BUSINESS: Blockchain disruptors set sights on Africa
AFRICAN BUSINESS MAGAZINE – From funding atrocities in Sierra Leone to fuelling civil conflict in the Central African Republic, few of Africa’s valuable resources are as closely tied to violence and war as the diamond.
Unveiled in a flurry of publicity and goodwill in 2003, the Kimberley Process was designed to bring an end to the excesses of the bloodstained trade, bringing key actors together to hammer out an international certification process for the rare stones. With NGOs and over 80 countries signed up, the high-profile venture appeared to offer a fresh start for the shamed industry, promising “to ensure that diamond purchases were not financing violence by rebel movements and their allies seeking to undermine legitimate governments.”
Just 15 years later, that optimism has disappeared. In December, Canadian NGO Impact – previously nominated for a Nobel Peace Prize for its work on conflict diamonds – became the latest international observer to abandon the Kimberley Process, arguing that buyers had been given “false confidence” that their diamonds were conflict free.
While observers appear to have lost all confidence that the industry will clean up its act, a revolutionary new technology could offer a path forward. In January, De Beers, the multinational diamond producer substantially active in Southern Africa, announced that it was developing the industry’s first blockchain initiative spanning the diamond value chain, offering “a single, tamper-proof and permanent digital record for every diamond registered on the platform.” A pilot project is working towards the ultimate goal of “ensuring that all registered diamonds are conflict-free and natural” while boosting sector efficiencies.
For the uninitiated, the idea of using blockchain – a digital technology best known as the basis for volatile cryptocurrencies like Bitcoin – to bolster confidence and security in the diamond market appears bizarre. Yet despite its association with wild speculation and the rollercoaster price movements of cryptocurrencies, the technology is increasingly talked up as a transparent solution to African governance and economic problems, from crooked elections to faulty land registers and inefficient transaction systems.
Defined by Marco Iansiti and Karim Lakhani in the Harvard Business Review as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way,” blockchain allows contracts to be embedded in code and “stored in transparent, shared databases, where they are protected from deletion, tampering, and revision.”
For African governments and businesses struggling under the weight of outdated administration techniques, overbearing bureaucracies, and competing asset ownership claims, the attractions of blockchain are obvious.
“The question is how could you boost the level of trust in developing countries, how do you arrest that cycle? One way is by having a blockchain type system which basically takes away the need to enforce trust because the system forces it upon you,” says Garrick Hileman, a blockchain expert who teaches at the University of Cambridge. “In our global blockchain benchmarking study we found over 130 unique use cases for the technology ranging across a wide variety of industrial sectors, healthcare, insurance, gaming, media, energy, transportation and communications.”
Despite the excitement, few are under any illusions about the challenges of rolling out complex technology underpinned by citizen networks across frontier markets. As with all transformative technologies in Africa, technical, political and regulatory hurdles remain steep.
“Right now it’s very new and the potential is enormous. However you’re still dealing with a nascent technological and regulatory framework, and a very nascent asset class with cryptocurrencies,” says Farzam Ehsani, blockchain lead at Rand Merchant Bank and chairman of the South African Financial Blockchain Consortium. “Given this infancy we should expect to see a lot of changes and a lot of resistance. We live in a world where there are many vested interests. There will be people with a lot to gain and a lot to lose.”
Building blocks of success
While much African blockchain activity remains at a highly speculative stage – the talk of academic researchers, thinktanks and dreamers with little more than a laptop and an internet connection – early movers are already getting to grips with the new technology and carving out innovative enterprises. Based in Nairobi and with a presence in several other African countries, BitPesa bills itself as an “online payment platform that leverages Blockchain settlement to significantly lower the cost and increase the speed of business payments to, from and within sub-Saharan Africa.”
With its multinational cast of tech-savvy employees and quirky, minimalist website, BitPesa seems the archetype of a trendy tech startup. But for founder and chief executive Elizabeth Rossiello, blockchain technology offers a serious chance to overhaul the African payments sector – a market originally known for its innovation and startup mentality that has coalesced around a tiny number of dominant players.
“The whole country [Kenya] uses M-Pesa, which is great and helps financial inclusion in so many ways, but on the other hand when you want to innovate you have to ask the company’s permission and when you want to do something new it becomes harder and harder because there’s a bottleneck,” says Rossiello. “Using Bitcoin blockchain technology was cheap, robust, fast and there was a great community. I could lock into that and use it as a processing system and transaction database with very little startup capital and I had more transparency than most companies using mobile money. All my customers could see their transactions. It was scalable and interoperable with every country around the world using the same technology.”
Indeed, the relative lack of financial sophistication in sub-Saharan Africa means that the region could act as a launchpad for the adoption of financial blockchain technology. In a region where hundreds of millions remain unbanked, citizens are crying out for new ways to settle transactions in secure, transparent, efficient and cost-effective ways.
