2017/12/04

How Blockchain Technology Can Serve the Have-nots

blockchain-2Can the blockchain, a distributed ledger technology that underpins cryptocurrencies such as the Bitcoin, be used to help millions of poor people gain access to financial services? Recent announcements by companies such as IBM and MasterCard suggest that it can, writes social venture capitalist Mir Haque in this opinion piece.
Haque is the CEO of Aphaea Capital, a blockchain and cryptocurrency venture fund. Previously, he worked at McKinsey & Co., Deutsche Bank and Google. Haque also recently moderated the conference panel, ‘How Blockchain Can Advance Social and Economic Justice,’ at the 2017 Blockchain Economic Forum in New York.
Can blockchain technology, the decentralized peer-to-peer network underpinning cryptocurrencies such as Bitcoin, bridge the economic divide for the developing world the same way that the internet has bridged the information gap? Developments over the last few weeks make us hopeful that it can.
Some 2.7 billion people worldwide today have zero access to capital. Despite lacking any credit history or verifiable economic identity, these so-called unbanked or under-banked individuals can now access global capital markets with a $10 Android phone, thanks to blockchain-based economic identity platforms like BanQu or Humaniq that create a unique hash of verifiable authenticity — similar to a social security number — from a simple retina scan or selfie. Since 60% of the unbanked already own mobile phones, these devices serve as ideal platforms to reach these mainly impoverished populations living in the remotest regions of the developing world. The total market opportunity this group represents is a staggering $380 billion, according to a recent report.
The biggest challenge to scaling for this industry, however, has been payment interoperability  (i.e. ability to transact with each other) between mobile money providers and local bank, merchant or government institutions, so that a recipient in rural area can either shop with digital currency or convert the digital cash into local currency for purchasing goods and services.
“Some 2.7 billion people worldwide today have zero access to capital.”
Major Breakthroughs
Fortunately, over the last few weeks, a few major breakthroughs have occurred in modernizing interoperability between banks and payment networks on a global scale. Last month, IBM announced a partnership with a network of international banks to use a blockchain platform that lets people send money to other countries using a digital currency. The transaction happens in near real-time, speeding up a payments process that usually takes days. A few days later, MasterCard also announced that it would open up its blockchain as an alternative method of making cross-border payments that is also possibly more efficient.
In a further boost to the unbanked, the Bill & Melinda Gates Foundation recently released a free open-source software program for creating payment platforms that will help unbanked people around the world access digital financial services by providing a reference model for payment interoperability between banks and other providers across a country’s economy.
Even though the early benefit from these advancements will mostly be limited to the business community, observers view these developments as major breakthroughs in payment technology and a huge boon for the unbanked in the long run. This is because, first, participation by large multinationals like MasterCard and IBM is a move toward mainstream adoption, opening the door for others to follow. Second, participation by multinational payment behemoths like MasterCard — which currently has a settlement network of 22,000 banks and financial institutions — will pave the way for broader interoperability within the vast banking relationships of the credit card company, which reaches many remote corners of the world.
Reinventing Microfinance
Conceived as a poverty reduction tool more than two decades ago, microfinance largely struggled in part because the costs of originating and servicing small loans demanded interest rates higher than 20% to be commercially viable. By decentralizing the update and verification process on any number of computers simultaneously, the blockchain eliminates traditional settlement and processing costs. In addition, AI-based underwriting and smart contracts could further lower the cost of originating and servicing microloans.
Blockchain technology can also revolutionize current peer-to-peer lending platforms that remain veritable black boxes for lenders, making it virtually impossible to know how loans are being spent. Factom, for example, is using blockchain technology to trace fund disbursements, while Rootstock, a peer-to-peer platform based on Ethereum, allows banks to use smart contracts to manage loans, further reducing processing costs.
Blockchain has already begun to slash costs in the $429 billion remittance market — a figure that still represents three times the amount of foreign aid doled out by governments globally. These remittances are a literal lifeline for many poor families.
Under our current centralized banking system, global money transfer networks require significant capital investment in both infrastructure and local collaborator networks. The result is a market that lacks competition, where large multinationals like Western Union and MoneyGram hold a duopoly and charge transfer fees as high as 29%, despite a 2009 pledge by G8 countries to cut the global average remittance fee to 5%. With blockchain, transferring money globally could become as easy as sending an email. That’s because digital currencies don’t require traditional settlements.
“Blockchain could also transform foreign aid and charity by infusing much-needed accountability into the process.”
Blockchain could also transform foreign aid and charity by infusing much-needed accountability into the process. Imagine a scenario in which any aid changing hands — from government, to charity, to local NGO, to final recipient — is simultaneously (and permanently) recorded and verified as a block across multiple computers. Blockchain-generated smart contracts and digital currency could also reduce Forex conversion as well as administrative and processing costs. The United Nations World Food Program ran a small pilot in Pakistan earlier this year and is now disbursing funds through a blockchain-based system it set up for a large refugee camp in Jordan.
Of course, blockchain’s true potential extends beyond money transfers. It also has the potential to create a “true sharing economy.” Facebook and Google make billions selling data they get from their users without payment. But since blockchain technology runs on a peer-to-peer network that is not controlled by any single party, we can have Uber and Airbnb without the expensive corporate middleman. OpenBazaar, a marketplace similar to eBay or Amazon but is decentralized, operates independently of any intermediary and requires no fees.
This technology could eventually allow developing countries to transform the way they handle their citizens’ most sensitive information. Georgia, Ghana, and Honduras have already begun working with blockchain startups likeBitfury, which allows government and transacting parties to verify and sign land titles. The advent of blockchain and immutable data technology has also led to innovations in voting systems that are more transparent and tamperproof. Blockchain voting, especially in the developing world, can prevent vote-rigging and make civic participation as effortless as sending a text message — perhaps changing the face of democracy as we know it.
Preventing Fraud
Despite blockchain’s promise, multiple hurdles still prevent mainstream adoption. For starters, this technology would need the explicit blessing of national governments and local regulators. Unlike the internet, which has a sophisticated governance ecosystem, the world of blockchain and digital currency continues to lack clear regulatory guidelines, which has led to many well-publicized frauds and scams.
“Despite blockchain’s promise, multiple hurdles still prevent mainstream adoption.”
While pilot adoptions by high-profile institutions like the World Bank, UNICEF, and USAID are helpful, international organizations with real clout must bring all stakeholders from government, business and academia together.
Nearly half the people on this planet live on less than $2.50 a day, and hunger remains the number one killer. Although the reasons behind such dire poverty are varied and complex, the modern push toward centralization in every sector has contributed to a concentration of power and wealth. Blockchain’s innovations in digital identity, smart contracts, peer-to-peer commerce as well as lending capability without middlemen and very little overhead have the potential for incredible financial inclusion for the world’s poorest citizens.
The ongoing innovations in blockchain technology have the potential to unlock this massive $380 billion market in a major boost to global commerce, and at the same time lift billions out of dire poverty and from the jaws of the high-interest charging loan sharks by including them in the 21st-century digital financial system. The only thing that hampers us from making a giant leap to financial inclusion of nearly half of humanity is the limitation of our collective imaginations, willingness, and foresight to cooperate on a global scale on an urgent basis.
Let’s just hope that millions of children in poverty today around the world will grow up and look back to this time as one of the finest hours of their father’s generation. They came together and laid the foundation for a new era of inclusive, prosperous and perhaps fairer economy, which freed half of humanity from the yoke of suffocating poverty.

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