How the Blockchain Brings Social Benefits to Emerging Economies
Developing countries such as India, Kenya and others in East Africa are discovering an increasing array of applications for blockchain, the decentralized ledger technology that promises a secure, peer-to-peer mechanism for verifying information. Blockchain is finding innovative uses in banking and financial services, supply chains, agriculture and in managing land ownership records (land titling) in those countries, according to panelists who spoke at the Wharton India Economic Forum held recently in Philadelphia.
However, many laws in both developing and developed countries have not kept pace with digital advancements, and they continue to require paper-based documentation, preventing participants from taking full advantage of the technology, they said. Although a decade has passed since the blockchain’s invention, its technology is still evolving and being tested.
Blockchain is essentially a growing list of so-called “blocks” (a record of transactions in a decentralized ledger), which form a “chain” in a peer-to-peer network. Participants in the network verify or validate the blocks, eliminating the need for a trusted entity like a regulator or an accounting firm to authenticate the information in them. According to experts, the blockchain is secure and tamper-proof by design because transactions cannot be changed once the network has verified them. The technology promises to speed up and reduce the cost of transactions, and boost financial inclusion by providing more opportunities to farmers.
Notably, the Wharton India Economic Forum met around the 10th anniversary of the introduction of the blockchain. It was on October 31, 2008 that a certain Satoshi Nakamoto published a white paper introducing the cryptocurrency bitcoin — and blockchain, its underlying technology. It has been speculated that Satoshi Nakamoto is a fictional name used by an unknown person or a group of people.
Blockchain Misconceptions
Removing misconceptions about the potential of blockchain is important in managing expectations, the panelists said. “People take a use case like, say, international remittances, and expect blockchain to take out all the costs, like fees, and all the overhead,” said Kevin Werbach, Wharton professor of legal studies and business ethics. “The challenge is not the technology; it’s the issues involved relating to implementation, organization and trust.”
Another misconception is that blockchain is “a scam,” and that “it’s dead, it’s over,” said Werbach, an expert in emerging technologies, the internet and communications law. “A surprisingly large audience still doesn’t understand what’s going on [with blockchain],” he recently wrote in an opinion piece in Knowledge@Wharton. He also authored the book The Blockchain and the New Architecture of Trust.
The panelists stressed that bitcoin merely happens to be one of blockchain’s earliest and most prominent applications, and that blockchain has a far greater potential lying in wait. “Crypto is the first scaled application of a blockchain technology,” said Jules Miller, partner at the IBM Blockchain Accelerator, where she guides businesses interested in incorporating blockchain in their operations. “We are much more excited about the underlying blockchain technology and how it relates to transactions, especially, than we are about cryptocurrencies.”
“Blockchain is not magic, but it has interesting capabilities,” Miller continued. Although there is “a lot of hype and excitement about blockchain,” she said, the technology is still in the early stages of implementation, and testing of its potential applications is underway.
Blockchain Adoption in India
India is a frontrunner among emerging economies in embracing the blockchain, according to Kavita Gupta, founding managing partner of ConsenSys Ventures, the venture capital arm of ConsenSys, a blockchain software firm. Gupta said her firm is working on implementing blockchain in a land titling project with NITI Aayog, the Indian government’s policy think tank (NITI stands for National Institution for Transforming India), and has signed a Memorandum of Understanding with the Andhra Pradesh state government for an array of uses, including in land titling, supply chains, health records and blockchain education.
A ConsenSys blockchain project in managing land ownership records in Chandigarh city (the capital of Punjab and Haryana states) is delivering benefits on two major fronts. First, it allows for the tracking of all state level financial services on one platform and prevents corruption once records are entered. “You cannot bribe somebody to change the records, so that is tamper-proof,” said Gupta. “Second, earlier, people could change land records by bribing somebody, and the government has no jurisdiction to do background checks. It was the buyer’s responsibility to do those checks, but there was no method or system to do that. The project we are implementing allows you to track land ownership history over time, and do verified land titling registration with background checks on who paid [the property] taxes.”
