BLOCKCHAIN

Opportunities for Private Enterprises

in Emerging Markets
Second and Expanded Edition, January 2019
This report contains nine chapters that had been recently published as the following EM Compass Notes:
Chapter 1, Blockchain in Development—A New Mechanism of ‘Trust’? has been published previously as Marina Niforos,
Blockchain in Development—Part I: A New Mechanism of ‘Trust’? EM Compass Note 40, IFC, July 2017.
Chapter 2, Blockchain in Development—How It Can Impact Emerging Markets has been published previously as Marina Niforos,
Blockchain in Development—Part II: How It Can Impact Emerging Markets, EM Compass Note 41, IFC, July 2017.
Chapter 3, Can Blockchain Technology Address De-Risking in Emerging Markets? has been published previously as Vijaya
Ramachandran - Thomas Rehermann, Can Blockchain Technology Address De-Risking in Emerging Markets? EM Compass
Note 38, IFC, May 2017.
Chapter 4, Blockchain in Financial Services in Emerging Markets—Current Trends has been published previously as Marina
Niforos, Blockchain in Financial Services in Emerging Markets—Part I: Current Trends, EM Compass Note 43, IFC, August 2017.
Chapter 5, Blockchain in Financial Services in Emerging Markets—Selected Regional Developments has been published
previously as Marina Niforos, Blockchain in Financial Services in Emerging Markets Part II: Selected Regional Developments,
EM Compass Note 44, IFC, August 2017.
Chapter 6, Beyond Fintech: Leveraging Blockchain for More Sustainable and Inclusive Supply Chains has been published
previously as Marina Niforos, Beyond Fintech: Leveraging Blockchain for More Sustainable and Inclusive Supply Chains,
EM Compass Note 45, IFC, September 2017.
Chapter 7, Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging Markets has been published
previously as Marina Niforos, Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging Markets,
EM Compass Note 57, IFC, September 2018.
Chapter 8, Using Blockchain to Enable Cleaner, Modern Energy Systems in Emerging Markets has been published previously as
Douglas Miller – Peter Mockel, Using Blockchain to Enable Cleaner, Modern Energy Systems in Emerging Markets, EM Compass
Note 61, IFC, November 2018.
Chapter 9, Blockchain and Associated Legal Issues for Emerging Markets has been published previously as John Salmon -
Gordon Myers, Blockchain and Associated Legal Issues for Emerging Markets, EM Compass Note 63, IFC, January 2019.

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BLOCKCHAIN
Opportunities for
Private Enterprises in
Emerging Markets
Second and Expanded Edition, January 2019
ABOUT THE AUTHORS
DOUGLAS MILLER , Origin Market Development & Regulatory Affairs Manager, Energy Web Foundation
([email protected]) (Chapter 8)

PETER MOCKEL, Principal Industry Specialist, Climate Strategy and Business Development, Climate Business,
IFC ([email protected]) (Chapter 8)

GORDON MYERS, Chief Counsel, Legal Department, Technology and Private Equity, IFC; and Co-Chair, Legal and
Policy Community, ITS Innovation Lab, World Bank Group ([email protected]) (Chapter 9)

MARINA NIFOROS is the founder and Principal of Logos Global Advisors, a strategic advisory firm to high-growth
startups and large multinationals, helping them form partnerships and leverage opportunities for growth. She is also
Visiting Faculty of Leadership at HEC Hautes études commerciales de Paris, a French business school.
([email protected]) (Chapters 1, 2, 4, 5, 6, 7)

VIJAYA RAMACHANDRAN, Senior Fellow, Center for Global Development. ([email protected]) (Chapter 3)

THOMAS REHERMANN, Senior Economist, Thought Leadership, Economics and Private Sector Development, IFC.
([email protected]) (Chapter 3)

JOHN SALMON, Partner, Hogan Lovells International LLP, London ([email protected]) (Chapter 9)

CONTRIBUTORS
Matthew Saal, Martin Holtmann, Steven Buck, Marcos de Brujis, Rachel Alexandra Halsema, Susan Carevic,
Andrew Yew

CONTENT ADVISORS
Economics and Private Sector Development | Neil Gregory, Thomas Rehermann
Financial Institutions Group | Matthew Saal, Susan Starnes, William Haworth
Global Infrastructure & Natural Resources | Tonci Bakovic
Legal | Gordon Myers

PROJECT AND CONTENT TEAM

Project Manager | Thomas Rehermann
Editors | Matt Benjamin, Ann Bishop, Ofeoritse Daibo
Research Assistants | Jung Ryun Byun, Ariane Tamara Volk, Robert Mwanamanga, Kevin Matthees
Composition and Design | Rikki Campbell Ogden, Daniel Kohan
CONTENTS
4 |
INTRODUCTION

6 |
EXECUTIVE SUMMARY

9 |
CHAPTER 1: Blockchain in Development—A New Mechanism of ‘Trust’?

16 |
CHAPTER 2: Blockchain in Development—How It Can Impact Emerging Markets

23 | CHAPTER 3: Can Blockchain Technology Address De-Risking in Emerging Markets?

29 | CHAPTER 4: Blockchain in Financial Services in Emerging Markets—Current Trends

38 | CHAPTER 5: Blockchain in Financial Services in Emerging Markets—Selected

Regional Developments

44 | CHAPTER 6: Beyond Fintech: Leveraging Blockchain for More Sustainable and

Inclusive Supply Chains

51 |
CHAPTER 7: Blockchain Governance and Regulation as an Enabler for Market
Creation in Emerging Markets

59 |
CHAPTER 8: Using Blockchain to Enable Cleaner, Modern Energy Systems in
Emerging Markets

66 | CHAPTER 9: Blockchain and Associated Legal Issues for Emerging Markets

77 |
REFERENCES
INTRODUCTION

The World Bank Group has set a goal of Universal Financial Access by 2020, and IFC has a long-
standing commitment to financial sector development. The continued digital transformation of
financial services is critical to both objectives. Only the reach and efficiency of digital finance can
sustainably bank the next billion people. Both existing and newly emerging technologies will be
part of this transformation. Mobile networks, cloud-based services, and big-data analytics are
already helping to reach thousands of previously unbanked customers with transaction accounts,
savings products, and credit. Many emerging markets lack connectivity infrastructure and trusted
institutions and counterparties. Distributed ledgers may provide some of the infrastructure these
markets need.

This collection attempts to focus attention on the underbanked in various emerging markets, including in
potential of blockchain, and of distributed ledger Latin America, Asia, and Sub-Saharan Africa (Chapter
technology (DLT) more generally, to address some of 5). Chapter 6 looks “beyond fintech” to explore how
the economic and financial challenges that emerging developments in applied blockchain technology can
markets face today. These challenges are many, and impact agribusiness, drug safety, and more generally
include Know-Your-Customer gaps, the de-risking by provide enforcement tools to promote the reach of
global financial institutions that prevents emerging sustainable and inclusive business. Chapter 7 discusses
markets from accessing the global financial system, and the proper regulatory environment needed to stimulate
the costs and inefficiencies of processing remittances competition and investment in blockchain technologies
through the interlinked ledger system that is today’s in emerging markets and beyond. Chapter 8 examines
correspondent banking network infrastructure. Various the potential of blockchain to accelerate the transition
approaches using distributed ledger technology could to low-carbon energy solutions in these countries.
provide solutions, as well as a new infrastructure for Chapter 9 offers a review of legal issues associated with
financial services in emerging markets. the use of blockchain and how these can be addressed.
Of the nine chapters that follow, the first six were These chapters are a continuation of the initial
written in 2017, while the last three are more recent exploration of this topic. Sound use cases for
and bring the perspective of more than a year of blockchain beyond cryptocurrencies are yet to
development in this nascent technology. They also be validated at scale. Many of the proposed
revisit several issues from different perspectives. implementations remove key attributes of distributed
Chapter 1 provides an overview of blockchain ledgers (for example, distributed write capability
technology, followed by a look at its unfolding or absence of intermediaries) in order to integrate
applications in emerging markets in Chapter 2. blockchains into existing institutional structures and
Chapter 3 examines whether blockchain can be used to business interactions. Many proofs of concept to
mitigate de-risking by financial institutions. Chapters date have focused on the question “Can this be done
4 and 5 look more closely at the financial services using a blockchain?” rather than “Is blockchain the
sector, including an overview of how blockchain fits most efficient and effective way to do this?” Given
into the spectrum of financial technology (fintech) the present higher cost and slower operation of DLT
innovations and the resulting provision of financial systems, the benefit of choosing DLT as an operational
services (Chapter 4), and an analysis of blockchain’s database may be limited to specific use cases. Gaining
contribution to reaching the unbanked and traction in those uses will require the cooperation

4
of those who currently control data or business Blockchain’s accelerated investment cycle has fostered
processes, as well as getting those who currently intense experimentation and focused attention not
rely on trusted counterparts to accept alternative only on the mechanics of digital ledgers, transactions,
governance mechanisms. and counterparty connectivity, but also on the need
for sound governance. The ongoing grappling with
As money pours into any new technology, it is
use cases is illuminating the processes underlying
important to distinguish hype from reality, and
counterparty interactions and challenging practitioners
speculative fervor from strategic early-stage
to think in new ways about the building blocks of
investments. Investments made under the “fear of
financial intermediation and value, or need for change,
missing out” do not guarantee the longevity of the
in existing institutional structures. Solutions may
business model. The continued volatility and decline in emerge that leverage distributed ledgers, or that apply
value of prominent cryptocurrencies and the corporate this new understanding to create combinations of, or
governance deficit plaguing some highly visible Initial innovations on top of, more standard databases. IFC
Coin Offerings has taken some of the air out of the will continue to monitor developments, looking for the
bubble. With that has come the ironic realization that technology to mature. To demonstrate sufficient value
blockchain-enabled business ventures must abide by to market participants, applications will need to make
codes of governance and regulatory compliance if these progress on both the technical and the organizational
supposedly trustless systems are to gain the trust of levels, such that the ecosystem can both leverage and
economic participants. benefit from distributed ledger technology. n

GORDON MYERS MARTIN HOLTMANN MATTHEW SAAL MARINA NIFOROS

Chief Counsel, Legal, IFC Manager, Digital Principal Industry Specialist Founder
Financial Services & Digital Financial Services Logos Global Advisors
Microfinance, FIG, IFC FIG, IFC

5
EXECUTIVE SUMMARY

Blockchain is an emerging technology that offers the possibility of re-engineering economic

models and enabling the creation of markets and products that were previously unavailable or
unprofitable across emerging markets.

