Blockchain Revolution (updated)

by Don Tapscott

  Remittances of funds sent back to their homelands by people living in distant locations connect diasporas globally. Diasporas are global communities formed by people dispersed from their ancestral lands but who share a common culture and strong identity with their homeland.

  One of the functions of many of today’s diasporas is to address and help solve common, global problems. Remittances represent one of the largest flows of capital to developing countries and can have an enormously positive impact on the quality of the lives of some of the world’s most vulnerable people. In some countries, remittances are a huge and vital component of the economy. In Haiti, for example, remittances account for 20 percent of GDP. The Philippines receives $24 billion every year in remittances, or 10 percent of GDP.38 According to the International Monetary Fund, recipients usually spend remittances on necessities—food, clothing, medicine, and shelter, meaning remittances “help lift huge numbers of people out of poverty by supporting a higher level of consumption than would otherwise be possible.”39 Remittance flows to developing nations are estimated to be three to four times as large as foreign aid flows.40 The positive effects of remittances on the poor in developing countries are well understood, yet despite this enormous economic injection, remittance costs are still appallingly high. In some of the most expensive corridors between nations, fees on remittances can run north of 20 percent.41

  Canada is one of the largest net senders of remittances in the world. In Ontario, Canada’s largest province by population and largest economy, 3.6 million people identify as being foreign born and every year billions of dollars leave the province in the form of remittances.42 Analie’s story is noteworthy because it is the norm in Canada.

  Consider the Dufferin Mall, also in Toronto. On most days the mall sees a steady flow of traffic and could be mistaken for any other shopping center in Canada or the United States. But every Thursday and Friday around five o’clock in the evening, something entirely different happens. Paychecks in hand, thousands of foreign-born Canadians descend on the mall to send remittances from the mall’s various banks and foreign exchange dealers to needy family members in their home countries. A cottage industry of foreign exchange dealers and Western Union outposts has popped up in convenience stores, bars, and restaurants in the surrounding area to deal with the overflow.

  Oftentimes traveling by bus, streetcar, or subway, with children in tow and exhausted from a long day, Torontonians speaking Filipino, Cantonese, Spanish, Punjabi, Tamil, Arabic, Polish, and other languages get to the mall, and then stand in long lines waiting for the chance to send their hard-earned money home. These days, most people pass the time on their smart phones, chatting over WhatsApp, Skyping friends and family in Toronto and abroad, playing games, and watching videos. More often than not, it takes upwards of a week for this money to arrive at its intended destination, at which point someone on the receiving end needs to go through a similarly tedious, time-consuming process.

  What’s wrong with this scenario? Just about everything. Let’s tease out the bright spots. Remember, most of the people waiting in line were using smart phones, a technology that is pervasive in Canada and increasingly ubiquitous globally. Seventy-three percent of Canadians own a smart phone, and in Toronto the number is almost certainly higher. The country has a wireless network infrastructure among the best in the world, which means that not only can most Canadians own a smart phone (effectively a supercomputer), but they can also use it to harness the power of the mobile Web in ways that would have seemed like science fiction two decades ago. Why do those people wait in line to send money via a physical point of sale using decades-old technology instead of what they have at their fingertips? Dollars are a lot less data intensive than HD video. In fact, according to Skype, video calling consumes 500 kilobits per second.43 Sending one bitcoin takes about 500 bits, or roughly one one-thousandth the data consumption of one second of video Skype!

  By disintermediating traditional third parties and radically simplifying processes, blockchain can finally enable instant, frictionless payments, so that people don’t wait in line for an hour or more, travel great distances, or risk life and limb venturing into dangerous neighborhoods at night just to send money. Today, a number of companies and organizations are leveraging the bitcoin protocol to lower remittance costs. Their goal is to put billions of dollars into the hands of the world’s poorest people. These industries have been controlled by a handful of firms that have used their unique positioning and legacy infrastructure to produce monopoly economics. But they too see the risk from this technology and they’re scared. According to Eric Piscini, who leads Deloitte’s cryptocurrency group, companies in the payment space today “are really nervous about what the blockchain is actually doing to them. Western Union, MoneyGram, iRemit, and others are very nervous about the disruption to their business model.”44 They should be, as there is an emerging industry of new and disruptive companies that plan to take their place.

  Well, Luke, My Friend, What About Young Analie?

  There are two main obstacles to creating a blockchain-based payment network for the world’s poor. First, many of the people sending the money get paid in cash and those on the receiving end live in a predominantly cash-based economy. Second, most people in the developed and developing world alike don’t have the knowledge and tools to use blockchain effectively. While cash may very well go the way of the dodo, until employers start beaming value to smart wallets in the developed world, and tiny streetside merchants in Manila, Port-au-Prince, and Lagos start accepting digital payments, we will still need hard currency. Western Union understands that, and that’s why it is still very relevant today, with more than 500,000 agents all over the world.45 If you’re looking to exchange your remittance for cash, your options are limited. Western Union wouldn’t be effective if it had only one agent. Its network has allowed it to maintain a monopoly position on the entire market for decades. There have been few if any companies with a seamless, easy-to-use “killer app” technology. Until now.