Supporters say blockchain technology is more reliable and resilient than other transaction technologies – the underlying technology of bitcoin has yet to fail despite billions of transactions over nine years says Hileman – while the security of networks is another defining feature. Furthermore, it can remove many of the unnecessary functions of financial intermediaries, allowing for a transparent peer-to-peer system that benefits consumers.
“The implications for Africa and emerging markets are just as profound as they are for developed markets,” says Ehsani. “In some cases people have argued that we will see a lot more innovation from smaller countries and smaller markets that are not as developed because they don’t have as much to lose as current systems which are highly entrenched.”
Yet if the opportunities may be larger in the developed world, the barriers to success are larger still. Low internet penetration rates affect the quality and speed of African networks, although decentralised networks are largely within the technical reach of many African countries. Both governments and private citizens have concerns about the privacy of their data. Regulation around blockchain financial technology remains basic across the continent, with many countries lacking expertise in rapidly evolving technologies that are only hinting at their full potential.
Elsewhere, vested interests lobby against the introduction of tools that will prove detrimental to their monopolies. Rossiello argues that BitPesa has had a mixed regulatory experience across Africa.
“In Nigeria we’ve been working with the regulator for two years, we’ve developed draft regulations and the regulator is so much more active,” she says. “So many departments have detailed questions, want to see briefs and hold meetings and forums. It’s amazing to be a part of that process and it flouts all the rumours and stereotypes of what it is to work in financial regulation here.
“In contrast, in Kenya we don’t get meetings, they refuse to read our memos, they write one sentence responses back to us and publish circulars without asking for public opinion. This secretive culture is hurting people and making it harder and harder to do business.” The response of Africa’s regulatory authorities to blockchain technologies could provide a test case for the rolling out of blockchain in other areas of government and corporate life.
“I think it will help if regulatory and policymakers were supportive. They can certainly block or slow dramatically the adoption of decentralised technologies like blockchain, but I think it’s going to put many of these countries at a disadvantage if they fight the trend too hard – it would set countries back in terms of advancing their position as an innovation hub and their ability to drive growth and investment,” says Hileman.
“There will be certain jurisdictions where they view this new technology and corresponding cryptoassets as a big threat and they may start banning them. This is such a powerful technology that attempts to quash or tame it will have difficulty succeeding,” says Ehsani.
Voting for change
While new ways of executing financial transactions already begin to chip away at the influence of incumbents, future uses of blockchain technology could offer a far more idealistic and potent challenge to the existing political and economic order in Africa. In Kenya’s 2017 elections, a flawed electronic voting system and the disputed role of the country’s Independent Electoral and Boundaries Commission led to a dramatic Supreme Court annulment of the vote and the order of a rerun.
Under a blockchain electoral voting system, voters could theoretically check that their ballot had been correctly cast and registered with the IEBC. Could such open-sourced, peer-reviewed technology threaten the long-established pattern of fraudulent elections on the continent?
“Imagine a world where you the voter with a unique alphanumeric ID could actually go check a public electoral ledger to see your vote in the column of the candidate you voted for,” says Hileman, “The authentic elections that could come out of such a process could have a massive knock-on effect. How countries would feel about having that decentralised system is a fair question but the infrastructure already exists to run such an election. The challenge is obviously that corrupt regimes in power aren’t necessarily going to want to embrace these technologies.”
Indeed, one of the paradoxes of blockchain technology is that they may require some support from established governments – potentially those with the most to lose – in order to reach their full potential. The expansion of blockchain cryptocurrencies like Bitcoin, which implicitly threaten a government’s control over its own monetary system, have already provoked a backlash among concerned policymakers.
“Cryptocurrency shows us there are many benefits to having a global currency but monetary union without political or fiscal union is very difficult to manage as we’re seeing with the euro right now,” says Ehsani. “I believe it will be quite a long time before we get to full potential in mainstream life, in deeds offices, government systems, identities, money etc, not due to a lack of technological progress – but because of vested interests in a traditional system.”
For now, blockchain enthusiasts may have to acknowledge that a technology that remains hostage to privacy and corruption concerns will have to proceed with the goodwill of many parties and prove its worth in ways mutually acceptable to governments, citizens and innovators.
“To get to the point where blockchains are enforcing payment of taxes through smart contracts and automatically deducting them from income – there’s a lot of steps to that. You would need to move to a blockchain-based monetary system and many central banks are reluctant to do that for a variety of reasons. But there may be simpler things like moving property titles on to a blockchain or doing electoral voting in some limited way in a local community or city-based blockchain system. It’s a real sea change to go from a hierarchical approach to giving up control and embracing more decentralised information,” says Hileman.
While utopian thought and a libertarian yearning to be free of the shackles of existing power structures sit at the heart of the blockchain dream in Africa, programmers may have to set their sights a bit lower for now.
“One of the underlying questions and the hype around this technology is that people think it’s a panacea for problems in society,” says Ehsani. “This is a tool that can be used for great social progress but can also exacerbate social ills like inequality. Just because there’s a blockchain doesn’t mean it’s now going to solve global poverty.”