This report is intended to introduce readers to current options and thereby learn in the process, inform their
developments in distributed ledger technology, or strategies, and improve their value propositions.
blockchain, with the vantage point of possible benefits Blockchain can be used to mitigate de-risking by
to emerging markets. The first six chapters were financial institutions. Such de-risking is a significant
written a year ago, while the last three are more recent challenge to banking in developing economies, as it
and bring the perspective of a year of development in affects recipients of remittances, businesses that need
the nascent technology. correspondent banking relationships, and charities
Blockchain is a database ledger that functions working in conflict countries. Blockchain appears to
like a distributed network. It is often referred to have potential to lower verification costs when offering
as a distributed ledger that can register blocks of remittance services, as well as for the provision of trade
cryptographically-secure, tamper-proof data with finance, among other things.
members of a network. This unique structure offers The financial services industry has been an early
near-frictionless cooperation between these entities, experimenter on and adopter of blockchain technology.
allowing them to transfer value or information Financial institutions around the world find their
without need of a central authority or intermediary. business models continually tested by technological
It has the potential to deliver productivity gains to innovation. The emergence of innovative digital
multiple industries, from the financial services sector financial technologies (fintech), including blockchain,
to energy markets, supply chains, intellectual property is challenging traditional players in the sector by
management, the public sector, and beyond. demonstrating new ways to deliver value across the
And blockchain may prove particularly valuable entire financial value chain. And emerging markets
in emerging markets. Yet the technology is in early may prove to be ideal for the adoption of blockchain-
stages of development and will need to overcome based financial solutions due to their underserved
serious challenges and risks, both technical and populations, higher banking risks, lower bank
regulatory, before it achieves widespread adoption. penetration and legacy systems, and greater presence of
Questions remain about blockchain’s scalability, digital financing. The convergence of these factors may
interoperability, security, transition costs, data provide the basis for a faster adoption of the technology
privacy, and governance. and could result in a technological leapfrog that boosts
In such a context of uncertainty, business leaders financial inclusion and growth.
and policy makers will need to think long and hard Blockchain can also be used beyond fintech for
about when and under what conditions a blockchain a more sustainable and inclusive management of
initiative is warranted. Companies—in emerging global supply chains. Two critical attributes of the
markets and elsewhere—can neither afford to wait blockchain in particular—the reduction of agency
until the outcome is evident nor expose their existing costs and auditable traceability—may help to facilitate
business models to overly risky wholescale blockchain trade as well as ensure compliance with specific
initiatives. Instead, they will need to adopt an goals regarding sustainability and inclusion. Two
experimental approach that allows them to develop supply chains where specific experimentation with

6
blockchain is taking place are food and agribusiness, facilitate and decrease the costs of trade finance and
and pharmaceutical safety. remittances, both of which boost growth and improve
Of course, exploiting the benefits of blockchain for living standards in poor countries.
emerging market economies will require a proper Blockchain technology can help individuals establish
regulatory environment to stimulate competition and a digital identity, inexpensively, which is necessary
investment—and to allow innovation to flourish. to gain access to the financial system, and to disclose
If blockchain-enabled markets are to come to life, their personal data securely. And it can complement
regulators and businesses must collaborate to enable a platforms such as mobile banking, which is rapidly
governance framework where they can both experiment growing in the developing world.
and learn, and so shape the future of the technology in
While Europe and the United States continue to lead
a way that benefits all parties and society as a whole.
the world in blockchain adoption and innovation, their
Blockchain also has enormous potential to accelerate dominance is now being challenged by Asia—and
the adoption of clean, affordable, reliable, and China in particular—which is rapidly increasing its
resilient energy sources in emerging markets. share of global blockchain venture capital financing.
Investors, policymakers, and regulators need to work
Blockchain-based applications and services are also
together here, too, to promote the development and
springing up across Africa and Latin America.
implementation of blockchain-based solutions that
aid the transition to low-carbon energy and achieve a Cognizant of blockchain’s substantial potential
modern, clean energy future in these countries. benefits for their citizens, but also wary of the
risks, emerging market governments are taking this
Finally, the usage of blockchain presents its own
technology seriously. Some are even becoming major
legal issues though several have been identified and
financial supporters of the technology with the hope
overcome before at similar innovative leaps in the
of using it to provide their citizens and economies
recent past, such as the commercialization of the
with a technological advantage and a boost to growth.
Internet or cloud computing. It is key that enterprises
China, for example, has explicitly made blockchain
understand any risks inherent in blockchain systems,
a pillar of its economic development strategy and is
including being able to identify clearly who is
accountable and legally responsible. pushing regulators and industry to collaborate on
emerging standards.
Implications for emerging markets Blockchain is a technology still at a very early stage of
Many emerging markets experienced a reduction of development, and there is no shortage of challenges to
available financial services in recent years as banks its adoption and efficient implementation. We are at the
and other institutions sought to curb risks and lower beginning of this experiment and the road to maturity
compliance costs in the wake of the financial crisis. is likely to create both winners and losers before
The economically vulnerable in these countries, as sustainable and profitable business models can emerge
well as organizations that serve them, have suffered and full network effects can be seen. Companies and
considerably from this type of de-risking. Blockchain, regulators in emerging markets will need to strike
through its ability to reduce regulatory costs and a balance between allowing enough space for the
increase transparency, can help reverse this trend innovation ecosystem to flourish, while also effectively
and broaden access to financial services. It may also managing the associated risks and costs. n

7
8
 EM COMPASS NOTE 40

CHAPTER 1
Blockchain in Development—
A New Mechanism of ‘Trust’?
By Marina Niforos

Blockchain is an exciting new technology that may prove to be a radical innovation—similar

to technologies such as the steam engine and the Internet that triggered previous industrial
revolutions—with the power to disrupt existing economic and business models. It has the
potential to deliver productivity gains to multiple industries, from the financial sector to energy
markets, supply chains, intellectual property management, “virtual firms”, the public sector, and
beyond. Its ability to provide disintermediation, improve transparency, and increase auditability
can significantly reduce transaction costs, introduce efficiency into existing value chains, challenge
revenue models, and open new markets. And blockchain may prove particularly valuable in
emerging market economies. Yet the technology is in its early stages of development and serious
challenges and risks, both technical and regulatory, will need to be addressed before it achieves
widespread adoption. Questions remain about blockchain’s scalability, interoperability, security,
transition costs, data privacy, and governance. And business leaders and policy makers will need
to think long and hard about when and under what conditions a blockchain initiative may be
warranted.

Blockchain has generated an enormous amount of a wide range of applications, in the financial sector and
interest over the last three years, with evangelists beyond. These include peer-to-peer technology, energy
for the technology calling it a pillar of the Fourth markets, supply chain certification and intellectual
Industrial Revolution and sceptics dismissing it as an property management.
overhyped combination of existing technologies. 2
So, what is blockchain? OVERVIEW OF DISTRIBUTED
Confusion persists among the public, businesses, and LEDGER TECHNOLOGY
policymakers as to blockchain’s structure, utility, and
applicability—and even its name. The term blockchain Evolution of ledgers: from centralized to
is often used interchangeably with the term distributed distributed
ledger technology, and the technology is still associated Blockchain introduces a database that functions like
with its first incarnation, bitcoin. a distributed network, hence the term ‘distributed
Though it has existed since 2009, blockchain has ledger’—with the promise of near friction-free
attracted a new level of interest over the last two years cooperation between members of complex networks
amid growing awareness that it could be exploited that transfer value to each other without central
beyond digital currencies and used for other types of authorities or middlemen.
inter-organizational cooperation and value transfer. Blockchain is often referred to as a ‘radical innovation’3
Thanks to its enabling potential for digital proof of or general-purpose technology (GPT) not unlike the
identity and costless verification, blockchain could have steam engine or the electric motor.4 In other words, a

