What do you do when Africa's richest man, Aliko Dangote, publicly says that he is not in favour of investing in a fintech start-up and would rather invest in agriculture? Well, you find yourself re-examining the role of financial technology and its punted disruptive nature. All of this thinking is somewhat problematic, especially since wherever you look there is an increased and heightened focus on blockchain, initial coin offerings, virtual card payments, in addition to social and political uprisings that vocalise a pressing need for financial inclusion.
We have seen the former CEO of STRATE, Monica Singer, leave the central securities depository to concentrate full-time on blockchain. She said, in her interview with CoinDesk, that she believes tech would help to cut out the "unnecessary middlemen". This is ground-breaking. The former head of South Africa's central security depository for over 20-years, a pioneer in transforming the paper-based financial markets to electronic settlement, clearly sees the benefits of blockchain despite the fact that, with time, it will more than likely eradicate the need for central securities depositories.
One can argue that there are clear benefits for blockchain use in any industry or economy. A few examples highlighting the potential benefits are:
- Blockchain is a public open ledger and this allows transparency in the transaction process;
- It can potentially reduce costs for large organisations, allowing them to move away from cumbersome paper-based processes and consequently increase productivity and efficiency;
- Governments, in particular central banks, can reduce costs of regulation and compliance as it allows for tamper-proof (multilateral) transactions. Hernando de Soto makes a very compelling case for blockchain technology having the ability to produce a hyper-efficient government administration with tamper-proof infrastructure.
- It is also possible for blockchain technology to allow developing economies to leapfrog their current technologies and in so doing compete with more advanced economies;
- Blockchain has the potential to introduce a world without the proverbial "middle man" in the settlement of financial transactions
- Blockchain provides for the decentralisation of power; and
- It has the potential to create new foundations for our current economic and social systems. This is not disruptive, this is much needed.
However it will take time for these to become a reality as blockchain is merely a foundational technology. Just as TCP/IP was the platform for the development of e-mail and later the internet, so too blockchain provides the platform required to create the new foundation in our economic and social systems. TCP/IP created an open shared public network without any central authority that regulated it. Blockchain is, therefore, similar in this regard. It took almost 30 years for the TCP/IP foundational technology, as it then was, to gain the critical mass needed that led to the wholesale adoption of e-mail and by extension the internet in the 1990s.
We will see the same with blockchain as it goes through various phases of technological development. Blockchain is not new and, therefore, is not disruptive. It has been around since 2008 and is, in effect, a peer-to-peer network that sits on top of the internet. Bitcoin is but the first application of blockchain technology and it will take time for us to see the full extent of how it will reshape societies and economies. While it may be possible for this to be accelerated, it is unlikely as central banks and other regulators will take time to fully embrace the technology. The current sandboxing of Bankymoon by the South African Reserve Bank is important, and a shining example for the development of effective regulation as well as the adoption of "new" technologies and innovation in the financial markets.
The more we delve into the uses for blockchain the more we see its potential and benefit. In banking, it may be a much-needed replacement for paper-based and manual-based transaction processes in securities settlement, trade finance, cross-border settlement, foreign exchange and even inter-bank transfers. Stellar, through blockchain technology, first focused on Africa, particularly Nigeria, to provide affordable financial services. Affordable financial services are more than possible but it will require the influence of government policymakers and central banks to start using it. Smart contracts, not Bitcoin, are the real example of the advanced level in the application of blockchain technology. This will put pressure on intermediaries, such as lawyers, accountants and banks, to reconsider their current offering in a way that will allow for the automation of contracts. Not only will this take time, but it also requires buy-in by society and adoption by regulators to effectively implement it.
Perhaps Dangote is right. Perhaps we should all exercise caution in embracing blockchain technology in our organisations and economies, providing well-thought out and systematic planning to its adoption and working on our internal sandboxing before going live with it.
The article first appeared in the November 2017 issue of Without Prejudice.
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