Blockchain path to more inclusive world (as published in Jakarta Post on October 4, 2019)

Blockchain path to more inclusive world 
By Emir Hrnjic and Nikodem Tomczak

Some 2 billion people in the world and unbanked and lack access to useful and affordable financial services. According to the World Bank, this is one of the major barriers to reducing extreme prverty and social inequality. 

Yet, of these 2 billion, approximately two thirds have access to a mobile phone with internet connection. This enables access to emerging blockchain technologies, offering in turn some unique and promising solutions to create a more equal and inclusive world.

Blockchain is an open and decentralized technology that enables electronic transfer of value without intermediaries. By design it is transparent, inclusive and censorship resistant. Because it is decentralized it empowers individuals, institutions, and governments to build democratic technological solutions that are resilient and less prone to manipulation. 

As a result the technology has the potential to eliminate divisions across caused by social, age, and gender gaps, erase geographical, cultural, and jurisdictional restrictions and build economic resilience. At the same time, it provides a platform for near real-time settlement of trades and retrieval of critical assets over a secure network at much lower cost than traditional financial solutions.

One of the main causes of financial exclusion is that many of the world’s poor  lack proper personal identification and documented property rights. Blockchain technology can help to overcome this by storing tamperproof personal information, unlocking access to financial services while reducing the risk of fraud. 

In developing countries, the ability to register and retrieve property rights should increase social mobility and improve living standards.

Meanwhile, on a global level, blockchain technologies should increase transparency and fraud detection, potentially reducing corruption and poor management of resources. 

This will be of even greater importance in the era of global projects, such as the China-led One Belt One Road Initiative spanning dozens of underdeveloped countries, which demand improved coordination of economic activities. In these contexts, promoting accountability and transparency can reduce problems with trade disputes while lowering barriers to entry for parties from many different countries.

Many developing nations have near-universal access to 3G mobile networks. Coupled with high mobile phone ownership rates this offers the potential to enable many underserved people to interact with blockchain technology and boost financial participation.

Since the cost of traditional money transfer can be as high as 20 percent, bypassing the banking system significantly reduces transaction costs and allows rural people to send and receive payments at near zero cost. 

An example of this is Kenya’s M-Pesa mobile payment system which has opened access to banking and financial services to anyone with a mobile phone and helped lift almost 200,000 Kenyan households out of extreme poverty. 

International organizations, such as the United Nations, have already launched several networks and programmes that use blockchain to increase participation, lower transaction costs and reduce fraud. This is particularly important for over 1 billion people who lack proper identification documents, many of them refugees from war-torn countries. 

For example, the World Food Program has integrated blockchain to eliminate third party fees and to improve its assistance programmes by using the technology to store refugees’ IDs. A recent smart city project in Phnom Penh saw residents issued a digital passport which includes a digital wallet function. Individuals can sign up for utilities services with their digital identities within minutes and skipping middlemen agencies. However, the impact of blockchain on financial inclusion is not without potential pitfalls. 

Running the decentralized blockchain can be costly, demanding dedicated equipment and high electricity consumption to secure the network. And of course it’s important to bear in mind that technology alone does not have supernatural powers to heal the ills of modern societies. Blind belief in “solutionism” that blockchain technology offers would be a mistake. Similar prophecies were made about the internet and the idea that the ability of computers to send data between each other would magically deliver a more just and equal society.

Furthermore, a full understanding of how the technology works may be necessary to build up a true trust-based relationship. 

While the technology may allow us to minimize trust in people and intermediaries, trust in the technology itself needs to be built through education. This clearly presents an obstacle to financial inclusion as underprivileged communities usually also have the largest educational gaps. 

Finally, if blockchain is to become a vehicle for financial inclusion, there must be internationally agreed regulations. Specifically, regulatory safeguards for a smooth transition would have to be established in order to minimise risk of a sudden disruption to current financial networks. 

Blockchain is a foundational technology that could potentially redefine economic systems and lead us to a more equal and financially inclusive world while mitigating risks and lowering transactional cost. At the same time its transparent and tamperproof characteristics can improve public oversight and strengthen economic resilience while increasing citizens’ confidence in the distribution of public resources. However, the full social impact of the technology will depend on its adoption rate; and that – to a large extent – will depend on our ability to bridge existing educational gaps.