9
technology that can create “subsequent innovation and Bitcoin’s commitment to anonymity in transactions
productivity gains across multiple industries,” similar unfortunately also opened the platform to illicit
to the Internet before it.5 activities such as drug trafficking and tarnished its
Blockchain’s primary value is its ability to deploy reputation with governments and the public alike.
cryptographic mechanisms to reach consensus across Despite this, the development of bitcoin continued. Its
parties in the ledger. This eliminates the need for a market capitalization is approximately $42 billion and
central authority or intermediary, thereby creating a it is used by millions of people for payments, including
distributed trust system of value transfer.6 No single a growing remittances market.9
entity can amend past data entries or approve new Designed to be much more than a payment system,
additions to the ledger (Figure 1).7 Eliminating the need Ethereum was launched in 2014 as an open-source,
for a central trusted party can increase speed, lower public, blockchain-based distributed computing
transaction costs, and enhance security in the network. platform that provides a ‘crypto-economically-
Blockchain first appeared in the form of bitcoin, a secured’ platform for the development of any kind
peer-to-peer electronic cash system launched by Satoshi of decentralized application.10 Given the extended
Nakamoto in 2009 “based on cryptographic proof capabilities it provides to the original bitcoin-oriented
instead of trust, allowing any two willing parties to technology, it is often called Blockchain 2.0.
transact directly with each other without any need for a Ethereum uses ‘ether,’ a cryptocurrency token to
trusted third party.”8 Cryptographic proof refers to the compensate participant nodes for computations
cryptographic process of reaching consensus through performed. Ethereum introduced the possibility of smart
proof of work eliminating the need for a trusted contracts, or “deterministic exchange mechanisms
intermediary. Bitcoin originally had a strong anti- controlled by digital means that can carry out the
establishment undercurrent, backed by a community direct transaction of value between untrusted agents.”11
of techno-libertarians or crypto-anarchists seeking to Ethereum’s market capitalization exceeded $26 billion in
establish a currency outside of government control and July 2017, which is especially noteworthy since it stood
censorship. at under $1 billion just six months earlier.12

CENTRALIZED DECENTRALIZED DISTRIBUTED

Traditional central body controls Intermediaries maintain local All parties can hold the same
transactions and records. Other records of transaction. Other record of every transaction.
parties maintain their own copies. parties maintain their own copies.

FIGURE 1  Evolution of Ledgers

Source: Paul Baran, On distributed communications networks, 1964, and Marina Niforos, 2017.

10
 FINANCIAL VALUE EXCHANGE ASSET REGISTRIES SECURITY
Currency Exchange & Network Infrastructure Gold & Diamonds Digital Identity
Remittances & APIs Property Titles / Land Management
Syndicated Loans Document Storage & Records Authentication &
Private Shares Delivery Data Storage Authorization
Treasury Repos Digital Content Supply Chain Compliance / KYC / AML
Loyalty Points App Development Management Governance & Risk
Marketplaces Logistics Management
Interbank Payments
Smart Contracts IOT Auditing
P2P Transfers
Insurance

FIGURE 2  Blockchain Value Chain

Source: The Blockchain Lab; theblockchainlab.com

How does blockchain work? A cryptographic hash function represents the process by
Blockchain is essentially a meta-technology that which miners (nodes participating in the computational
consists of game theory, cryptography, and mainstream review process performed on each “block” of data)
software engineering.13 Blockchain protocols verify verify and timestamp transactions. Time stamped
numbers or programs, time stamp them, and enter records are displayed in a sequential manner (‘blocks
them as a block into a continuous chain linked to all in a chain’) to all parties on the network who have the
previous blocks linked to the original transaction.14 appropriate access levels (Figure 2).20
Assets may be created directly on the network. For The time required to verify and record a transaction
example, cryptocurrencies and rights to real world
on the distributed ledger technology network varies
assets can have a digital representation as a token15
depending on the process employed (for example,
(referred to as “tokenized assets”).16
‘proof of work’21 for bitcoin or ‘proof of stake’22 for
A distributed ledger technology, or DLT, network Ethereum).
can be either open (permission-less) or private
(permissioned). Assets on a DLT network, whether Open versus private distributed ledger
the network is public or private, are cryptographically technology networks
secured using a public-private key combination. A
Open (permission-less) networks are accessible
public key is the “address” where the digital asset
is located on the network. A private key is the code to anyone wishing to join, without restriction on
that gives the holder access to the asset at the address membership. Data stored on these networks is visible
represented by the corresponding public key. Once a to all participants in encrypted format. Digital
transaction is initiated, it is broadcast on the network currency bitcoin is an example. Open distributed ledger
to all ‘nodes’, or participating computers,17 and the technology networks do not have a central authority.
nodes acknowledge acceptance of the block by using Instead, they rely on network participants to verify
its hash18 as an input when working on creating the transactions and record data on the network, based on
next block.19 a certain protocol.

11
The ‘miners’ participating in the verification process
are incentivized to perform computationally complex BOX 1  Key advantages for
tasks in exchange for bitcoin rewards (‘tokens’). Distributed Ledger Technology
This consensus-based process (‘proof of work’ in
bitcoin) to ensure encryption of the data requires Distributed and sustainable. The ledger is
intense computational power, which some qualify shared, updated with every transaction and
as wasteful and restraining to the scalability of the selectively replicated among participants
in near real-time. Privacy is maintained
system. However, it is this feature that guarantees the
via cryptographic techniques and/or data
chain’s robust security, making bitcoin more resilient
partitioning techniques to give participants
to attacks. On a public blockchain, sensitive data needs selective visibility into the ledger; both
to be encrypted to ensure privacy, but encrypted data transactions and the identity of transacting
cannot be used by smart contracts, so there is less parties can be masked. Because it is not owned
flexibility on bitcoin for complex or highly regulated or controlled by any single organization, the
‘transactions’ (see Challenges below). blockchain platform’s continued existence isn’t
dependent on any individual entity.
By contrast, private or permissioned networks cannot
access data without prior permission. Permission Secure and indelible. Cryptography
levels may be tiered, such that different entities and authenticates and verifies transactions and
allows participants to see only the parts of
individuals may have varying levels of authority to
the ledger that are relevant to them. Once
conduct transactions and view data (as such, they are
conditions are agreed to, participants can’t
closer to relational databases currently in use in large
tamper with a record of the transaction. Errors
corporations). There are ‘trusted’ nodes or system can only be reversed with new transactions
administrators that control access and rights onto the
Transparent and auditable. Participants in a
network. They can still have an important effect in
transaction have access to the same records,
reducing transaction costs within the ecosystem of allowing them to validate transactions and
participating entities. verify identities or ownership without the need
Established companies, particularly those in the for third-party intermediaries. Transactions are
financial industry, are gradually adopting private time-stamped and can be verified in near real-
time.
distributed ledgers for internal use, as well as for
conducting transactions with trusted partners, Orchestrated and flexible. Business rules
attempting to experiment with the new technology and smart contracts that execute based on
while maintaining data confidentiality. This also one or more conditions can be built into the
platform, helping blockchain business networks
allows them to comply with regulations, something not
to evolve as they mature and support end-to-
possible under the conditions of complete anonymity of
end business processes and a wide range of
open networks.
activities.
Noteworthy industry initiatives to pilot private Consensus-based and transactional. All
distributed ledger technology in financial services relevant network participants must agree that
include Digital Asset Holdings, Chain, R3’s Corda a transaction is valid. This is achieved by using
(which describes itself as a distributed ledger consensus algorithms. Blockchains establish the
technology but not a blockchain), and Ripple/ conditions under which a transaction or asset
Interledger. Linux Foundation’s HyperLedger Project exchange can occur.
and Ethereum Enterprise Alliance, while focusing
Source: IBM Institute for Business Value
primarily on the financial sector, have a vision to
test applications beyond financial services, with
HyperLedger already involved in proofs of concept in
supply chain provenance initiatives.

12
 3. The block is broadcast to
every party in the network.

1. A wants to send money to B. 2. The transaction is

represented online
as a block.

4. Those in the network

approve the transaction
is valid.

6. The money moves from A to B. 5. The block then can be added to the
chain, which provides an indelible and
transparent record of transactions.

FIGURE 3  How does blockchain work?

Source: Financial Times

While private networks are practical and encourage The blockchain ecosystem is currently in full
other companies to adopt the technology, they experimentation mode, bringing new innovations and
may hinder security, since private blockchains are hybrid solutions. Consortia are emerging globally to
paradoxically more vulnerable to external attacks. And discuss and provide solutions, address governance
questions about the interoperability of these coexisting and industry standard issues, and provide regulatory
private blockchains may arise in the future. insights. These include The Ethereum Enterprise
A heated debate, akin to that of the 1990s Internet Alliance and China Ledger, which are attracting
versus intranet concepts, surrounds the question of participation from dozens of major industry players,
open or private networks relating to improved security, innovators, regulators, and governments.
creating new markets, and promoting inclusiveness. 23
Enabling a ‘distributed trust’ system through
However, public or private blockchains are not
mutually exclusive. There may also be “partially Distributed Ledgers—Economic and business
decentralized” blockchains. In these, the right to read model implications
the blockchain may be public, or restricted to the The innovation of blockchain is capable of transforming
participants, or have hybrid routes that allow members the infrastructure of our economic systems, not only
of the public to make a limited number of queries. financial services, where most of the attention is
Additionally, data from a private blockchain can be currently concentrated, but entire global value chains
periodically fingerprinted (hashed) and sent to a public and revenue models. It offers a chance to reimagine
one, which can provide additional auditability. 24 industries, rebuild financial processes, and build

13
markets once considered improbable or unprofitable. companies such as MedRec and Pokitdok; digital
The blockchain provides an infrastructure where trust rights and micropayments innovators such as the Brave
in transactions is not brokered by intermediaries— browser, Ascribe, and Open Music Initiative;
as has been the case until now—but is embodied identity companies such as Uport, BitNation, and
algorithmically in the transaction itself. The algorithmic BanQu; supply chain innovators such as Everledger,
consensus process is the trust agent. Its effectiveness can Hyperledger, and Provenance; and peer-to-peer
be further enhanced if combined with the use of smart renewable energy disruptors such as LO3 Energy and
contracts and digital compliance (Box 1) the Sun Exchange. 29

This process of disintermediation and decentralization, Additionally, distributed ledger technology can replace
coupled with increased transparency and auditability, partially or entirely the government’s role as the direct
provides for improved efficiency, speed, and authority in identity authentication, issuing certificates,
cost reduction (such as in Know-Your-Customer land titles, storing health records, disseminating
verification). Its immutability provides for a verifiable social security benefits, and managing votes and civic
audit trail of any physical or digital asset. 25 participation.

