Tapping into the wealth of blockchain
Photo: Thought Catalog/Unsplash
Blockchain is an innovative new technology with the power to disrupt existing economic and business models. Blockchain also has enormous potential for emerging markets.
These nations appear poised for a more rapid adoption of blockchain, though a framework is needed to assess how the technology can be deployed and which applications and use cases are likely to be seen in the near future.
While the potential of blockchain is great, the technology is still at an early stage of development and will need to overcome potential setbacks — technical, regulatory, and organizational — before it becomes mainstream.
In such a context of uncertainty, companies in emerging markets can neither afford to wait until the outcome is evident nor expose their existing business models to overly risky wholescale blockchain initiatives.
Instead, they will need to adopt an experimental approach that allows them to develop options and thereby learn in the process, inform their strategies, and improve their value propositions.
Blockchain’s full capability is difficult to predict at this early stage in its development. Yet while most of the attention surrounding blockchain has taken place in advanced economies, its greatest potential for decisive impact may lie in emerging market economies.
In 2016 Christian Catalini, Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at MIT’s Sloan School of Management, and Joshua Gans, Professor of Strategic Management at the University of Toronto’s Rotman School of Management, proposed an economic framework to assess the potential impact of blockchain and its capacity to disrupt the current market by reducing verification and networking costs.
Their paper concluded that when blockchain is combined with cryptocurrency, marketplaces can be ‘bootstrapped’ to function without the use of traditional ‘trusted parties’ and thereby result in significantly lower networking costs for participants.
The paper also finds that open blockchains will likely have the most drastic effect on market structure, challenging the market power of incumbents, and lowering the cost of entry for new entrants.
Nevertheless, given the relatively high costs of the proof of concept, it is likely that most early adoptions of blockchain will take place in the form of
(i) value-added applications built on top of existing blockchains such as bitcoin;
(ii) private or semi-private blockchains targeting process efficiencies in financial services; or (iii) extensive margin applications enabling new marketplaces.
The coexistence of public and private blockchains is assured, depending on the type of services and the nature of the industry where they are applied.
A compelling business case for blockchain can be made in currently neglected or underserved markets, where there is a less competitive market structure and high verification costs.
Use cases that are relatively simple to design and implement, and which are combined with already tested technological solutions such as cryptocurrencies, will likely find early adoption (for example, adding a digital currency payment option for wallets and cross-border payments).
Intra-organizational projects intended to reduce organizational complexity and reconcile multiple databases would be another possibility Financial services firms are extending that kind of collaboration to trusted counterparties to reduce costs through private blockchains.
Truly disruptive blockchain solutions that depart from existing business practices carry high potential for future growth, but their heightened complexity and need for stakeholder collaboration (such as elaborate financial instruments and smart contracts) will likely delay their adoption.
Building on this hypothesis, emerging markets appear poised for a more rapid adoption of blockchain technology, as they meet many of the conditions listed above, including high verification costs, underserved populations, and in many cases have a relative lack of traditional incumbents with significant market power to impede new entrants.
In financial services, for example, the existing infrastructure is shallow in almost all low-income countries, many of which have also suffered from derisking in the wake of the financial crisis.
Fortunately, this handicap may accelerate the adoption of blockchain, as a lack of financial infrastructure also means less organizational resistance to the new technology and lower transition costs for moving from a legacy to a new system.
Consequently, regulators and existing financial institutions in emerging markets have less incentive to prevent the blockchain revolution, as it does not massively disrupt existing market conditions.
Global payments and trade finance are examples of sectors experiencing a flurry of initiatives from market front-runners and new entrants alike.
Both have high transaction and verification costs that blockchain can reduce by improving the speed, transparency, and process.
Emerging market nations have large population segments that remain underserved in terms of financial and banking services due to the high cost of customer acquisition for traditional financial institutions.
In addition, the extensive use of mobile-based services, particularly in Africa and Asia, provides an easy avenue for a blockchain-based system to extend its services. Even in lower-income countries, mobile penetration is extremely high, at 83 percent among the 16-to-65 age bracket.
If blockchain manages to provide proof of concept for a viable business model in payments for mobile banks and other financial players, it would advance the long-standing developmental goal of financial inclusion.
Serving previously unprofitable customers and small and medium-sized companies can generate up to $380 billion in additional revenues.
So blockchain may provide emerging markets an opportunity to leapfrog traditional technologies, as happened with mobile technology in many emerging market regions, particularly Sub-Saharan Africa.
In the financial services sector blockchain initiatives fall under two main categories.
The first is process efficiency rationale, which occurs in countries with established financial market leaders (typical in OECD countries).
Blockchain projects in such cases focus on a gradual application of the technology, leveraging process efficiencies in existing business models and utilizing private or semi-private blockchains, either within their organization or through consortia such as R3, Hyperledger, and Digital Asset Holdings.
And the second is new market creation rationale, in which new market players target the inefficiencies of existing business models to deliver value in emerging markets.
These can be start-up businesses originating from advanced or from emerging market economies, or large non-financial players that see an opportunity in expanding the value chain of a current service. Global payments, or remittances, and digital wallets are examples.
These initiatives tend to flourish in markets with a combination of relative volatility due to political or currency risk, an absence of a strong traditional banking system, large underserved customer segments, a digital or mobile finance culture, and explicit support or tolerance by regulators.
In this sector, blockchain initiatives tend to be open networks, backed by a cryptocurrency — usually bitcoin — and tend to be local. Examples of such start-ups include BitPesa (Kenya), Bitso (Mexico), Remit.ug (Uganda), Satoshi Tango (Argentina), BitSpark (Hong Kong), OkCoin (China), OkLink/Coinsensure (India), CoiNnect (Mexico/ Argentina), Rebit and Coin.ph (Philippines).
There are also large players in this space, including MPesa, a mobile money transfer service launched by telecommunications giant Vodafone in Kenya, and e-commerce companies, including AliPay, a subsidiary of China’s Alibaba.
China is a noteworthy player in this classification, with companies that have a dynamic presence in both segments (start-ups and large established players), with regional coverage across Asia, and venture capital investors who have global ambitions beyond emerging markets.
Bridging the institutional gap. The positive effect of blockchain in emerging markets can be not only technological but also institutional.
From governance and societal perspective, blockchain’s features of transparency can also serve to bridge the ‘trust deficit’ and put pressure on governments to improve services to citizens, forcing them to become more accountable and eliminating the need for decades of institutional development.
For example, in 2016 the Dubai Government established a Global Blockchain Council to assist governments and industry on how to best leverage the technology to improve services to citizens.