5 Ways Blockchain Can Boost Economic Development – Blockchain at Berkeley

5 Ways Blockchain Can Boost Economic Development – Blockchain at Berkeley

If there is one area where blockchain technology seems to have not only direct relevance but also an enormous potential, it is ultimately developmental economics. Because blockchain’s purpose is to remove the middleman in transactions, in other words removing the need for institutions, it seems particularly relevant to use blockchain in developing countries where institutions might not always be trustworthy and efficient. Blockchain furthermore provides the possibility of using alternative cryptocurrencies instead of national currencies, which can be especially beneficial in countries where inflation hits extreme levels. Blockchain technology also offers new opportunities for financial and insurance services, which is particularly appropriate in countries where the level of unfunded and uninsured individuals is very high. Finally, blockchain potentially offers much more secure and cost-effective ways of making donations, sending funds for foreign aid and making cross-border transfers. Here are 5 ways we think blockchain can boost economic development and alleviate poverty.

1. Blockchain to Replace Failing Institutions

According to many development economists, from Daron Acemoglu to William Easterly and UC Berkeley professor Edward Miguel, the slow economic convergence of developing countries is a direct result of the instability of their institutions and of the corruption and inefficiencies that result. For the majority of economists, we need to focus on improving institutions in the developing world if we want to promote their growth and development.

Property rights are one good example of an institutional challenge in most developing countries. An important number of households in developing countries can’t trust any institution to keep a good and secure record of their land-ownership rights or property rights. This is because these countries often lack the legal and political security and maturity that other western countries might benefit from. Instead, these countries’ record systems are often fragmented, and the citizens tend not to trust the politicians and officials behind them because of political instability or corruption concerns.

Blockchain thus offers an interesting alternative to these untrusted institutions, proposing a secure, transparent and immutable environment that removes the need for an official institution or middle-man. Instead of a centralized system of property rights, which offers an easy leeway for manipulation and subversion to corrupt officials, blockchain has the benefit of being a decentralized ecosystem where transactions are processed by multiple nodes (or miners) in a network. The immutability characteristic of the blockchain is especially interesting in the context of property rights. Blockchain systems, for example, ensure the immutability of a block in the chain of validated transactions by including block headers that reference the previous block in the chain of transactions. In that way, if someone tampers with a block (or set of property rights in this case), the change propagates throughout the whole chain and everyone sees that a malicious actor tried to modify this block.

2. Blockchain as an Alternative Source of Capital

Access to bank loans, for both modest individuals and small firms, is often difficult in developing countries, as most banks ask for large collaterals and insurances that these agents don’t have. The problem of funding is very important in the developing world. In the absence of banking services, a significant amount of African households simply lend to one another in very informal settings. In his paper “Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy”, published in the World Bank Economic Review in 1990, Udry shows that, instead of resorting to state banks, households pool risk and lend to one another by taking advantage of the free flow of information within local communities and of informal enforcement mechanisms.

Blockchain could provide an interesting alternative to these informal lending processes, and help agents find more secure sources of financing. A few new startups have emerged proposing tailored financial services using blockchain to address the issues associated with informal lending. For example, the startup OmiseGo proposes decentralized wallets and asset-agonistic value exchange for the unbanked individuals, and Wetrust offers insurance and lending circles within existing reputation-based trust networks and communities as an alternative to the formal insurance and lending institutions. Humaniq addresses another facet of the funding issue and seeks to foster financial inclusion by using biometric authentication for identity. In all of these use cases, blockchain offers an interesting middle ground between formal and informal lending and enables processes to be more local while ensuring broader enforcement mechanisms.

3. Blockchain to Escape Fluctuating Currencies

In many developing nations, inflation and hyperinflation often cause currencies to devalue at rapid rates, making prices of everyday items extremely expensive and imports far more costly. For example, Venezuela has faced immense inflation in the past 6 years. By the end of 2018, Venezuela recorded reaching astronomical highs of 80,000% inflation. Cryptocurrencies have the potential to eradicate this problem as a supplement to a country’s fiat currency, providing a decentralized digital form of payments.

Stablecoins, for example, are often pegged to a different asset like the US dollar or gold but do not have a central bank behind their stability. Stablecoins can thus be used as an alternative medium of exchange (the ability to trade without having to barter), a store of value (the ability to keep value over years), and unit of account (the ability to measure a unit to define and compare the values of markets). This empowers cryptocurrencies to essentially be used for more day-to-day transactions and as an alternative store of value in cases of high inflation.

4. Blockchain for Cross-Border Payments

Currently, many fees are collected by organizations that facilitate cross-border payments. In 2017, the global remittances market reached over $613 billion. The costs of remittances have been estimated to be up to 5%, and the average transaction fee in sub-Saharan Africa is at an astounding 9% for cross-border payments. However, blockchain can actually bring these costs down to 1%. Blockchain also guarantees real-time transactions across borders and is able to reduce risks existing from currency fluctuations. Companies like Abra have for example developed platforms that empower people to convert fiat currencies into cryptocurrencies that can be withdrawn in their local currencies instantly.

In international money transfers, various middlemen often benefit from commissions, which allow them to stay in business, such as SWIFT which collects a small portion of every transaction across borders. Blockchain technology enables the elimination of these middlemen and removes the need for central agencies that manage payment processing fees. In addition, blockchain has the quality to allow near-instant money transfer because there is no need to wait for central agencies to facilitate its movement.

5. Blockchain and Foreign Aid

Blockchain can finally help in even more straightforward ways, for example in the context of foreign aid. Issues with foreign aid to developed countries today are multifold: donations are often subject to important overhead costs to compensate for every actors and third-parties in the process, which often disincentivizes potential donors; donations often lack data transparency, both in terms of how the money gets to destination and in terms of how it is used and beneficial for the cause; finally, donations are often thought of as counterproductive for an underdeveloped country, keeping it in a state of dependency with the donators.

Blockchain is an interesting solution to these problems because it substantially decreases the number of middlemen involved in the donation, thereby decreasing overhead costs that get “lost” in the donation. Instead of paying the multiple actors involved in the processing and converting processes, blockchain allows for targeted donations that directly land in desired hands without the need for any third party thanks to automated mechanisms enabled by smart contracts. Blockchain can hence make donations much more efficient, transparent and trustworthy for the donator. Furthermore, blockchain offers real-time and traceable data on the donation, without the need to trust a specific organization. New companies like Alice and Bankymoon, for example, seek to provide real-time and transparent data on donations thanks to blockchain technology. According to Alice’s website, “The performance of each project is publicly available, making it easier for funders (philanthropic organizations, impact investors, small donors) to identify and help scale social projects that actually work.”

Conclusion

Three young boys running down the street, Cape Town, South Africa (BFG Images)

In conclusion, although much still needs to be achieved in practice and new potential problems can arise from blockchain use in developing countries, blockchain technology offers promising solutions to a lot of problems undeveloped countries face today. The use cases we have addressed in this blog post are just examples among an infinity of possible applications of blockchain in the developing world. Alleviating poverty and fostering growth in poor countries should be a concern shared by everyone, as world inequalities have skyrocketed in the last decades and populations in these countries are especially vulnerable to civil conflicts and, in the immediate future, to the negative consequences of climate change that the rich world has mainly fostered. We think that blockchain, among other new technologies, has a central role to play in creating stronger growth and higher standards of living in developing countries, and that NGOs and businesses should seriously consider its promises if they want to alleviate economic problems in the developing world.

Based on a research paper co-written with Faiz Moosa

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