Financial Services: Blockchain was first used in the

financial services industry, where it has been enabling
digital payment systems and remittances as well “We should think about blockchain as another
class of thing like the Internet—a comprehensive
as testing more complex financial instruments and
information technology with tiered technical
transactions such as insurance, deposits, lending,
levels and multiple classes of applications
capital raising, and investment management. 26
for any form of asset registry, inventory, and
Global payments, trade finance, and automated exchange, including every area of finance,
compliance are some of the most active economics, and money; hard assets including
experimentation domains for blockchain today. There physical property; and intangible assets such as
have been more than 2,500 blockchain related patent votes, ideas, reputation, intention, health data,
filings and over $1.4 billion in investments in just information, etc.”
three years. 27 At least 24 countries are investing in — MELANIE SWAN, Founder,
the technology, 50 corporations have joined consortia Institute for Blockchain Studies
around it, and 90 banks are in discussions about it
worldwide. Deloitte reports that 80 percent of banks “A distributed ledger is essentially an asset
will be initiating projects on blockchain by next year. 28 database that can be shared across a network
of multiple sites, geographies or institutions. All
Beyond financial services—A potential business
participants within the network can have their
and public governance paradigm shift: In principle,
own identical copy of the ledger. Any changes to
any type of asset can be tokenized, tracked, and the ledger are reflected in all copies in minutes
traded through a blockchain. Blockchain can serve as or seconds.”
a registry, inventory system, and transaction platform
— MARK WALPORT, UK Government
for recording, tracking, monitoring, and transferring Chief Science Advisor
rights to different asset classes, including intellectual
property, votes, digital identity, health data, and real
“It has math. It has its computer science. It has
estate. Information about the origin of goods, identity
its cryptography. It has its economics. It has its
credentials, and digital rights can be securely stored
political and social philosophy.”
and traced with a distributed ledger.
— VITALIK BUTERIN, Founder of Ethereum
Text BoxAlthough its innovation is in early stages,
blockchain use already includes medical record

14
Estonia is a good example of how blockchain can a complete solution to be applied ubiquitously, but
be used in this way, with the country’s blockchain- instead is one piece of a well-articulated digital
enabled platform, known as X-Road, used to provide transformation strategy that probably includes artificial
integrated services to citizens across multiple programs. intelligence and big data management, among other
Similarly, the Dubai government recently announced a emerging technologies. Companies need to proceed
comprehensive blockchain strategy to help its agencies deliberately but cautiously, in the context of a thorough
run more efficiently, with the aim of saving up to 5.5 cost-benefit analysis. There is no magic formula that
billion dirhams per year.30 fits all firms or situations.

Since it operates without the need for a central Before embarking on a blockchain initiative,
authority, distributed ledger technology challenges organizations need to determine whether blockchain
the assumptions of governance systems that underpin is anchored in their strategy and how it will address
today’s business models and economic and political existing business problems. They will also need to
systems, threatening entire professions and even decide if blockchain can reduce costs and promote
governments. Blockchain has both the economic and market expansion, and determine whether and when
organizational potential to reduce costs across global to reengineer their business model to stay ahead of the
value chains and ‘redefine an organization’s traditional competition.
boundaries,’ blurring the lines between private and Decision makers must also measure the potential
public, individual and collective.31 technical, financial, and reputational risks associated
with blockchain implementation, and find ways to hedge
against them, for example by limiting the perimeter
CONCLUSION of the project or starting with middle- or back-office
In the real world, the choices for business leaders improvements that have no direct customer exposure.
regarding blockchain will not be clear cut. While Businesses also need to determine the direct and
the potential of blockchain is immense, so is the organizational costs of testing and adopting blockchain
uncertainty surrounding it. The technology is not technology, as it may stress already limited resources. n

15
 EM COMPASS NOTE 41

CHAPTER 2
Blockchain in Development—How It Can
Impact Emerging Markets
By Marina Niforos

As discussed in Chapter 1 Blockchain is an innovative new technology with the power to disrupt
existing economic and business models. 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 options
and thereby learn in the process, inform their strategies, and improve their value propositions.

Blockchain’s full capability is difficult to predict at this and lowering the cost of entry for new entrants.
early stage in its development. Yet while most of the Nevertheless, given the relatively high costs of the proof
attention surrounding blockchain has taken place in of concept, it is likely that most early adoptions of
advanced economies, its greatest potential for decisive blockchain will take place in the form of (i) value-added
impact may lie in emerging market economies. applications built on top of existing blockchains such as
bitcoin; (ii) private or semi-private blockchains targeting
In 2016 Christian Catalini, Assistant Professor of
process efficiencies in financial services; or (iii) extensive
Technological Innovation, Entrepreneurship, and
margin applications enabling new marketplaces.
Strategic Management at MIT’s Sloan School of
Management, and Joshua Gans, Professor of Strategic The coexistence of public and private blockchains
Management at the University of Toronto’s Rotman is assured, depending on the type of services and
School of Management, proposed an economic the nature of the industry where they are applied. A
compelling business case for blockchain can be made
framework to assess the potential impact of blockchain
in currently neglected or underserved markets, where
and its capacity to disrupt the current market by
there is a less competitive market structure and high
reducing verification and networking costs.32
verification costs.
Their paper concluded that when blockchain is
Use cases that are relatively simple to design and
combined with cryptocurrency, marketplaces can
implement, and which are combined with already tested
be ‘bootstrapped’ to function without the use of
technological solutions such as cryptocurrencies, will
traditional ‘trusted parties’ and thereby result in
likely find early adoption (for example, adding a digital
significantly lower networking costs for participants.33
currency payment option for wallets and cross-border
The paper also finds that open blockchains will likely payments). Intra-organizational projects intended to
have the most drastic effect on market structure, reduce organizational complexity and reconcile multiple
challenging the market power of incumbents databases would be another possibility.34

16
 Yesterday:  Closed and centralized

Today:  Open and in the cloud

Tomorrow:  Open and decentralized

FIGURE 4  Blockchain for Internet of Things

Source: Hewlett Packard Enterprise

Financial services firms are extending that kind of less incentive to prevent the blockchain revolution, as it
collaboration to trusted counterparties to reduce does not massively disrupt existing market conditions.
costs through private blockchains. Truly disruptive Global payments and trade finance are examples of
blockchain solutions that depart from existing business sectors experiencing a flurry of initiatives from market
practices carry high potential for future growth, but frontrunners and new entrants alike. Both have high
their heightened complexity and need for stakeholder transaction and verification costs that blockchain can
collaboration (such as elaborate financial instruments reduce by improving the speed, transparency, and process.
and smart contracts) will likely delay their adoption.
Emerging market nations have large population
Building on this hypothesis, emerging markets appear segments that remain underserved in terms of financial
poised for a more rapid adoption of blockchain and banking services due to the high cost of customer
technology, as they meet many of the conditions listed acquisition for traditional financial institutions.
above, including high verification costs, underserved
In addition, the extensive use of mobile based services,
populations, and in many cases have a relative lack of
particularly in Africa and Asia, provides an easy
traditional incumbents with significant market power
avenue for a blockchain-based system to extend its
to impede new entrants.
services. Even in lower income countries, mobile
In financial services, for example, the existing penetration is extremely high, at 83 percent among
infrastructure is shallow in almost all low-income the 16-to-65 age bracket.35 If blockchain manages to
countries, many of which have also suffered from de- provide proof of concept for a viable business model in
risking in the wake of the financial crisis. payments for mobile banks and other financial players,
Fortunately, this handicap may accelerate adoption it would advance the longstanding developmental goal
of blockchain, as a lack of financial infrastructure of financial inclusion. Serving previously unprofitable
also means less organizational resistance to the new customers and small and medium-sized companies can
technology and lower transition costs for moving from generate up to $380 billion in additional revenues.36
a legacy to a new system. Consequently, regulators and So blockchain may provide emerging markets an
existing financial institutions in emerging markets have opportunity to leapfrog traditional technologies, as

