By Katia Hilal, COO, RedCloud Technologies
Blockchain technology has the potential to foster innovation and broaden access to banking systems for entire countries and provide greater access to financial services in emerging markets.
Many of these so-called ‘developing’ countries are off the financial grid, with haphazard regulations, a lack of banking competition, fines and ’cash and criminal’ money markets causing further damage to their already fragile economies.
When banks are unwilling to enter a market, financial technology can supposedly step into the breach with innovations such as blockchain, which can be used to invent new ways of providing financial services to millions of excluded businesses and consumers. But is the revolutionary potential for blockchain real – or is it just hype?
What is blockchain technology?
Blockchain is a distributed ledger containing several nodes that maintain a shared ledger using a cryptographic oriented protocol. Its perceived advantage lies in its security and fault tolerance as no transaction roll-back is allowed and assets are controlled either publicly or by appointed trusted partners. Not only does this promise multiple financial innovations to emerge, it provides a system of financial information that is almost impossible to manipulate.
It’s also worth mentioning that it’s not Bitcoin.
Many believe that it forms part of a package deal with cryptocurrency, but cryptocurrency is merely one application of blockchain technology. Though blockchain originated with and underpins Bitcoin, it is also applicable to other financial or non-financial systems such as contracts, energy, cyber security and others.
How blockchain technology can benefit Africa’s emerging market
Imagine being able to move assets across borders and between institutions without paying huge transfer fees. By removing barriers, such as intermediary banks, prohibitive costs, interminable waiting periods, and regulatory restrictions, service providers connecting with the blockchain technology can open up financial systems to entire countries. Given that Accenture figures indicate that raising the financial service spending levels of the developing world to those of lower-middle income countries could generate $110 billion worldwide, a large number of financial regulators in developing countries are interested.
An obvious first application would be international remittance but many can emerge and Africa has the potential to make a technological and regulatory leapfrog, as is often the case for emerging markets.
The economic development of many African countries is dependent on the success of local SMEs receiving the financial support they need to grow. This is where blockchain could prove particularly beneficial. With all the red tape erased, banks or other service providers using the technology can offer better credit to smaller businesses through smart contracts and negate settlement times – reducing costs to zero.
Larger businesses would benefit too, saving time and money on processes such as payment collection which can all be done digitally through blockchain.
Is blockchain the financial tool of the future?
Possibly. However, more banks and countries need to collaborate on blockchain exploration to harness its potential across emerging markets. While technologies like this always take some time to fulfil their promise, working together will only expedite the process. For example, in the US, more than 40 banks now have a stake in R3 CEV, a start-up meant to agree on and implement shared standards. Similarly, firms including IBM and Digital Asset Holdings have started the Open Ledger Project to develop open-source blockchain software and Microsoft announced its open Blockchain middleware.
But all is not perfect yet. We’ve already seen shockwaves run through the blockchain community from the recent attack on Ethereum -a public blockchain-based platform, that can execute peer-to-peer contracts using a cryptocurrency called ether – where the equivalent of over $50m was stolen. Even though we can argue that it was not the blockchain that was hacked but a loop hole in a contract written on top of it that was exploited, this shows the boundaries of how far we can go about putting all of our faith in an executable code versus a traditional trusted party.
What is certain is that blockchain has all the traits of a disruptive phenomenon and that with more research and work, this innovative technology could represent a turning point for many industries, the first of which is in the financial sector.