Forbes: The blockchain revolution may first appear in emerging countries, not developed Western countries

A financial revolution was said to be taking place on Wall Street and in London. But the real change was happening elsewhere.

A poster at the Old Shoreditch Station Café in London in 2014 reminds customers that the store accepts Bitcoin payments.

Predicting revolutions is often futile and at least somewhat inaccurate. When Marx and Engels were studying communism, they predicted that the proletarian revolution and then the communist revolution would begin in a country with a large industrial working class, most likely in Britain or Germany, but they did not predict that it would be in Russia.

Similarly, for the blockchain revolution, people's attention is mostly focused on OECD countries. It is predicted that the blockchain revolution will be led by Western banks in different fields, such as UBS, Goldman Sachs, JP Morgan Chase, Credit Suisse, Barclays and Commonwealth Bank of Australia.

However, few people have noticed that there is great market potential for applying blockchain technology in the financial field around the world, especially in low-income emerging countries.

Currently, there is a growing gap between the supply and demand of financial services in low-income countries. Rapidly growing populations and continued economic growth are the main reasons for this gap. Morgan Stanley's research mentioned that without a large number of users, blockchain will not succeed.

Leveraging blockchain technology to bridge the financial services gap

Most low-income countries have weak financial services infrastructure. However, the lack of financial infrastructure also means greater potential and less resistance to the implementation of new technologies. In markets where financial services infrastructure is scarce, the blockchain revolution will have little impact on existing financial markets. Therefore, existing regulators and financial institutions in these markets have no reason to stop this blockchain revolution.

The popularity of mobile payments combined with blockchain technology provides a more powerful combination for inclusive finance.

In recent years, the world has made significant progress in financial inclusion (as shown by the annual data of the Global Economic Index in previous years), but developing countries and vulnerable groups (women, the poor) are still largely unbanked. For example, recent estimates show that paying wages through private enterprises could increase the number of people with bank accounts by up to 280 million, while paying wages through state-owned enterprises would only increase the number of people with bank accounts by 160 million. The infrastructure support for inclusive financial services still lags behind.

Many countries are now jumping right into mobile payments, skipping the development of financial infrastructure. In Africa, where so many mobile phones are used for mobile payments and other services, providers are investing about $1.35 billion to bring mobile payment networks to an additional 500 million people by 2020. In recent years, mobile payments have grown fastest in sub-Saharan Africa. Overall, the gap between the number of mobile payment users in high-income and low-income countries is narrow (according to 2015 World Economic Forum data). In Southeast Asia and the Pacific, as well as in Europe and the Middle East, mobile payments are growing at double-digit rates. This opens up fast-growing markets for blockchain.

The first sign of this was in September 2016, when Barclays Africa and its UK parent company Barclays PLC completed the world’s first trade finance transaction using blockchain technology. In late January 2017, Standard Bank, one of Africa’s largest banks, joined the R3 blockchain consortium to explore the application of blockchain technology in financial services.

A deeper investigation shows that there is more potential for using blockchain technology to provide financial services in markets with high mobile device penetration (multiple mobile devices per capita) and low financial inclusion (i.e. less than 30% of the population has a bank account). The main markets include Eastern European and Central Asian countries such as Armenia, Moldova or Azerbaijan, Middle Eastern and North African countries (i.e. Egypt, Jordan, Tunisia) and other regions (such as Cambodia, Peru, Nicaragua, Congo and Mali).

We can see that after Ecuador, Tunisia also launched its national digital currency, eDinar, this year. With the rapid development of digital currencies, more African countries will also launch their own digital currencies.

Further challenges ahead

Bitcoin can fulfill many of the basic functions of a base currency, such as being a unit of account and for currency exchange. However, Bitcoin still faces several important challenges.

The first and most significant challenge is facing the government's monopoly regulation. If Bitcoin can become a currency, it will abolish the government's regulation of currency. However, the government prefers to maintain its dominance over currency and intervene when necessary. Moreover, governments around the world have begun to control digital currencies in developed and emerging economies. In the United States, the IRS has issued a notice on the taxation of Bitcoin, and Bitcoin wallet providers must now comply with anti-money laundering rules.

Until now, China has been able to buy, sell and insure currencies or other currency derivatives at designated financial institutions. But in late October 2016, the Chinese government launched a white paper on the application of blockchain technology. The white paper states that blockchain is a key component of future finance. The change in the regulatory environment will not only affect China's leading Internet financial companies, such as Alibaba's Ant Financial, WeBank, Ping An Insurance Group, etc., but will also affect the banks in China that have the world's largest assets, such as Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China.

Assuming that the government does not interfere, Bitcoin will still have two problems. The first problem is the stability of the currency. The price of gold (in US dollars) was relatively stable between 1850 and 1970, but the price of Bitcoin has fluctuated wildly in the past few years. According to data from Blockchain.info, the average price of Bitcoin on several major Bitcoin exchanges in the US dollar market reached a high of $1,151 in December 2013, and fell to a low of $177 in January 2015. This makes it difficult for Bitcoin to be a stable value currency.

The second issue is privacy protection. Part of the reason for the success of Bitcoin is anonymity. For several years, people believed that anonymous transactions could be carried out through Bitcoin, and the government could not identify it. However, a large number of transactions are recorded in the blockchain. Although they are not the real names of the accounts, the government can use other information to analyze transactions and obtain real identities. And the government may already be making full use of the blockchain to do so... After all, the government cannot allow anonymous financial transactions, which will only protect terrorists and criminals. This issue may also be the least important, because the government has many ways to solve the problem of anonymous transactions.