17
happened with mobile technology in many emerging These initiatives tend to flourish in markets with
market regions, particularly Sub-Saharan Africa. a combination of relative volatility due to political
or currency risk, an absence of a strong traditional
Financial services banking system, large underserved customer segments,
a digital or mobile finance culture, and explicit support
In the financial services sector blockchain initiatives
or tolerance by regulators. In this sector, blockchain
fall under two main categories.
initiatives tend to be open networks, backed by a
The first is process efficiency rationale, which occurs cryptocurrency—usually bitcoin—and tend to be local.
in countries with established financial market leaders
Examples of such start-ups include BitPesa (Kenya),
(typical in OECD countries). Blockchain projects
Bitso (Mexico), Remit.ug (Uganda), Satoshi Tango
in such cases focus on a gradual application of the (Argentina), BitSpark (Hong Kong), OkCoin (China),
technology, leveraging process efficiencies in existing OkLink/Coinsensure (India), CoiNnect (Mexico/
business models and utilizing private or semi-private Argentina), Rebit and Coin.ph (Philippines). There
blockchains, either within their organization or are also large players in this space, including
through consortia such as R3, Hyperledger, and Digital MPesa, a mobile money transfer service launched by
Asset Holdings. telecommunications giant Vodafone in Kenya, and
And the second is new market creation rationale, in e-commerce companies, including AliPay, a subsidiary
which new market players target the inefficiencies of of China’s Alibaba.
existing business models to deliver value in emerging China is a noteworthy player in this classification, with
markets. These can be start-up businesses originating companies that have a dynamic presence in both segments
from advanced or from emerging market economies, (start-ups and large established players), with regional
or large non-financial players that see an opportunity coverage across Asia and venture capital investors who
in expanding the value chain of a current service. have global ambitions beyond emerging markets.
Global payments, or remittances, and digital wallets Bridging the institutional gap. The positive effect
are examples. of blockchain in emerging markets can be not only

FIGURE 5  Blockchain Strategy Assessment Matrix

Source: Marina Niforos

18
technological, but also institutional. From a governance Blockchain (r)evolution: What’s next?
and societal perspective, blockchain’s features of Distributed ledgers technology is evolving rapidly,
transparency can also serve to bridge the ‘trust deficit’ driven by internal forces aimed at correcting some
and put pressure on governments to improve services of the technology’s limitations, with easy-to-use
to citizens, forcing them to become more accountable alternatives like Ethereum and other disruptive
and eliminating the need for decades of institutional technologies that are shaping the Fourth Industrial
development. Revolution.37 The combination of these innovative
For example, in 2016 the Dubai Government forces, including cognitive computing, robotics, the
established a Global Blockchain Council to assist Internet of Things, and advanced analytics, will
governments and industry on how to best leverage the combine to create ideal conditions for altering the
technology to improve services to citizens. current economic infrastructure.38
Smart contracts: With the advent of Ethereum, the
Recent developments “smart contract” concept was introduced, embodying
Although it is still too early for definitive conclusions, a second-generation blockchain platform dissociating
2016 saw a trend in terms of the flow of capital and the digital representation of assets on the chain from
investments in the blockchain industry, according to digital currencies such as bitcoin. In addition to the
data provided by research firm CB Insights. There were speed and efficiency achieved through distributed
signs that the sector is moving beyond hype and toward ledger technology, smart contracts provide the ability
an inflection point, with a consolidating interest to execute more complex and sophisticated tasks
from large corporates and venture capitalists into among parties.39
more complex financial applications, as well as global Unlike traditional contracts, smart contracts are
diversification: embedded in code and can receive information and
• Investment into the sector remained flat with take actions based on predefined rules. They can be
respect to 2015 (at $550 million) but still significant used in numerous scenarios, including the transfer of
(it stood at $5 million in 2012), with capital property titles, settlement of financial derivatives, and
concentrated into fewer deals, signifying perhaps an royalty payments for artists. The biggest impact is
end to the investment bubble. anticipated to be a combination of smart contracts and
the Internet of Things.40
• Corporate venture capitalists entered the market
dynamically, with investments rising 24 percent Internet of Things (IoT): Internet of Things platforms
in 2016, to $52 million, a sign that industry is tend to have a centralized model in which a broker
mobilizing seriously around the technology. or hub controls interactions between devices, an
arrangement that can be expensive and impractical.
• Financial services remained the most active
Blockchain can alter that by decentralizing secured
corporate investors, with major banks joining.
and trusted data exchanges and record keeping on IoT
• While the United States still dominated the sector platforms, serving as a general ledger that maintains a
with a 54 percent deal market share, its relative trusted record of all messages exchanged between smart
proportion diminished as Asia’s share increased devices. It thus provides transactional capability for both
threefold to 23 percent; Asia emerged as a global person-to-person and machine-to-machine transactions
venture capital investor in major deals. in an increasingly interconnected world of multiple,
• The sector matured with blockchain companies enabled devices such as sensors and smart devices.41
emerging beyond financial services, to the This transactional capability among intelligent devices
Internet of Things, identity management, and can facilitate the emergence of new business models.
content distribution and supply chain, including For instance, devices could also be used as miners,
Mediachain, BitMark, Filament, SatoshiPay, and earning cryptocurrency rewards for the blockchain
Cambridge Blockchain. verification process. By dedicating computing cycles

19
 How many copies Traditional ledger;
ONE
of the ledger? e.g. a personal bank account

MANY

Who can use Permissioned, private shared ledger;

OWNER GROUP e.g. Bankchain, a clearing and
these copies? settlement network

ANYONE Permissioned, public shared ledger

TRUSTED LEDGER
OWNERS OR ACTORS,
(i.e. a distributed ledger);
BY VALIDATION e.g. Ripple, a global financial
transactions systems
Who maintains integrity
of the ledger?
ANY USER, BY Unpermissioned,
UNTRUSTED public shared ledger;
CONSENSUS e.g. bitcoin, a cryptocurrency

FIGURE 6  Distributed Ledger Taxonomy

Source: Consult Hyperion

during idle time to securing a digital ledger, a cellular Distributed autonomous organizations: Distributed
phone plan, for example, could be partially subsidized Autonomous Organizations are, in effect, virtual
through its mining chip.42 distributed firms. They consist of collections of smart
A blockchain-enabled Internet of Things can be applied contracts written on the Ethereum blockchain, which
to various scenarios, from industry to government, together define the corporate governance of the
energy, agriculture, health, science, education, and the organization without resorting to a traditional vertical
arts. IBM makes a compelling case in its report, Device managerial structure.45
Democracy: Saving the Future of Internet of Things, Taken collectively, smart contracts amount to a
in favor of blockchain as the catalyst for rebooting series of bylaws and other founding documents that
the Internet of Things. It describes blockchain as “the determine how an organization’s constituency—
framework for facilitating transaction processing and including anyone around the world who possesses
coordination among interacting devices. …Devices are DAO tokens bought with ethers—votes on decisions,
empowered to autonomously execute digital contracts allocates resources and, in theory, create a wide-range
allowing them to function as self-maintaining, self- of possible returns.46 Decisions are made through
servicing devices.”43 collective voting.
In collaboration with Samsung, IBM revealed a The decentralized nature of a Distributed Autonomous
successful proof of concept in 2015, combining the Organization’s “management structure” is
Internet of Things with blockchain to develop the revolutionary, striking at the heart of traditional
Autonomous Decentralized Peer-to-Peer Telemetry, a hierarchical organizational models, the firms that have
distributed IoT network that aims to provide a low- been the foundation of our economic system since the
cost, secure way for devices to interact.44 First Industrial Revolution. Blockchain technology

20
blurs the lines between the market and the firm since potentially be cross referenced and deciphered, despite
it creates a more efficient way to manage the high the ‘anonymity’ on the blockchain.
transaction costs of economic coordination.47
Can regulation adapt quickly enough? This is arguably
The emergence of network-centered models based on the most important hurdle preventing rapid adoption
blockchain technology can challenge the preeminence of blockchain. The existing regulatory framework has
of existing digital platform giants and provide the not been able to keep up with the rapid pace of digital
underlying framework for a shared economy and innovation. Unclear or hostile regulations and a lack of
reconfigured economic activity. government recognition of digital assets can deter the
onboarding of any new technology, including blockchain.
Potential setbacks
For distributed ledgers technology to be accepted in the
Despite the enormous potential that blockchain
financial services industry, it will need to comply with
technology presents, technical, organizational, and
existing Know Your Customer/Anti Money Laundering
regulatory challenges remain that stand in the way of
regulations. Some countries, including the United
its widespread adoption.
Kingdom, China, and Singapore, have taken a hands-on
Can the network grow? The consensus based nature of
approach to understanding the new regulatory needs,
blockchain validation mechanisms requires significant
appointing special task forces to advise the government
computational power and can delay transaction speed
on its strategy or forming public-private partnerships,
as the demand for data storage increases. This poses
while others have adopted an arm’s-length approach,
a serious technical obstacle to the scalability of the
awaiting developments from the industry.
blockchain system and to attaining economies of scale.
What is it going to cost? Another critical challenge
Is it secure? The 2016 cyber-attacks on Distributed
is the potentially high costs, both financial and
Autonomous Organizations, the result of a
vulnerability of smart contracts, highlights organizational, associated with the implementation
cybersecurity as a concern for blockchain and indicates of blockchain technology, even for a pilot phase.
that the technology has not yet reached its maturity. Companies need to weigh the potential but uncertain
benefits that may result from the adoption of
Can different blockchains work together? In order to
blockchain against the present and real costs of testing
benefit from a distributed system, the establishment
use cases. These costs include issues of integration with
of industrywide collaboration and common standards
legacy systems as well as the limited a pool of qualified
for interoperability is critical. However, the technology
is still in its pilot phase and a certain period of human capital needed to bring a blockchain project
prototyping will be necessary before industry standards to fruition. Firms in the financial sector are forming
emerge, suggesting that industrywide standards are not consortia with a view to mutualize costs so that the
likely in the near term. blockchain infrastructure can serve as an interoperable
industry utility, yet issues of alignment and conflicts of
In the financial services sector, consortia initiatives are
interest among the various players remain.
currently underway to provide space for coordination
among stakeholders, such as Fabric by Hyperledger and These roadblocks, while not insurmountable, indicate
R3 Corda. that blockchain most likely will not have an immediate
Is data privacy guaranteed? Several ambiguities and disruptive effect across industries. Adoption is likely to
concerns remain unresolved concerning data protection be gradual over the next five to ten years, and widespread
in the context of blockchain applications, including onboarding will be necessary to attain full economies of
choice of applicable law and jurisdiction, right-to-be- scale and leverage the full network effects.48 The financial
forgotten inapplicability, and the availability of data services sector is the first to mobilize in a concerted
to all parties. On the last issue, there are concerns manner, as they are currently investing and are adopting
regarding the vulnerability of personal data that could a try, learn, and adapt approach.

