How will blockchain affect emerging market economies in 2020?

Source: Medium

Translation: First Class (First.VIP)


The full functionality of the blockchain is difficult to predict in the early stages of its development. However, although most people focus on the development of blockchains in developed economies, the decisive impact of their greatest potential may be in emerging market economies.

Although assessing how to deploy blockchain technology and which applications and use cases can be implemented as soon as possible needs to build a framework, countries seem to have accelerated the pace of blockchain applications.

Although the potential of the blockchain is unlimited, the technology is still in the early stages of development. Before the blockchain technology becomes mainstream, potential obstacles in technology, regulation and organization need to be overcome.

In this uncertain situation, companies in emerging markets are neither able to wait for technology to mature, nor can they expose their existing business models to a large number of high-risk blockchain solutions.

Instead, they will need to adopt an experimental approach that will enable them to develop options to learn in their process, adjust their strategies and improve the value proposition.

The full functionality of the blockchain is difficult to predict in the early stages of its development. However, although most people focus on the development of blockchains in developed economies, the decisive impact of their greatest potential may be in emerging market economies.

In 2016, Christian Catalini, Assistant Professor of Technology Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management and Joshua Gan, Professor of Strategic Management at Rotman School of Management, University of Toronto Joshua Gans proposed an economic framework to assess the potential impact of blockchain and its ability to disrupt current markets by reducing verification and network costs.

Their paper states:

When the blockchain is combined with cryptocurrencies, it is possible to “guide” the market operation without using traditional “trusted parties”, thereby greatly reducing the network costs of participants.

The paper also states:

Open blockchain may have a drastic impact on the market structure, challenge existing market forces and reduce entry costs for novices.

However, given the relatively high cost of proof-of-concept, the early adoption of blockchain may come in the following forms:

(I) Value-added applications built on existing blockchains such as Bitcoin;

(Ii) private or semi-private blockchains for financial service process efficiency;

(Iii) Extensive margin applications have created conditions for new markets.

Public and private chains must coexist, depending on the type of service and the nature of the industry to which they apply.

In a market that is currently overlooked or under-served, if the market structure is weak in competitiveness and the verification cost is high, then the business case of blockchain is very convincing.

Use cases that combine the design and implementation of relatively simple and tested technical solutions (such as cryptocurrencies) are likely to be adopted earlier (such as adding digital currency payment options for wallets and cross-border payments).

In-organization projects designed to reduce organizational complexity and coordinate multiple databases can become another type of financial services company, working with trusted transaction parties through private chains to reduce costs.

A truly disruptive blockchain solution that departs from existing business practices has huge future growth potential, but its higher complexity and the need to collaborate with stakeholders (such as well-designed financial tools and smart contracts) may Will delay its adoption.

Based on this assumption, emerging markets seem to be ready to accelerate the adoption of blockchain technology because of the flaws mentioned above, such as high verification costs, user groups who cannot enjoy perfect services, and in most cases, Traditional companies that lack strong market power prevent new players from joining.

For example, in financial services, the existing infrastructure of almost all low-income countries is weak, and many countries have also experienced de-risking after the financial crisis. (First-class warehouse note: The so-called "de-risking" means that, for the purpose of avoiding risks, financial institutions do not adopt the "risk-based approach" recommended by FATF to actively manage risks, but simply choose to terminate or limit and transfer operators Or customer relationships such as banks.)

Fortunately, this obstacle may accelerate the implementation of the blockchain, because the lack of financial infrastructure also means that the institutional resistance faced by the new technology is reduced, and the transition cost from the old system to the new system is also lower.

Therefore, regulators in emerging markets and existing financial institutions are less enthusiastic about stopping the blockchain revolution because it will not cause significant disruption to existing market conditions.

Industries such as global payments and trade finance are examples of market leaders and new entrants launching a series of initiatives.

Both have high transaction and verification costs, and blockchain can reduce these costs by increasing transaction speed, transparency, and processes.

Emerging market countries have large population bases, but because of the high customer acquisition costs of traditional financial institutions, these groups still do not enjoy comprehensive services in financial and banking services.

In addition, the widespread use of mobile services (especially in Africa and Asia) opens the door for blockchain systems to expand their services. Even in low-income countries, mobile penetration is very high, reaching 83% in the 16-65 age group.

If blockchain can provide a proof of concept for a viable payment business model for mobile banks and other financial participants, it will advance the long-term development goals of inclusive finance.

Serving previously unprofitable customers and SMEs can generate up to $ 380 billion in additional revenue.

As a result, blockchain may provide emerging markets with the opportunity to disrupt traditional technologies, just like mobile technology in many emerging market regions, especially sub-Saharan Africa.

Financial Services

In the field of financial services, blockchain plans can be divided into two broad categories.

The first is the theory of process efficiency, which is mainly in countries with mature financial market leaders (usually in OECD countries).

In this case, the blockchain project is more focused on the gradual application of technology, using process efficiency in existing business models, or using private or semi-private assets within its organization or through companies such as R3, Hyperledger, and Digital Asset Holdings Blockchain.

The second is the emerging market creation theory, that is, new market participants aim at the inefficiency of existing business models to create value in emerging markets.

These participants can be startups from developed or emerging market economies, or large non-financial companies, and they see opportunities to extend the current service value chain, such as global payments, remittances, and digital wallets.

These programs tend to thrive in the market and have relative volatility due to factors such as political or currency risks, the lack of a strong traditional banking system, customers who cannot enjoy full service, digital or mobile financial culture, and the explicit support or tolerance of regulators. Sex.

In this field, blockchain plans are often open networks, supported by cryptocurrencies (usually Bitcoin), and tend to be localized. Such startups include BitPesa (Kenya), Bitso (Mexico), (Uganda), Satoshi Tango (Argentina), BitSpark (Hong Kong), OkCoin (China), OkLink / Coinsensure (India), CoiNnect (Mexico / Argentina) ), Rebit, and (Philippines).

There are also many large companies in this field, including telecom giant Vodafone, which launched MPesa, a mobile money transfer service in Kenya, and e-commerce companies such as China's Alibaba subsidiary AliPay.

In this category, China's performance is very prominent. Chinese companies are active in these two market segments (startups and large established companies). Their business scope covers the entire Asia. Venture capital investors have also been developing globally. Market ambitions.

Close the institutional gap. The positive impact of blockchain on emerging markets can be expressed not only in terms of technology, but also in terms of institutions.

From the perspective of governance and society, the transparency characteristics of blockchain can also play a role in reducing the "trust deficit" and put pressure on governments to improve their services, be more responsible, and eliminate the development of institutions over decades. need.

For example, the Dubai government set up a global blockchain committee in 2016 to help governments and industries better use blockchain technology to improve services to citizens.

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