The last week has generated a lot of buzz about Blockchain Technology with KPMG partnering Microsoft to develop of suite of services through a cloud-based platform. This has restarted the debate on the exciting yet puzzling opportunities which the technology may provide us in the future much like the Bitcoin Revolution which began in 2008.
Before delving into details, it is crucial to get a sense of what Bitcoin and Blockchain are. Until the arrival of Bitcoin, if I had to send $100 to say, my friend in the US, I had to rely on the services of Paypal, Mastercard, Western Union or similar providers. PayPal deducts the amount from my account and adds it to my friend’s account. It also keeps a record of the transaction.
Without such intermediaries, digital money could be spent twice and here's how. Imagine there are no intermediaries with records, and digital cash is simply a computer file, just as word documents are computer files. I could send $100 to my friend by attaching a money file to an email.
But just as with email, sending an attachment does not remove it from my computer. I would retain a copy of the money file after I had sent it. I can then easily send the same $100 to somebody else and keep repeating this process. In computer science, this is known as the “double-spending” problem.
This problem could only be solved by a third party keeping record of your transactions in what is called a ledger. Bitcoin solves the problem of this extra third party step by maintaining a public, distributed ledger called the Blockchain. New transactions are checked against the Blockchain to ensure that the same Bitcoins haven’t been previously spent, thus eliminating the double-spending problem.
Now, the question arises as to how I can obtain Bitcoins for the purpose of transferring $100 to my friend? Acquiring Bitcoins is as simple as buying any other currency. You just need to exchange your dollars for an equivalent number of Bitcoins. The dollar value of a Bitcoin will be determined on an open market, just as the exchange rate between different world currencies is determined.
First-World Project
However, the conventional portrayal of Bitcoin conjures up images of a handful of internet geeks, rich techies, Chinese magnates, American traders and European depositors. Certainly their efforts have helped Bitcoin become the most exciting currency in the world but the honeymoon did not last long.
Despite the meteoric rise in popularity, there have been serious doubts about Bitcoin's usage due to digital theft, hacking, frauds, speculation and money-laundering. There has also been severe misuse by drug cartels.
Most global institutions initially tried to adopt Bitcoins as a payment or donation acceptance method, but it has not been explored further until recently when PwC setup a blockchain team at its Belfast office, and Accenture opened a practice dedicated to the technology. On the practical side, Cognizant Technologies supported Mizuho with a blockchain implementation for smart contracts. KPMG has also begun to offer Digital Ledger Services for its clients and full lifecycle support for their projects through this technology.
This focus on Bitcoin and Blockchain as a first-world project ignores the enormous potential it holds as a tool for economic development and poverty alleviation.[1] Bitcoin has the capacity to solve the challenges of the world's poorest with respect to financial services and property ownership.
Tool for Poverty Alleviation
Bitcoin continues to be one of the most important yet misunderstood innovations of this century.[2] According to Silicon Valley entrepreneur Wences Casares, “Bitcoin may be the best form of money we have ever seen in the history of civilisation. Its value lies in its ability to be transferred for free, in real-time and without an intermediary.” It gives hope for 2.5 billion people today who do not have formal bank accounts for a cheap payment system.
In 2015, officially recorded remittances to impoverished countries amounted to $432.6 billion. But, the average costs for sending these funds stood at 7.7% (transaction fees and exchange rate spreads included). The cost for this transfer using Bitcoins would have been less than 1%, thereby translating into an additional flow of over $28 billion into the poor countries. This would increase their purchasing power, improving quality of life for them and their families.[3]
Hernando de Soto from The Institute for Liberty and Democracy, Peru identified ownership of property as one of the most powerful factors contributing to the economy and the creation of wealth.[4] This is where Blockchain Technology plays a key role. It enables one to have a public ledger of ownership and transfer that cannot be denied in any court of public law, regardless of how corrupt the government may be, because it’s absolutely transparent. It enables individuals to approach banks for credit as there is a fool proof record of collateral.[5]
Furthermore, a 2013 UNICEF report shows that over 200 million children under the age of five worldwide lack any kind of registration at birth, a situation that exposes them to economic hardship and possible exploitation. Christopher Fabian, co-founder of the United Nations Children’s Fund (UNICEF) innovation effort has expressed confidence in blockchain technology's ability to offer solutions in providing identification for these children.
Similarly, there is a need for other multilateral organisations to explore Blockchain applications for solving current problems and not shy away from them due to the Bitcoin bust. In the short to medium term, there is an expectation that corporations will invest in the new technology and startups will help leverage it, even though it may seem a threat to existing financial intermediaries like credit cards and paypal.
The time is also ripe for regulators and governments to encourage Blockchain cryptography and similar disruptive technologies by building safeguards into this ecosystem. Ergo, I can finally hope that me sending over $100 be a near free experience.
References:
1. Jeff Fong, "Bitcoin Price 2013: How Bitcoin Could Help the World's Poorest People" in www.mic.com, May, 2013
2. S Nakamoto, "Bitcoin : A peer to peer electronic cash system" in www.cryptovest.uk, October, 2008
3. Trevir Nath, "Can Blockchain and Bitcoin Help the World's Poorest" in Investopedia, April, 2016
4. H De Soto, "The other path: The invisible revolution in the third world"
5. Interview Transcript of William Blair partner Brian Singer, "How Bitcoin will end world poverty", Forbes Magazine, April, 2015.
(The author is a former LAMP Fellow and currently works for a legal tech startup in Delhi.)
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