In supply chains, Mumbai and Visakhapatnam ports are using the blockchain to create tamper-proof methods that track incoming shipments and shippers, Gupta said. Those systems are also able to ensure that shipping-related payments reach the right parties. The identities of those parties are verified through the government’s Know-Your-Customer program that was launched a few years ago to combat fictitious accounts and money laundering. Gupta said the Mumbai Port Trust has projected savings of $18.2 billion over two years from using blockchain technology in supply chains.
Blockchain is also demonstrating visible social impact in several cases. For example, India’s northeastern states of Assam and Sikkim are using it to help their tribal people secure ownership titles to lands that the government had promised them at the time of India’s Independence in 1947, said Gupta. “The tribals want to prevent mineral mining and other industries from taking over those lands,” she added.
IBM-led artificial intelligence and blockchain projects in India are helping improve crop yield for agriculture companies and helping others transition to the unified goods and services tax (GST) system that was launched last year. IBM’s Research Lab has completed three pilots with Indian companies with use cases like pest and disease prediction, improving yield, and yield prediction on India-specific crops like potato and sugarcane, Miller said, pointing to a news report in Quartz India. The company is also working closely with India’s central bank, the Reserve Bank of India, for banking applications, and with the Mahindra Group in a supply chain project. IBM’s India Lab is its biggest research arm outside North America focusing on those technologies.
Anything around the food supply chain – farm-to-grocery store – would be interesting for emerging economies,” said Miller. “Insurance for farmers is another application because they face hurdles like inclement weather. With IoT sensors on their fields, they could make sure they are buying the right crop insurance.”
Africa and the Blockchain
In Nairobi, Kenya, IBM has worked with Twiga Foods, a business-to-business logistics platform for kiosks and food stalls across Africa to extend micro-finance loans to vendors, which in turn would help them buy more inventory. IBM built a blockchain-enabled lending platform to overcome the obstacle of ascertaining the creditworthiness of the food vendors, said Miller.
IBM analyzed purchase records from mobile devices and then applied machine-learning algorithms to predict creditworthiness. Once the credit scores were determined, it used a blockchain to manage the entire lending process from application to receiving offers, to accepting the terms, to repayment, according to an IBM post. Miller said those applications have potential in India as well.
Indeed, lending is a good use case for blockchain applications. “It is about the identity of the person who wants a loan, and if you can verify the person’s financial or personal history, or if they have a viable business that needs to be financed, you can cut out a lot of the process,” Miller said. “It is especially helpful for small businesses that don’t have a strong record of owning and operating a business, or the conventionally required credit scores.” The vendors in the micro-finance project in Nairobi, for example, are able to build their credit as they repay their loans and become eligible for larger loans, she noted.
When it comes to pharmaceuticals, sensors could ensure that medicines are stored at the right temperature in climate-controlled trucks, said Miller. “You can ensure that they are only logged into the blockchain supply chain and paid for if they are delivered on time, and at the right temperatures or conditions. That prevents bad products from going to market.”
Gupta also cited a project in Nigeria involving the cleanup of a river belt along the River Niger where blockchain and IoT technologies are being used to monitor toxin levels. The findings are considered quantifiable results in reporting to the NGOs and other international organizations that are financing that project, she added.
In another example, Miller cited an insurance company that processes workers’ compensation claims. It uses wearable devices to verify that the workers were actually at the construction site instead of somewhere else. Linking that data to the blockchain lets the insurer verify the information related to a claim and decide whether or not to process it.
Trust Gaps and Adoption Challenges
Werbach saw a common thread in these examples of blockchain applications. “Those are a class of use cases that are about overcoming trust gaps, where there isn’t sufficient trust in existing institutions, or existing governments and government agencies,” he said. “Once information is recorded on a shared ledger, blockchain provides a bridge to overcome some of those trust gaps.”
The trust factor in blockchain has its limitations, though. “If someone checks information in incorrectly, the blockchain will report that immutably and verify that that was all checked in, but it doesn’t itself inherently verify the accuracy of the information,” said Werbach. “It’s an infrastructure for trust; not inherently an infrastructure for truth. There are ways to build systems and processes around the implementation to ensure that the information is accurate and truthful, but the blockchain itself does not automatically do that.”
