Exotix
thinks the best opportunities for blockchain technology are in
countries like Zimbabwe.
REUTERS/Philimon
Bulawayo
Specialist investment bank Exotix argues that the
biggest potential for blockchain technology, first developed to
underpin bitcoin, lies in frontier markets.
Analyst Paul Domjan says blockchain could be used for
things like property registration, contract law, and exchange
in countries with volatile local currencies.
Goldman Sachs made a similar point about the potential
for bitcoin in countries with unstable local
currencies.
LONDON — The biggest potentially for blockchain technology is in
developing markets not developed markets, according to specialist
investment bank Exotix.
Paul Domjan, global head of research, analytics & data at
Exotix, which specialises in emerging markets, compares
blockchain technology to the smartphone and mobile boom of the
last decade in a note sent to clients this week.
Smartphones brought about much greater change in developing
markets than developed and allowed many countries to "leapfrog"
fixed line telephones.
Domjan writes: "Today, frontier markets may be positioned to
leapfrog developed economies once again, but this time the key
technology is blockchain and cryptocurrencies."
He sees the clearest applications in recording property
ownership, contract enforcement, and storing or sending currency.
Blockchain explained
Blockchain technology, also known as distributed ledger tech, was
first popularised by bitcoin, the digital currency created in
2009. It allows for a shared database that is near instantly
updated, meaning all parties can see the same version of that
database. It uses complex cryptography and group authentication
to police the editing of the ledger.
Usually people have a central database to record things like
trade. That way an impartial middleman can make sure everyone is
playing by the rules. Blockchain removes the need for that
middleman.
The technology was originally developed to do away with the need
for a central bank for bitcoin, meaning it could be totally
independent. But this feature has almost endless applications for
other industries and processes that involve a trusted middleman
or central authorities.
Banks are particularly keen to adopt blockchain, as its inbuilt
security and trust checks cut out the need for middlemen in
processes like settlement and clearing. This, in turn, cuts down
costs. Santander estimated in a 2015 report that the
technology could save banks as much as $20 billion.
Sceptics argue that blockchain simply replicates processes and
systems that already work relatively well, without enough of a
payoff to warrant the costs.
Domjan says: "Due its distributed nature, recording new assets on
a blockchain can be quite slow, with transaction times measured
in hours or even days rather than the seconds that are typical of
e-commerce. As such, blockchain technology is a poor substitute
for existing ownership records in developed or even emerging
economies."
'We see this advantage across the developing world'
That's not the case in emerging markets, Domjan says, where there
is often only a poorly developed and unreliable system for
recording property ownership.
"Whereas some emerging markets, such as Russia and China, have
property registration systems on par with those in the
high-income OECD countries, frontier markets in Latin America,
Sub-Saharan Africa, and South Asia lag far behind, with average
performance less than half that of the best performing
economies," he writes.
While it is a developed nation,
Sweden is looking at a blockchain-based land registry system.
Others looking at the solution include Ukraine and Georgia.
Domjan writes: "Indeed, blockchain technology can be used to
maintain a clear, reliable record of anything. For example,
Estonia has implemented the BitNation public notary services,
including recognising marriages recorded in the BitNation
blockchain, and Ukraine is developing an election platform based
on the blockchain."
It's a similar case for contracts. Ethereum's blockchain allows
people to write rules based commands: if a payment is received,
then release the deed to a property, for example. It's not that
powerful in developed nations where processes are already
established for this type of thing but it could be
transformational in developing economies.
"The same principle can be used for transactions ranging from
financial derivatives to international trade," he writes.
Finally, Domjan also argues that the ease of transfer of
cryptocurrencies, which are built on blockchain technology, is
also most useful to developing nations.
"In countries with capital controls, highly volatile currencies,
and high inflation, the governance problems, payments transaction
costs, and volatility of their domestic currency may seem worse
than those of cryptocurrencies, or at least bad enough that
cryptocurrencies represent an attractive hedge against their
domestic currency," he writes.
"We see this advantage across the developing world, from foreign
investors in Brazil looking to move money to brokers in Zimbabwe
looking for an alternative store of value."
Goldman Sachs recently made a similar argument, saying that
cryptocurrencies like bitcoin
could become a legitimate currency in parts of the global
financial system where the traditional functions of money don't
work as well.
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