21
CONCLUSION required by participants and compliance requirements,
firms will decide what blockchain tools to deploy
On the road to blockchain implementation, two (choice or private, semi-private or open networks) and
important risks should not be underestimated. First whether they will be better served by developing the
is the legislative and regulatory environment and how project in collaboration with external partners.
it may affect distributed ledger technologies in the
This process should lead to the selection of one or
jurisdictions in question, including compliance and data
two pilots to render quick wins, to learn from the
privacy. Second is an organization’s capacity for change
experience, and to provide informed feedback on how
and the talent pool available for dealing with the shift
to adjust longer-term efforts. Whatever their choice
in the operations and culture of the organization.49
and degree of involvement, companies must seriously
The decision-making process needs to originate in the
consider the far-reaching implications of blockchain by
company’s value proposition and its strategic vision conducting their own research to determine how it may
and direction, moving to an analysis of how blockchain impact their market and future value proposition, and
is affecting that space and how it could provide then plan accordingly.
improvements in the company’s value proposition, or
In doing so, companies will need to strike a balance
even create new markets for the business.
between developing internal competencies and
A review of key assessment criteria should link any experimenting, while effectively managing potential
investments to the value proposition, and should focus risks and costs. To hedge exposure to risk, they may
on providing business partners and customers with wish to pursue partnerships with industry peers and
improvements in speed, convenience, and control start-ups to mutualize costs of infrastructure building,
over the product or service involved. Depending on as well as consider the regulatory threats and anticipate
the complexity of the process and the degree of trust the governance complexity of consortia. n

22
 EM COMPASS NOTE 38

CHAPTER 3
Can Blockchain Technology Address
De-Risking in Emerging Markets?
By Vijaya Ramachandran and Thomas Rehermann

Blockchain, or distributed ledger technology, has the potential to address many problems in
emerging markets. In this note we consider whether blockchain can be used to mitigate the
problem of de-risking by financial institutions, which affects receivers of remittances, businesses
that need correspondent banking relationships, and charities working in conflict countries.
Blockchain is an evolving technology, and understanding its scope and limitations will be critical to
employing it to address these and related issues.

At its simplest, blockchain is an online database for the Blockchain is a shared digital ledger
exchange of information that takes place on a digital Let us now consider a more technical definition. A ledger
network to form a secure, transparent, and easy-to-
is a book or computer file that records transactions.
use platform. This technology can be used to send
Blockchain technology is a shared digital ledger wherein
money between countries, verify land ownership, share
transactions can be recorded and verified without
electricity across grids, and reduce the cost to banks of
recourse to a central authority to oversee the transaction.
verifying customers and transactions.
Shared: Traditionally, computing services run on
Blockchain allows data to be stored securely and
centralized networks in which a central server
accessed by multiple users without recourse to a trusted
distributes information to computers (clients) on a
third party such as a bank. Instead, a network of users
network. A digital ledger is different—it is replicated
verifies and stores the information.
and distributed across nodes—several computers
around the world that compete to verify transactions in
What is blockchain or distributed ledger
technology? a peer-to-peer network—where information is shared
by all parties engaged with the transaction.
The term ‘blockchain’ refers to the way that data are
stored. Transactions are recorded in time-stamped Unlike a centralized network where there is one hub
“blocks” and each block is connected to previous or server and every other node is a client, blockchain
blocks, forming a chain of transactions. This chain has smaller mini-hubs where a peer-to-peer network,
is stored by all users on a network; every time a new consisting of equal peer nodes, functions as both client
block is verified and added, the entire chain is updated and server. Each peer on the blockchain provides
simultaneously across users. computing power and stores a replicated version of
the ledger, thereby creating consensus and sharing the
Currently, when buying, selling, or verifying the
responsibility of governance.
ownership of an asset, individuals must rely on
institutions such as banks, credit card companies, Recorded and verified: Transactions on the blockchain
or governments. Blockchain technology provides are confirmed by all participants on the network,
an alternative to that method by making use of and once they are recorded they become secure from
cryptography and computer code to generate the trust revision and tampering. Banks spend significant
that would otherwise be provided by an institution. resources to reconcile records with counterparties.

23
By contrast, blockchain technology updates and stores In 2013, Barclays Bank informed over 140 United
information in real time, and has the potential to vastly Kingdom-based remittance companies that their
reduce the costs of reconciliation. accounts would be closed. Following this and
similar de-banking episodes in the United States and
The problem of de-risking in the Australia, only larger money transfer organizations
financial sector have had access to bank accounts. Reports from
industry associations indicate that several smaller
De-risking is a common response to regulations related
players in the money service sector have had to
to anti-money laundering or combating the financing
close, become agents of larger businesses, or even
of terror (AML/CFT).50 Although financial crimes
disguise the true nature of their operations in order
such as money laundering, terrorism financing, and tax
to obtain or keep a bank account. De-banking
evasion are serious offenses which may have negative
of money service businesses can impact global
repercussions for both wealthy and poor nations,
remittances, a vital source of finance for poorer
anti-money laundering regulations intended to counter
countries that totals some $440 billion a year—over
these types of financial crimes may sometimes serve to
three times the amount of foreign aid disbursed.
hinder capital flows, especially to individuals in poorer
countries. They may also reduce the transparency of • Nongovernmental organizations (NGOs) delivering
financial flows. humanitarian assistance to vulnerable individuals
in post-disaster or conflict situations. These
Tougher banking regulations require banks to assess organizations are affected by de-risking because
the risks of doing business in countries with weak they can fall outside of a bank’s narrowed risk
anti-money laundering regimes or customers who appetite.
might be engaged in illicit activity. Failure to do so
• Small to medium-sized firms in poor countries.
could cost banks heavy penalties. However, regulatory
Their ability to apply for credit often depends on the
guidance on how to manage these risks is often vague
rating of local banks vis-a-vis larger international
and contradictory. As a result, to reduce their own
financial institutions and the global financial
risks banks have become more conservative and less
system. Rich-country banks increasingly report
discretionary when evaluating customers.
withdrawing correspondent banking services from
Available evidence suggests that some banks are banks in high-risk jurisdictions, including those in
denying services to firms, market segments, and entire poor countries.
countries that appear to have higher risk and lower
profit, and that could cause costly future fines or legal How can blockchain help?
issues. In short, banks are engaging in de-risking entire Blockchain technology can help with de-risking by
segments of customers rather than judging the risk reducing regulatory compliance costs while increasing
levels of clients on a discretionary basis.51 the transparency of transactions. In particular,
blockchain has the potential to reduce compliance costs
Who loses from de-risking? associated with “Know Your Customer” requirements.
The poor and economically vulnerable—and Lower customer verification costs and greater
organizations that serve them—stand to lose the most transparency can mitigate de-risking by financial
from this type of de-risking. They include: institutions while also benefiting senders and recipients
• Migrants who remit money across borders to their of remittances, businesses needing trade finance, and
families and therefore require a healthy money charities operating in conflict areas.52
transfer sector. Money transfer organizations that Financial institutions dedicate a significant amount
are denied services by banks are often forced to use of resources to complying with Know Your Customer
services that carry higher transactional fees or that requirements. They must meet these requirements
are based in less transparent jurisdictions. when taking on a new customer even if the customer’s

24
identity and credentials have already been verified by created a “regulatory sandbox”55 to allow institutions
another financial institution. A Thompson Reuters to test new products and services.56 A new report from
survey found that Know Your Customer costs the United Nations Economic Commission on Latin
are, on average, $60 million per year for financial America and the Caribbean argues that, with the
institutions.53 Some institutions spend up to $500 appropriate enabling environment, there are blockchain-
million a year on procedures to verify customers that based solutions that might be used to address the
can take several months. problem of de-risking in Caribbean countries.57
Blockchain has the potential to improve this situation.
As discussed earlier, each block of information contains The use of blockchain for remittances
a record of valid transactions with time stamps, and Blockchain might also be used to conduct transactions
carries the history of all transactions on the network by between two fiat currencies. A local currency can be
including a reference to the previous block. And while converted to bitcoin and transferred between customers
the blockchain can replace a centralized authority or across countries in a manner that is cheaper and
trusted third party, its multiple users can also ensure more secure than traditional methods of sending and
that any data stored is extremely difficult to change or receiving remittances.
tamper with. This feature, combined with biometric Seamus Cantillon of Marino Software Insights argues
identification or Know Your Customer utilities, can be that blockchain combined with biometric ID can lower
an effective, inexpensive way to verify customers and Know Your Customer costs. He outlines six steps by
their transactions. which financial institutions can identify customers and/
Blockchain is not a perfect technology; nor is it or transactions:58
impervious to hackers. While it enables the protection 1. A customer is onboarded to the blockchain
of confidential information, the level of anonymity
it allows can be problematic, leaving it open for bad 2. A customer’s personal information, Know Your
actors to conceal their identities and making the Customer documents and biometric data is added to
tracking of individual payments difficult. the blockchain with appropriate encryption