Even as blockchain technology has made inroads into developing countries like India, inadequate digital infrastructure and relatively low financial literacy may be obstacles. However, even more than those, outdated laws and rules are proving to be the biggest impediments to achieving blockchain’s full potential.
Gupta noted that in Chandigarh, for instance, although the state government had done “a great job of digitizing land ownership records,” some of which are tracked to the 17th century, federal rules do not permit those records to be posted online. “You still have to personally visit the title registration office and meet three different people, show the documents and get one signature after another,” she said. “It doesn’t provide room for blockchain to be very efficient. You cannot use a self-sovereign identity (a blockchain-era innovation for online identify verification), an online payment system, or digital signatures for reference checks.”
According to Gupta, such shortcomings exist also in developed countries like the U.S., and cited a case in Ohio where there were similar disconnects between a county government and the state government. In some places like Dubai or Singapore, governments actively “work with you to change the rules as needed,” she added.
IBM-led artificial intelligence and blockchain projects in India are helping improve crop yield for agriculture companies and helping others transition to the unified goods and services tax (GST) system that was launched last year. IBM’s Research Lab has completed three pilots with Indian companies with use cases like pest and disease prediction, improving yield, and yield prediction on India-specific crops like potato and sugarcane, Miller said, pointing to a news report in Quartz India. The company is also working closely with India’s central bank, the Reserve Bank of India, for banking applications, and with the Mahindra Group in a supply chain project. IBM’s India Lab is its biggest research arm outside North America focusing on those technologies.
Anything around the food supply chain – farm-to-grocery store – would be interesting for emerging economies,” said Miller. “Insurance for farmers is another application because they face hurdles like inclement weather. With IoT sensors on their fields, they could make sure they are buying the right crop insurance.”
Africa and the Blockchain
In Nairobi, Kenya, IBM has worked with Twiga Foods, a business-to-business logistics platform for kiosks and food stalls across Africa to extend micro-finance loans to vendors, which in turn would help them buy more inventory. IBM built a blockchain-enabled lending platform to overcome the obstacle of ascertaining the creditworthiness of the food vendors, said Miller.
IBM analyzed purchase records from mobile devices and then applied machine-learning algorithms to predict creditworthiness. Once the credit scores were determined, it used a blockchain to manage the entire lending process from application to receiving offers, to accepting the terms, to repayment, according to an IBM post. Miller said those applications have potential in India as well.
Indeed, lending is a good use case for blockchain applications. “It is about the identity of the person who wants a loan, and if you can verify the person’s financial or personal history, or if they have a viable business that needs to be financed, you can cut out a lot of the process,” Miller said. “It is especially helpful for small businesses that don’t have a strong record of owning and operating a business, or the conventionally required credit scores.” The vendors in the micro-finance project in Nairobi, for example, are able to build their credit as they repay their loans and become eligible for larger loans, she noted.
When it comes to pharmaceuticals, sensors could ensure that medicines are stored at the right temperature in climate-controlled trucks, said Miller. “You can ensure that they are only logged into the blockchain supply chain and paid for if they are delivered on time, and at the right temperatures or conditions. That prevents bad products from going to market.”
Gupta also cited a project in Nigeria involving the cleanup of a river belt along the River Niger where blockchain and IoT technologies are being used to monitor toxin levels. The findings are considered quantifiable results in reporting to the NGOs and other international organizations that are financing that project, she added.
In another example, Miller cited an insurance company that processes workers’ compensation claims. It uses wearable devices to verify that the workers were actually at the construction site instead of somewhere else. Linking that data to the blockchain lets the insurer verify the information related to a claim and decide whether or not to process it.
Trust Gaps and Adoption Challenges
Werbach saw a common thread in these examples of blockchain applications. “Those are a class of use cases that are about overcoming trust gaps, where there isn’t sufficient trust in existing institutions, or existing governments and government agencies,” he said. “Once information is recorded on a shared ledger, blockchain provides a bridge to overcome some of those trust gaps.”