  Enter Abra, and other companies like it. With a name like Abra, one would expect to see a little “cadabra,” and the company does not disappoint. Abra is building a global digital asset management system on the bitcoin blockchain. Its stated mission is to turn every smart phone into a teller that can dispense physical cash to any other member of the network. We wanted to test whether this solution improved Analie’s experience.

  Analie and her mom both downloaded the app to their Android smart phones. Analie’s balance to start was in Canadian dollars. At the click of a button, Analie initiated the transfer to her mom. She got it, in pesos, almost instantly. At this point, her mom had the choice of keeping pesos on her phone as a store of value and choosing to spend them at a growing number of merchants that now accept Abra as a payment system. By creating a payment mechanism and store of value, Abra effectively displaces the conventional banking system’s two most essential roles: payments and value storage. This alone is a revolutionary concept, but here’s where it gets really interesting: Mom wants cash. She pays her rent, buys her food, and manages virtually all other expenses in cash. She checks the app and notices there are four other Abra users within a four-block radius of her. She messages them all to see who will exchange her digital pesos for physical pesos and at what price. The four come back to her with different “bids” for their services. One person will do it for 3 percent, another for 2 percent, and two more for 1.5 percent. Mom decides to go with the teller offering 2 percent—not because it’s the cheapest but because this teller has a five-star rating and has agreed to meet her halfway. They meet and she swaps her Abra pesos for physical pesos, the teller makes his commission, and they both walk away happy. Abra takes a 25-basis-point fee on conversion.

  The entire process, from money leaving Toronto to the Filipino recipient holding cash, takes less than an hour and costs 25 basis points net, inclusive of foreign exchange and all other transaction costs. Whereas every Western Union transaction requir
es up to seven or eight intermediaries—corresponding banks, local banks, Western Union, the individual agents, and others—the Abra transaction requires only three: two peers and the Abra platform. “I get it now. That’s really cool!” said Analie, ecstatically.46

  For Abra to scale globally, it must address two core challenges. First, the network requires a critical mass of tellers to make the service convenient. Analie’s mom won’t use it if the nearest teller is twenty miles away. Abra understands this, and it is presigning tellers—at last count many thousands in the Philippines alone—who are ready to transact when things go live. Second, the model works on the assumption that tellers and customers will abide by their commitment when they transfer digital for physical currency. This is less of a concern. Businesses like Airbnb, Lending Club, and Zipcar have debunked the myth that individuals will not trust one another. Indeed, for Abra CEO Bill Barhydt, the staggering growth in the number of so-called sharing economy companies convinced him this wasn’t an issue. “People are willing to trust each other faster than they’re willing to trust an institution,” he said.47

  The smart phone is key to all of this. In the same way the smart phone allows you to rent your apartment to someone else or rent your car to someone else or provide ride sharing to someone else, it can also be used as an ATM. Barhydt said, “It’s amazing what people are willing to do in a shared economy model and they’re just not doing it for money yet, maybe with the exception of peer-to-peer lending.” Moreover, he said, “It’s more important to us that you trust each other rather than Abra. If you trust each other, it’s highly likely that you’re going to get to know Abra, and that you’re going to like it and you’re going to have a good experience,” and ultimately trust the platform.48

  Abra is not a remittance app but instead a new global platform for value exchange that combines in equal measure the distributed, trustless blockchain network, the power of smart phone technology, and the very human inclination to want to trust peers in a network. By offering users the ability to store value in traditional currencies, transmit value across the network, and also pay at a growing merchant network, Abra takes on not only Western Union, but also the credit card networks, like Visa. According to Barhydt:

  The settlement rails for a Western Union transaction, and the settlement rails for a Visa transaction, are very different. But the settlement rails for an Abra transaction that’s used for both person-to-person payment, as well as person-to-merchant payments, are exactly the same. . . . We have come up with a single solution that works domestically or cross-border, and that can be used for both person-to-person payments and person-to-merchant payments for the first time.49

  Abra might eventually become a global juggernaut, rattling the walls of the biggest financial institutions in the world. But for now, it’s an elegant and simple solution to an important global problem. With remittances topping half a trillion dollars next year, the market opportunity is nothing to sneeze at.

  BLOCKCHAIN HUMANITARIAN AID

  Can blockchain fundamentally transform how NGOs, governments, and individual donors deliver foreign aid? Hundreds of billions of dollars of aid flow annually into developing nations, yet the macroeconomic effects of aid are not always clear.50 There is ample evidence to suggest that corrupt officials, local strongmen, and other intermediaries steal much of it long before it ever reaches its intended source. More troubling, according to the Journal of International Economics, an “increase in government revenues may lower the provision of public goods.” The report concluded that “large disbursements of aid, or windfalls, do not necessarily lead to increased welfare.”51 Organizational bloat and leadership corruption combine for lots of waste and greater disparity between haves and have-nots in the poorest countries. This is true for direct foreign aid from government to government but also for NGOs that put boots on the ground in hard-hit places.

