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Blockchain in Development — How It Can Impact Emerging Markets

Blockchain’s full capability is difficult to predict at this early stage in its development. Yet while most of the attention surrounding blockchain has taken place in advanced economies, its greatest potential for decisive impact may lie in emerging market economies.

In 2016 Christian Catalini, Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at MIT’s Sloan School of Management, and Joshua Gans, Professor of Strategic Management at the University of Toronto’s Rotman School of Management, proposed an economic framework to assess the potential impact of blockchain and its capacity to disrupt the current market by reducing verification and networking costs.

Their paper concluded that when blockchain is combined with cryptocurrency, marketplaces can be ‘bootstrapped’ to function without the use of traditional ‘trusted parties’ and thereby result in significantly lower networking costs for participants.

The paper also finds that open blockchains will likely have the most drastic effect on market structure, challenging the market power of incumbents, and lowering the cost of entry for new entrants.

Nevertheless, given the relatively high costs of the proof of concept, it is likely that most early adoptions of blockchain will take place in the form of

(i) value-added applications built on top of existing blockchains such as bitcoin;

(ii) private or semi-private blockchains targeting process efficiencies in financial services; or (iii) extensive margin applications enabling new marketplaces.

The coexistence of public and private blockchains is assured, depending on the type of services and the nature of the industry where they are applied.

A compelling business case for blockchain can be made in currently neglected or underserved markets, where there is a less competitive market structure and high verification costs.

Use cases that are relatively simple to design and implement, and which are combined with already tested technological solutions such as cryptocurrencies, will likely find early adoption (for example, adding a digital currency payment option for wallets and cross-border payments).

Intra-organizational projects intended to reduce organizational complexity and reconcile multiple databases would be another possibility Financial services firms are extending that kind of collaboration to trusted counterparties to reduce costs through private blockchains.

Truly disruptive blockchain solutions that depart from existing business practices carry high potential for future growth, but their heightened complexity and need for stakeholder collaboration (such as elaborate financial instruments and smart contracts) will likely delay their adoption.

Building on this hypothesis, emerging markets appear poised for a more rapid adoption of blockchain technology, as they meet many of the conditions listed above, including high verification costs, underserved populations, and in many cases have a relative lack of traditional incumbents with significant market power to impede new entrants.

In financial services, for example, the existing infrastructure is shallow in almost all low-income countries, many of which have also suffered from derisking in the wake of the financial crisis.

Fortunately, this handicap may accelerate the adoption of blockchain, as a lack of financial infrastructure also means less organizational resistance to the new technology and lower transition costs for moving from a legacy to a new system.

Consequently, regulators and existing financial institutions in emerging markets have less incentive to prevent the blockchain revolution, as it does not massively disrupt existing market conditions.

Global payments and trade finance are examples of sectors experiencing a flurry of initiatives from market front-runners and new entrants alike.

Both have high transaction and verification costs that blockchain can reduce by improving the speed, transparency, and process.

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