Yet blockchain could also bolster anti-money 3. A customer’s biometric data along with a PIN would
laundering efforts, according to the Bipartisan Policy act as a key for transactions
Center. “Blockchain could give banks and regulators 4. A customers’ transaction is recorded and validated by
access to far more detailed transactional and cross- a consensus algorithm on the peer-to-peer network
institutional data than is currently available, allowing 5. With customer authorization, a financial institution
them to peer deeper into financial networks to identify can access a customer’s record for verification
bad actors. Furthermore, the distributed nature of
blockchain technology makes it difficult for criminals 6. Further changes to the record would be validated by
to falsify transactional data to cover their tracks. the network
All of this could take place in real-time, giving law Cantillon paints an optimistic picture, yet there
enforcement the precious time they need to identify are concerns about storing personal identification
terrorist plots before they happen. However, this information on a blockchain. Nonetheless, blockchain-
additional speed would need to be balanced against based businesses are emerging, including Kenya’s BitPesa,
privacy concerns that could arise depending on how a remittance service that allows customers to send money
such a system were implemented.”54 across countries using the cryptocurrency bitcoin.
Given the technology’s enormous potential, regulators Customers can send money in a fiat currency (such
should fully explore how blockchain can improve the as Kenyan shillings) to BitPesa, which converts it to
current anti-money laundering system. There should bitcoin and transfers it to designated mobile money
also be room for experimentation. For example, the accounts, to then be converted back into another fiat
UK Financial Conduct Authority’s Project Innovate has currency. BitPesa charges a 3 percent remittance fee

25
for this service. By contrast, BitPesa’s main competitor
Blockchain,
M-Pesa charges fees up to 30 percent for registered Internet
users and 66 percent for unregistered users. BitPesa’s of Things,
website says that it can now transfer money from Traditional and Smart
Category process Contracts
Nigeria, Tanzania, and Uganda to any bank in China.
TRANSPARENCY: All supply chain
BitBond, a German firm that offers peer-to-peer partners update data in real time No YES
loans using bitcoin blockchain, announced that it is within one system
teaming up with BitPesa to provide financing for small
COST EFFICIENCY: No physical
businesses in Kenya, Nigeria, Uganda, and Tanzania. documents or transportation. No No YES
New borrowers can have financing from BitBond paid risk of duplication or loss.
into a local currency mobile money account or bank CUSTOMIZABLE: Tailored,
account in as little as 20 minutes. No YES
individual insurance policies.
CONVENIENT: All parties work off
The use of blockchain for trade finance No YES
same ledger, all online and instant
While many financial institutions are embracing SECURE: Verifiable and immutable
No YES
blockchain, others remain skeptical. Some are opposed to data to reduce fraud risk
making large investments in a technology that they argue
may not be profitable.59 Others are making significant
investments in building blockchain-based networks. TABLE 1  Traditional process vs blockchain proof
Hyperledger, an open source collaborative effort created of concept
to advance cross-industry blockchain technologies, is an Source: Commonwealth Bank of Australia
example. Hosted by The Linux Foundation, it includes
ABN-AMRO, ANZ Bank, Deutsche Borse Group, BNP
feature provided all parties with greater certainty
Paribas, BNY Mellon, State Street Bank, Wells Fargo,
compared with traditional open account and trade
and other financial institutions.
instruments such as letters of credit, which focus on
In October 2016 the Commonwealth Bank of documents and data.61
Australia, Wells Fargo, and international cotton
According to the Commonwealth Bank, the use of
producer Brighann Cotton announced the first global
blockchain technology created transparency between
trade transaction between two independent banks
buyer and seller, a higher level of security, and the
combining blockchain with smart contracts and the
ability to track a shipment in real time. Advancing
Internet of Things. The transaction involved financing
a shipment of cotton from Texas, in the United States, from paper ledgers and manual processes to electronic
to Qingdao, China, using a distributed ledger algorithm tracking on a distributed ledger reduced errors and
known as the Skuchain’s Brackets system. transaction times from several days to a few minutes.

According to the Commonwealth Bank’s press release, this Commonwealth Bank and Wells Fargo indicate that they
trade “involved an open account transaction, mirroring will continue to collaborate with trade finance clients,
a letter of credit, executed through a collaborative financial institutions, fintech companies and consortiums,
workflow on a private distributed ledger between the and businesses in the insurance and shipping industries
seller (Brighann Cotton US); the buyer (Brighann Cotton to explore the potential of distributed ledger technology.
Marketing Australia) and their respective banks (Wells Table 1 above shows a schematic of costs and benefits of
Fargo and Commonwealth Bank).”60 traditional processes versus blockchain, as seen from the
perspective of the two banks.
The parties involved in this transaction introduced a
physical supply-chain trigger to confirm the geographic Barclays Bank provides an additional example. In 2016
location of goods in transit before a notification was it enlisted Wave, an Israel-based fintech, to develop a
sent to allow for release of payment. This tracking blockchain-based system for settling trades. A letter

26
of credit was generated between Seychelles Trading A blockchain system allows individuals to undertake
Company, a food distributor, and Ornua, an Irish instant and transparent global transactions, and quickly
agriculture co-operative, through Wave’s blockchain correct documentation errors, while avoiding delays for
platform, guaranteeing the shipment of dairy products the importer receiving the original bill of lading.
worth nearly $100,000 from the Seychelles to Ireland. Many banks are considering the potential of
The transaction was settled using smart contracts.62 blockchain technology. Natixis, HSBC, KBC, Société
Traditional trade finance requires an enormous amount Générale, UniCredit, Rabobank, and Deutsche Bank
of paperwork—in bills of lading, insurance certificates, have signed a memorandum of understanding to
develop a Digital Trade Chain, a new product based
certificates of origin, letters of credit, bills of exchange,
on a prototype tool that allows cross-border trade for
and invoices—to transport goods around the world
small businesses using blockchain.64 Alfa Bank and
(see Figure 7 below for an example of a traditional
S7 Airlines have also tested blockchain technology by
transaction between institutions located in Tanzania
recording a letter of credit on a blockchain platform
and Germany).
and settling the transaction using a smart contract.65
The most inefficient step, according to Jeremy Wilson,
Although examples of NGOs using blockchain to
vice-chairman of corporate banking at Barclay’s Bank, transfer money are not readily available, it is not difficult
is the bill of lading, which he notes “can take weeks to see the potential of a platform such as BitPesa. There
to get to the other side of the planet.”63 A standard remains, however, the problem of ensuring transparency
bill of lading (of which there are over 12 common when the cryptocurrency is converted to fiat currency.
types), includes the description of goods, quantity, But in the interim there is scope for business-to-business
weight, freight details, port of loading and discharge, transactions in the NGO sector. Blockchain-based
final destination, shipper name, and so on. If issued applications are currently being tested by NGOs for
incorrectly, the forwarder could lose the shipment. purposes other than financial transactions.

TANZANIA GERMANY

Importer can purchase

equipment, which will increase
labor productivity and oupout,
which will increase revenues
and allow for growth and Exporter does not trust
support new jobs. Importer Local bank would like that the importer or
cannot risk prepaying for the to help its client and the importer’s bank will
equipment as (1) he does not agrees to transmit pay him (on time) if he
trust that the experoter will ship payment to the German bank is not delivers goods to order
the goods as arranged once he exporter once goods familiar with the specifications. Thus he will
has sent payment and (2) he are received, but Tanzanian bank and not ship the goods without
needs the working capital to needs clarity on exact is unwilling to take receiving full payment in
maintain his current operations. specifications. payment risk. advance.

IMPORTER: TANZANIAN BANK GERMAN BANK EXPORTER:

CEMENT COMPANY (ISSUING) (CONFIRMING) MACHINERY COMPANY

TRADE FINANCE

FIGURE 7  Traditional Model of Trade Finance

Source: IFC

27
Can blockchain be truly transformational? a new way to process transactions in trade finance and
Blockchain and distributed ledger technology have cross border settlements.
tremendous potential in various sectors. There are But other applications, such as self-executing smart
several examples of blockchain technology being contracts, may take a while—perhaps decades—to
used in the electricity sector, including a startup gain wide use. Iansiti and Lakahni caution that as the
called Grid Singularity, which explores “pay as you scale and impact of blockchain transactions increase,
go” solar power with financial transactions recorded adoption of the technology will require significant
on a blockchain. institutional change and will pose very real challenges
to governments, regulators, and financial institutions.
It is still too early to tell if blockchain will become
a widely used technology. Marco Iansiti and Karim
Lakhani at Harvard Business School argue that CONCLUSION
blockchain is a foundational technology, similar to Blockchain is an exciting new technology that has the
TCP/IP technology that was introduced in 1972 and potential to reduce the costs of verifying customer
powers the Internet as we know it today.66 They argue transactions, thereby widening access to financial services
that “single use” applications that are low in novelty in emerging markets. The examples discussed in this note
and complexity, such as payments made with bitcoin describe significant changes in the way transactions are
or blockchain-based Know Your Customer credentials, made and recorded. It is likely that the major players in
are already appearing in the financial sector and will the financial sector will continue to make investments
likely spread across at least some parts of the sector. in blockchain technology. We do not yet know whether
Innovation that is quite novel but needs only a few blockchain will become a technology that is widely
users—such as private distributed ledgers or peer-to- used. At the very least, this will take time and will
peer networks—appears to be underway. As discussed involve significant changes to the regulatory regimes and
above, some banks are testing blockchain technology as institutions that govern economic activity. n

28
 EM COMPASS NOTE 43

CHAPTER 4
Blockchain in Financial Services in Emerging
Markets—Current Trends
By Marina Niforos

Financial institutions around the world find themselves continually barraged by external
innovations they are often unable to absorb and internalize. The emergence of innovative digital
financial technologies has challenged traditional players in the sector by demonstrating new ways
to deliver value across the entire financial value chain. Blockchain, or distributed ledger technology,
is just such a disruptive—and possibly game-changing—innovation.
Emerging markets are in general characterized by low banking penetration, the exit of financial
players from certain markets, strong demand for financial inclusion both from individual
consumers and small businesses, high levels of mobile penetration, and less developed business
infrastructure and financial sector incumbents. These conditions in combination can be a powerful
catalyst for the adoption of blockchain-based financial solutions and can provide the basis for a
technological leap forward and a boost to financial inclusion and growth.