  We touched briefly on the question of foreign aid in our introduction. Let’s explore it further. Recall that the Red Cross came under fire in the aftermath of the 2010 Haiti earthquake after a study conducted by ProPublica, an independent, not-for-profit news organization, and National Public Radio found the organization squandered funds and did not fulfill many of its commitments such as building 130,000 new homes. It built only six.52 In its defense, the Red Cross argued that Haiti’s shoddy land title registry hindered its efforts: nobody could figure out who actually owned the land. As a result, the Red Cross improvised a less desirable solution. Could a blockchain-based land title registry improve this situation by providing clear title and perhaps prevent unlawful expropriation?

  Foreign aid is perhaps the clearest example of the ineptitude of many governments and the rent-seeking behavior of unethical intermediaries, and is thus excellent grounds to explore blockchain solutions. The 2010 Haiti earthquake was one of the most devastating humanitarian crises of the past hundred years.53 While the government was paralyzed and the crisis raged on, thousands of “digital humanitarians” converged on the Internet to help first responders collect, triage, and visualize pleas for help from mobile phones of devastated Haitians. Originally formed online by like-minded volunteers, these ad hoc groups became increasingly organized and effective amid the crisis. One in particular—CrisisCommons—made a real difference. CrisisCommons exemplifies a global solution network, an emerging nonstate network of civil society organizations, companies, and individuals, collaborating to solve a major problem. The digital revolution has enabled new networks to connect and collaborate across borders and can solve problems and enable global cooperation and global governance. The Internet makes all this possible. Never before could people organize collectively to create a public good as they did in Haiti. This information layer of the Internet proved vital—providing critical connections, know-how, and data for people in need and volunteer organizations alike. Imagine if there was also a value layer. What kind of possibilities could that enable?

  The blockchain can improve the delivery of foreign aid in two ways. First, by disintermediating the middlemen who act as conduits of large aid transfers, it can reduce the chronic problem of outright misappropriation and theft. Second, as an immutable ledger of the flow of funds, it compels large institutions, from aid groups to governments, to act with integrity and abide by their commitments. If they don’t, people will be able to see their malfeasance and hold them to account.

  One could easily imagine UNICEF or the UN’s women’s initiative using the blockchain to get funding directly to women and children without having to go through local power structures. Individuals in poor countries could sign up for certain benefits through a distributed ledger managed by a network of different aid groups acting as nodes on the network. When particular aid is delivered—say, vaccinations from the Red Cross or school supplies by UNICEF—those “transactions” can be time-stamped on the ledger. This would reduce or perhaps prevent aid groups accidentally double spending on particular people or communities, thus spreading the benefits of aid more equitably.

  Indeed, UNICEF has begun exploring cryptocurrencies. In June 2015, UNICEF announced the launch of Unicoin, a digital currency that children can “mine” by submitting an inspirational drawing to the program. The coins are then exchanged for a notepad and pencil.54 This is a small start, but the opportunities are limitless. It’s not far to imagine the hypothetical we posed in chapter 1—orphanages in villages all around the developing world working with UNICEF to set up accounts for each child from the moment they arrive. Donations could be split on a pro rata basis into each kid’s personal individual account. Governments, strongmen, and other corrupt officials simply couldn’t access it. The poorest and most vulnerable children in the world would have the funds to start a life when they move into adulthood. This is attainable with blockchain.

  Natural disaster relief or provisions for the poor cannot all be peer to peer, of course. Oftentimes, institutions are not only desirable but also essential. But the blockchain can radically improve the transparency o
f how those organizations, and other institutions in the foreign aid value chain, function. Every dollar donated to the Red Cross could be tracked from its starting all the way through the value chain to the individual it directly benefits. Recall our hypothetical in chapter 1—the Red Cross could run crowdfunding campaigns for each of its most important initiatives—delivering medical aid and fighting the spread of disease, water purification, the rebuilding of homes—and when you donate you would know whether your dollar went to a plank of wood, a gallon of water, or a gauze Band-Aid. If funds went missing, the community would know and could hold these organizations accountable. Smart contracts could be employed that hold the aid groups themselves accountable. The funds for major projects—from housing initiatives to the implementation of a water purification scheme—could simply go into escrow and be released only after the successful completion of key milestones—securing title for a site, importing raw materials, signing a contract with a local supplier, building the finished product, installing a certain number of clean water access points—is achieved. The result? Radically improved transparency and accountability in the delivery of foreign aid, and thus significant improvements in the end results.

  Foreign aid is the second-largest fund transfer from developed to developing nations, after remittances. Blockchain technology can enable transparency, accountability, and more efficient operations for well-meaning NGOs and better delivery of critical services in times of crisis and in normal circumstances. Of course, there are a multitude of implementation challenges—things that must be overcome. People on the ground will need to know how to use this technology. Mobile phone networks could fail in the midst of a crisis. Crafty criminal elements and corrupt governments might still find ways to defraud the poor and destitute. But are these reasons not to explore this technology? No. The situation today is dysfunctional and in many cases plainly broken. Empowering individuals and holding aid groups accountable will mean more aid in the hands of the right people. Alleviating poverty and addressing catastrophic crises is the first rung of the ladder to global prosperity. Let’s take a chance on blockchain.