Economic Development on the Blockchain

Developing countries continue to struggle with accessible financial services, a key indicator of a healthy economy. Without important banking services, poverty-stricken nations find themselves stuck with stagnant economies. Blockchain technology introduces a portfolio of options that may enable critical steps to a more developed and stable country. With blockchain’s algorithms, a user can transfer money, equities, bonds, titles, or other important assets from peer to peer in a secure, private, and more cost-effective way. With the iron grip of financial intermediaries loosening because of blockchain technology, people without accessible financial services in developing countries could find themselves on a more even playing field with other, more fortunate parts of the globe.

Most of the people that reside within developing countries don’t have stable credit history, proper identification, or access to banking facilities. These roadblocks have slowed the economic growth of developing countries, which have sometimes resorted to extreme alternative options. Land and livestock are common signs of wealth and often used as currency where financial institutions are non-existent, but problems clearly arise on a global scale. It may sometimes be feasible to trade chickens for corn in a Togolese village, or lard for beans in a Honduran community, but global transactions require financial intermediaries and currency. Financial accessibility through the blockchain might be a path to greater financial equality.

Remittances Reimagined

Blockchain technology and cryptocurrencies such as Bitcoin enable a consumer with an internet connection to send and receive money without requirements that many in the developing world cannot meet. With the ability to keep money secure and accessible, new opportunities immediately become reachable. For example, microloans, payday loans, cash advances, and business loans all become options for consumers within developing countries. Wayniloans, a Bitcoin-lending platform in Latin America is the trailblazer for this newly developed concept. Its portfolio of different lending services uses the Bitcoin blockchain and offers a much lower interest rate than traditional lending companies.

Fostering such investment opportunities can lead to increases in growth and employment within developing countries. The amount of remittances coming into some countries can be a frightening reminder of how lacking in employment opportunities those countries can be. Blockchain technology can make the remittance process more cost-effective as well.

Blockchain can offer substantial cost savings for the poor who send money home to their families in other countries. Mark Van Rijmenam, an expert in Blockchain development, says it best: “A blockchain based remittance service uses a crypto coin to transfer money instantly across the globe for a fraction of the costs and uses local agents to exchange the crypto coin into the local fiat money that can be used by the receiver. Instead of days and costing a fortune, it takes minutes and is nearly free.”

In many poverty-stricken countries, such remittances are used for education, food, clothing, and medicine. According to the World Bank, developing countries received over $410 billion in remittances in 2013, which grew to $441 billion in 2016. These transactions are currently facilitated for a hefty cost by powerful financial institutions such as Western Union, Money Gram, TransferWise, and Ria. On average, the cost for a transaction can be anywhere from 8.4 percent to 12 percent. In most cases, blockchain can eliminate or significantly lower these transaction costs. With the extreme poor living on $1.25 a day, every cent counts.

The challenges for widespread implementation may seem daunting, but various start-ups and organizations have increased their efforts to meet the challenges of blockchain and Bitcoin remittance. Aircoinz of Argentina, Beam Remit of Ghana, BitPesa of Kenya, Coins.ph of the Philippines, and Coin Batch of Mexico are all leaders in this innovative process. In addition to the private sector, the United Nations is considering applications in microfinance, remittances, and other areas with planned blockchain-focused projects.

Today, Nigeria is the nucleus for such instant, reliable, cheap money transfers. With the largest economy and highest population in Africa, it seems to be an ideal proving ground for this technology. WorldRemit, a global money-transfer company in Nigeria, has 140 cash-pickup locations and processes 400,000 transactions every month. With 68 percent of the population lacking access to financial institutions, blockchain brings hope for more financial inclusion.

Assets Turned Legal

Although remittances are a lifeline for many families, people must begin building and investing in local economies for developing countries to have significant growth. In many cases, this can only happen with investments from banks or other lenders. Insufficient collateral is a major roadblock for many businesses in developing countries because nothing is officially documented, saved, or updated. A blockchain ledger, a digital recordkeeping system running on millions of devices capable of recording anything, can help in this regard as well.

Rule of law and protection of property rights are often very weak in developing countries. Although much of the traditional legal system has never been put in place, let alone enforced, blockchain technology might be able to help in a country’s pursuit of financial equality. Land is often never documented with legal deeds or contracts, thus sparking conflicts over ownership. One Ghanaian company, Bitland, plans to use the blockchain to allow individuals and groups to survey land and record title deeds on the Bitland Blockchain. With nearly 78 percent of the land unregistered in Ghana, the Bitland Blockchain can resolve land disputes quickly and correctly.

The experience of Haiti after the 2010 earthquake shows the potential importance of blockchain-based land registries. The quake left much of the country’s infrastructure in ruins, including municipal buildings in which land deeds and trusts were stored. To this day, the earthquake has caused major hurdles for proving the ownership of land among many of the citizens in Haiti.

Recording land ownership on a blockchain is ideal because the data are irreversible. Blockchains cannot be tampered with, stolen, or privately changed. It also reduces manual errors, while improving security processes for transferring documents including mortgages and contracts. In addition, land ownership and documentation of it could make a community or region more attractive to financial institutions, because prospective borrowers have their own land as collateral.

Businesses Better Equipped

When small businesses in developing countries look to developed countries for customers, the process is often complicated and expensive, but the use of a blockchain platform with a digital currency can streamline it.

Farmers and small business owners who remain confined to their communities can now have access to global customers without paying high transaction fees. Bitcoin and other digital currencies have potential to facilitate small-scale global commerce. A producer of fresh papayas from Mexico or a hand-weaved basket maker in India can sell their products to customers in the United States in exchange for digital-currency tokens, which can then be redeemed for local currency. With the use of Bitcoin or other digital currencies, small businesses in developing countries can immediately have access to a secure bank account and transaction platform, and can receive payments instantly. In addition, they would not have to pay transaction fees to financial intermediaries such as Visa, Chase, or PayPal.

The Path to Prosperity

Introducing and implementing blockchain technology might be the start of a domino effect that could potentially bring financial improvement to many regions within the developing world. Family members working abroad could send money more securely and at a lower cost. At home, citizens in developing countries could better protect and secure title to assets. With their land becoming a legal asset, financial institutions would be more willing to loan them money. With this loan, a business could expand and hire more employees, or a family could send its children to schools. Both outcomes would improve the local economy and clear the dark cloud that inhibits economic growth. In addition, businesses in developing countries could tap into customers all over the world without the iron grip of large financial intermediaries. Many developing countries face an uphill climb to achieve real prosperity, but blockchain technology may bring such a goal within range.

 

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.