggest that blockchain could eliminate the need for 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 view health care as another fruitful domain. “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 easier. With clinical trials, blockchain could also enable pharmaceutical companies to gather and share data,” he said, adding that Blockchain-enabled sharing of clinical trial data could halve the costs and time of bringing a new drug to market.
Proponents also argue that blockchain can help solve data ownership issues, as highlighted in controversies regarding social media data transfer. “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 see the technology as having the potential to transform the global economy. For example, a 2017 article in the Harvard Business Review compared blockchain and its potential to that of the transmission control protocol/internet protocol technology, which laid the groundwork for the internet’s development, stating that it “has the potential to become the system of record for all transactions”.
Nevertheless, not all are convinced by the claims of the technology’s applications. Aspects cited as benefits have also been criticised, including the lack of intermediaries and difficulties in reversing transactions. While a credit card company can, for example, reverse a fraudulent payment, it could be much harder to reverse a blockchain-based payment. Furthermore, while it could increase efficiency, blockchain can be highly inefficient: a given ledger is fully replicated across the computers of many or all users, with each instance taking up storage and requiring energy to process. Furthermore, the technology, for the time being at least, is slower than some centralised transaction-processing technologies. 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 can be 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 do not always benefit 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.”
Others argue that the technology does not need to replace existing institutions and infrastructure, but rather can be used as a supplement. “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 can deliver trust.”
To date, the technology has yet to become widespread. According to “The 2018 Chief Investment Officer (CIO) Agenda”, published by business research and advisory firm Gartner, less than 1% of 3000 CIOs interviewed invested in or used a blockchain-based solution. However, many think it will take off soon. “The year 2018 was when everyone said blockchain would pass from proof of concept and from experimental technology to actual deployment,” Shrier told OBG, though he added that the most interesting applications 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 financial services. In May 2018 HSBC announced that it had carried out the world’s first commercially viable trade finance deal using blockchain, namely a credit letter for a soybean shipment. Furthermore, because of the technology’s connection with cryptocurrency, the blockchain development community has access to substantial amounts of liquidity, which could help finance the implementation of the technology in other areas.
Implications for Emerging Economies
It is hoped that blockchain technology will enable emerging economies to reach higher levels of development at lower costs and higher speeds. Of particular relevance is the potential application of blockchain technology to track resources, as well as combat 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, because there are often fewer existing technologies in place with established institutions using them.
The UAE and Dubai in particular have arguably taken one of the most proactive approaches. In late-2016 the public bodies Smart Dubai and the Dubai Future Foundation launched the Dubai Blockchain Strategy to support take up. Following the strategy, 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. The UAE government followed suit in April 2018 with the launch of UAE Blockchain Strategy 2021, under which it aims to carry out half of all government transactions using blockchain by 2021. The authorities estimate that this will save Dh11bn ($3bn) per year in document-based transaction spending and 77m hours of work.
Use of the technology is also taking off in Saudi Arabia. In February 2018 the kingdom’s central bank signed an agreement with Ripple, an international settlements and remittances platform, for a pilot project to create a blockchain-based cross-border interbank settlement system. In late April 2018 a blockchain event was held in the capital, Decoding Blockchain KSA, where officials from national energy firm Saudi Aramco – the world’s largest oil and gas company – said they were exploring potential uses for the technology. Also in April 2018 the government and blockchain design studio Consensys held a blockchain-focused “boot camp”, offering training on building decentralised applications and smart contracts. That same month Consensys signed a memorandum of understanding (MoU) with Saudi Telecom Company to develop blockchain in sectors such as financial services, health care and real estate.
The technology is also seeing wider use in Latin America. According to IBM-cited research, the blockchain solutions market is set to grow by more than 125% by 2021. 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.
Health care applications could also play a significant role in Mexico. “In the distribution of pharmaceutical products, there have been 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. “Over the medium term new technologies will drastically change the system, allowing for greater efficiency, transparency and real-time tracking of products.” Similar sentiments were echoed by other 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 via its ability to rigorously manage and process information.”
Nonetheless, the country faces potential bottlenecks in health care solutions, as the technology remains too advanced for institutions outside major urban centres.
One region 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 financial services. 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 tax office and central bank, providing clear proof of tax payments.
Financial services are also acting as a driver of blockchain-related activity in Thailand. In February 2018 the country’s Ministry of Digital Economy and Society signed an MoU with Asian financial inclusion-focused start-up Omise to develop a national blockchain-based payment and digital identity system.
The African continent has arguably led the world in the development of mobile payments. Unsurprisingly, such transactions have become a main focus of applications for blockchain. Kenya has emerged as a leading player, building on its previous success in mobile payments through M-Pesa to launch BitPesa in 2013, a platform that uses blockchain to settle business payments within sub-Saharan Africa and between the continent and the rest of the world. Furthermore, the country hosts 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. Blockchain can also reduce costs, with it lowering remittances in Africa from 10-15% of the transaction value to 0.1-0.2%. Kenya is also home to BitHub Africa, a private sector accelerator for start-ups using blockchain technology, established in 2015.
The authorities are working to support further development of this. In April 2018 the country’s Capital Markets Authority sponsored the World Blockchain Summit, a regional conference on the technology. This move followed an announcement in early 2018 that it was setting up a blockchain task force headed by Joe Mucheru, the ICT Cabinet secretary, to establish a roadmap for potential uses of the technology, with education and land ownership earmarked as promising areas.
Indeed, the use of blockchain as an alternative to centralised land registries has been touted as a prime application. Proving title to land is a global issue, but land fraud is a particular problem in less-developed countries with poorer record-keeping.
In Ghana the government is piloting a project with Bitland to record title deeds in the Kumasi region using blockchain to reduce fraud and allow for more efficient mortgage lending. Addressing these issues could be key to Africa’s sustained development. “Blockchain can increase confidence in real estate transactions, opening up a significant asset class,” Shrier told OBG.
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