Recommended Download: Blockchain in Development – Part II: How It Can Impact Emerging Markets
Blockchain is an innovative new technology with the power to disrupt existing economic and business models, as discussed in EMCompass Note 40. Blockchain also has enormous potential for emerging markets. These nations appear poised for a more rapid adoption of blockchain, though a framework is needed to assess how the technology can be deployed and which applications and use cases are likely to be seen in the near future. While the potential of blockchain is great, the technology is still at an early stage of development and will need to overcome potential setbacks—technical, regulatory, and organizational—before it becomes mainstream. In such a context of uncertainty, companies in emerging markets can neither afford to wait until the outcome is evident nor expose their existing business models to overly risky wholescale blockchain initiatives. Instead, they will need to adopt an experimental approach that allows them to develop

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.1 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. 2 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) 

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). Intraorganizational projects intended to reduce organizational complexity and reconcile multiple databases would be another possibility. 3 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 de-risking in the wake of the financial crisis. Fortunately, this handicap may accelerate 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 frontrunners and new entrants alike. Both have high transaction and verification costs that blockchain can reduce by improving the speed, transparency, and process. Emerging market nations have large population segments that remain underserved in terms of financial and banking services due to the high cost of customer acquisition for traditional financial institutions. In addition, the extensive use of mobile based services, particularly in Africa and Asia, provides an easy avenue for a blockchain-based system to extend its services. Even in lower income countries, mobile penetration is extremely high, at 83 percent among the 16-to-65 age bracket. 4 If blockchain manages to provide proof of concept for a viable business model in payments for mobile banks and other financial players, it would advance the longstanding developmental goal

of financial inclusion. Serving previously unprofitable customers and small and medium-sized companies can generate up to $380 billion in additional revenues.5 So blockchain may provide emerging markets an opportunity to leapfrog traditional technologies, as happened with mobile technology in many emerging market regions, particularly Sub-Saharan Africa.

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About IFC and World Bank Group work on blockchain IFC is part of the World Bank Group, mandated to foster development through private sector focused investment and advisory interventions. Within the World Bank Group, IFC participates in the initiative “Blockchain Lab” that was launched on June 27 by the World Bank Group VP Information and Technology Solutions (ITS) and CIO Denis Robitaille. The Blockchain Lab serves as a learning, experimentation, and collaboration platform on DLT (Distributed Ledger Technologies) and Blockchain inside and outside the WBG. The ITS Blockchain Lab engages and partners with leading technology companies, start-ups, entrepreneurs, innovators and development organizations to experiment, develop, and roll out blockchain-enabled solutions. The Blockchain Lab conducts knowledge-sharing events open to anyone interested in topics related to blockchain and development. This initiative aims to connect development practitioners and disparate efforts across the WBG in DLT and Blockchain technologies. The Lab will boost and contribute to increased WBG knowledge and expertise in DLT and Blockchain, and improve its capability to respond to client countries inquiries and needs. For more information please contact the Blockchain Lab team [email protected] or Stela Mocan, Lead IT Officer, Business Solutions, World Bank at [email protected]
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    Francisco Gimeno - BC Analyst I agree with the article where it says that Block chain will be useful and will be accepted faster in emerging markets in the financial sector. I would say also on the development sector and in adding value and lowering verifications costs to agricultural products which are so important in emerging markets. I have lived the revolution of Mobile money in East Africa and understand how fast and easy will be for the public and the institutions there to jump to the Block chain wagon when needed. For me is also interesting when comparing with financial institutions in developed countries which are more cautious or even against BC startups and their ICOS. Again, the forefront of technology will be on developed countries but I strongly believe that many successful applications will be based on emerging markets first.