The trust factor in blockchain has its limitations, though. “If someone checks information in incorrectly, the blockchain will report that immutably and verify that that was all checked in, but it doesn’t itself inherently verify the accuracy of the information,” said Werbach. “It’s an infrastructure for trust; not inherently an infrastructure for truth. There are ways to build systems and processes around the implementation to ensure that the information is accurate and truthful, but the blockchain itself does not automatically do that.”
Even as blockchain technology has made inroads into developing countries like India, inadequate digital infrastructure and relatively low financial literacy may be obstacles. However, even more than those, outdated laws and rules are proving to be the biggest impediments to achieving blockchain’s full potential.
Gupta noted that in Chandigarh, for instance, although the state government had done “a great job of digitizing land ownership records,” some of which are tracked to the 17th century, federal rules do not permit those records to be posted online. “You still have to personally visit the title registration office and meet three different people, show the documents and get one signature after another,” she said. “It doesn’t provide room for blockchain to be very efficient. You cannot use a self-sovereign identity (a blockchain-era innovation for online identify verification), an online payment system, or digital signatures for reference checks.”
According to Gupta, such shortcomings exist also in developed countries like the U.S., and cited a case in Ohio where there were similar disconnects between a county government and the state government. In some places like Dubai or Singapore, governments actively “work with you to change the rules as needed,” she added.
Miller noted that often, many pieces of a process — such as with a supply chain, for example — are not fully digitized. Blockchain lets users pinpoint where they need to work on “non-blockchain digitization” of specific aspects of the process, she said. For example, IBM is helping Walmart use blockchain with its suppliers in order to meet food safety requirements. IBM built a simple app where farmers could scan and send information on the produce they ship to Wal-Mart. “The app we built is not complicated and it was not a blockchain app, but it was a single piece of digitization that made the blockchain app work,” she said.
Often, the pace at which users adopt blockchain depends on the quality of the UI (user interface) and UX (user experience), said Gupta. She shared the experience of an online payment system in East Africa in which her fund had invested. “They had to literally go to the tribals and figured that a text-based system was the only thing they could understand,” she said. “If you give them a simple form which has a ‘yes’ and a ‘no’ they can read in Swahili, they could operate it.” She noted that over the past decade, such text-based systems have been popular worldwide. India could comfortably use such text-based systems because “everyone has a cell phone, even in the villages,” she added.
‘Keep People Safe’
According to Miller, the role of the government is “keep people safe,” and that that maxim applies to India as well. “You want to clear the path for innovation, but prevent people from being taken advantage of in an unethical way, and preventing bad actors from causing harm. That is the philosophical role of government in blockchain.” In the U.S., the Securities and Exchange Commission has issued a series of investor alerts on initial coin offerings, or ICOs, that issue tokens or cryptocurrencies.
Werbach noted that in the case of India, its legal system “is incredibly convoluted, and there are much bigger problems in that area just [relating to] blockchain.” His advice: “Don’t start with what you need to tweak for blockchain. Start with what you need to allow entrepreneurs to innovate.” At the same time, he said, most of the legal changes that are required for blockchain are still underway in the U.S. as well. Many of the changes needed are those that make way for technology, where existing rules might require paper documentation, he explained.
Gupta had some advice for aspiring entrepreneurs and users in the blockchain space. “Don’t use blockchain when you don’t need it,” she said, noting that many entrepreneurs use it to lure investors. “About a year and a half ago, blockchain was the new buzzword in Silicon Valley, and a promoter inserting the word ‘blockchain’ somewhere in the pitch might increase the [enterprise] valuation by $10 million. Those times are gone and people are smarter now.”
Businesses considering using blockchain need to recognize that the technology is still in its early stages. Gupta advised users to maintain open technology platforms to enable faster adaption of newer applications. Miller added that agility is important to ensure that the business keeps pace with regulations. That approach also ensures that the company is less likely to be targeted by regulators for fines and fees, she said.
Although a decade has passed since the release of the Nakamoto white paper on blockchain, Werbach said, the technology has not exactly been developing at a steady pace since then. Many of the advances have occurred in recent years, he said. “There are still very basic questions about the scalability of these networks that are going to take time to unfold,” he said. “So there may not be a huge killer app that’s a multibillion dollar company for five or 10 more years.
But during that time there might be powerful use cases.”