Blockchain, or distributed ledger technology, is a the financial sector.68 (See Figure 8 for Blockchain basic
digital, distributed, immutable transaction ledger functionalities).
that replaces a central authority (or ‘middleman’) Bitcoin, a cryptocurrency that emerged in 2009,
with algorithms. By doing so it offers numerous provided the first widespread use of blockchain. Since
opportunities for cost savings while opening new then, the technology has been synonymous with digital
market segments for existing financial institutions and currencies. Yet the early abuse of bitcoin by criminal
new players alike.67 enterprises may have hindered the development
Distributed ledger technology is still in an early stage of blockchain. Many other digital currencies have
of development and deployment, yet it is widely since emerged, including ether, the crypto-currency
thought to have the potential to deliver a new wave token used on the Ethereum distributed applications
of innovation to the financial technology, or fintech, platform, the closest challenger to Bitcoin.
ecosystem by providing a ‘trustless’ distributed system Today a number of experiments are taking place in the
to exchange value. financial industry that attempt to broaden the use of
This does not mean that the new system is not blockchain beyond its use as a digital fiat. These range
trustworthy. Instead, blockchain’s unique technology from relatively straightforward solutions such as money
eliminates the need for ‘trusted’ intermediary to transfers, to more complex financial instruments
guarantee the authenticity of and register a transaction, enabled by the introduction of ethereum and smart
and thus could have the same transformative impact contracts, such as trade clearance and settlement.
for the transfer of value that the Internet had for the Based on research conducted by Catalini and Gans
transfer of information. As described by the World (2016), EMCompass Notes 40 and 4169 detailed a
Economic Forum, it is the future “beating heart” of conceptual framework that assesses the evolution of

29
 How many copies Traditional ledger;
ONE
of the ledger? e.g. a personal bank account

MANY

Who can use Permissioned, private shared ledger;

OWNER GROUP e.g. Bankchain, a clearing and
these copies? settlement network

ANYONE Permissioned, public shared ledger

TRUSTED LEDGER
OWNERS OR ACTORS,
(i.e. a distributed ledger);
BY VALIDATION e.g. Ripple, a global financial
transactions systems
Who maintains integrity
of the ledger?
ANY USER, BY Unpermissioned,
UNTRUSTED public shared ledger;
CONSENSUS e.g. bitcoin, a cryptocurrency

FIGURE 8  Blockchain basics

Source: Consult Hyperion

blockchain adoption across markets based on (i) the with blockchain company Chain to build Visa B2B
market power of incumbents; and, (ii) the complexity Connect, an enterprise blockchain infrastructure to
and associated costs of the solutions proposed. It predicts facilitate international financial transactions for their
that future developments will be propelled by the drive corporate clients.
to create new markets, where competition and barriers
Established financial institutions are more likely
to entry are lower, or to target process efficiencies in
to use blockchain for intra-organizational projects
existing operations, where current players maintain
intended to reduce organizational complexity, improve
considerable market power. Additionally, value-
efficiency, and reduce costs. Banks and major financial
added applications built on top of existing blockchain
institutions are working both collaboratively and
functionalities would be the early use cases of blockchain
independently to develop blockchain technology, as
by financial institutions, according to the research.70
seen in the proliferation of global consortia (see below).
The framework also makes supports the idea that
blockchain technology could have a strong impact in Emerging markets, despite getting a later start on
markets currently neglected or underserved by financial blockchain than the United States and Western Europe,
institutions, with a less competitive market structure have been catching up, with strong performances in
and high verification costs. These conditions are typical 2016–17, in particular by Asia (see EMCompass Note
in emerging markets. 44). And governments and regulators are taking notice,
and trying to fashion appropriate responses.
Current developments show that use cases that
are relatively simple to design and implement are In India, the legalization of bitcoin is a hotly-contested
appearing. For instance, digital wallet AliPay is adding policy issue between the Ministry of Finance, which
a bitcoin option for its customers. Visa has partnered would like to tax it, and the Reserve Bank of India,

30
which has declared bitcoin illegal and in breach of anti- As a result, blockchain innovation has been closely
money laundering provisions.71 The Indian situation is linked to the efforts of large financial institutions that
an example of how distributed ledger technology has focus on process efficiency initiatives. These firms have
the power to act as a disrupter, but also as an enabler started testing distributed ledger technology solutions
to market players, changing business models and to address specific problems or improvements in their
influencing the governance of the global financial system. business processes, including data reconciliation,
Recent venture capital developments also indicate clearance, settlement, regulatory compliance, and entry
that the financial industry is mobilizing around the into new segments or markets.74
potential impact of blockchain on their business, and is Consistent with the conceptual framework mentioned
beginning to invest in related research and development above, major global banks and financial intermediaries
and is testing applications.72 Investment in blockchain are working closely with blockchain companies to
is gaining momentum, with approximately $1 billion explore use cases that are relevant to their business and
of venture capital investment over the last 24 months learn how the new technology may impact their legacy
($500 million in 50 venture capital deals in 2016 alone) systems and infrastructure. They are also entering
and the trend is expected to grow rapidly. into consortia (some more than one) to mutualize
A 2017 McKinsey survey found that the global development and potential transition costs, as well as
banking industry is expected to spend $400 million race to establish standards for the emerging technology.
on blockchain related projects by 2019. Some 70 Most corporate initiatives so far have taken the form
percent of financial organizations are in the early of enterprise or permissioned (private) blockchains,
stages of experimentation with the technology and as companies attempt to manage a trade-off between
most executives expect to see material impact in leveraging the new but still unproven innovation and
mainstreaming it in the next five years. A first rough preserving the integrity of their existing business
estimate of limited applications, driven mostly from a concerns. Post-Trade Distributed Ledger Group brings
cost reduction perspective, suggests significant value together global banks, custodians, central securities
creation on the order of $70 to $85 billion.73 depositories, clearing houses, exchanges, regulators,
This note seeks to: examine current macrotrends of the government agencies, and central banks from all
blockchain ecosystem in the financial services industry continents to share information and ideas about how
and areas where the technology is being actively tested; distributed ledger technologies can transform the post-
analyze the implications of the technology on business trade landscape.
models; and identify use cases with the most dynamic The newly launched (February 2017) Enterprise
uptake, from the perspectives of both efficiency in Ethereum Alliance (EEA) aims to leverage large
existing processes, and of market creation. corporate investments in the private Ethereum
EMCompass Note 44 will provide a brief overview of blockchain, bringing together Fortune 500 companies,
specific regional developments in emerging markets startups, and other stakeholders.
with regard to blockchain. Interest in comparing alternatives to blockchain is also
great, evidenced by broad industry participation to the
Potential Impact of blockchain on the R3 consortium, an alternative distributed consensus
financial services sector—Current ledger.75 This group has grown to include more than 70
developments and trends global banks, despite the highly publicized departures by
The drive for efficiency in existing businesses. Most Goldman Sachs and Santander in 2016, which reportedly
of the attention surrounding blockchain has centered were due to governance conflicts. Corda, its underlying
on the United States and Western European countries, protocol, is technically more of a messaging protocol.
particularly on the financial services industry, where Ripple, which offers a blockchain-like technology and
the technology is expected to have a major impact due network for faster settlement of international payments,
to its ability to reduce transaction costs. has more than 75 banking clients globally.

31
In addition, financial services firms have also entered such as telecommunications or ecommerce companies.
the blockchain space as investors, with corporate Such actors are rapidly moving to introduce new
venture capitalists becoming the most active investors business models and services, and are transforming in
in bitcoin and blockchain technology in 2016–17. the process the value chain and challenging traditional
Create new markets. On the other end of the spectrum, players such as banks. Consistent with the framework
blockchain is a disruptive technology that offers the mentioned in EM Compass notes 40 and 41, the
possibility of reengineering economic models and majority of these initiatives focus on value-added yet
enabling the development of markets and products that fairly simple design applications.
were previously unavailable or unprofitable. These efforts have originated mainly with new
A great number of these new market opportunities companies entering established markets, targeting
that distributed ledger technology makes possible are emerging markets directly or indirectly. They are not
related to: (i) its offer of an alternative to fiat money, exclusively based in developed markets, although
addressing in a new manner challenges of currency the best funded ones are, for now, U.S.-based. A
instability and political risk and, (ii) its ability to huge portion of the total venture capital investment
establish a digital identity in a rapid and cost-effective has been captured by a handful of startups in the
manner and thereby allow the financial inclusion of digital wallet and capital market services space ($625
previously underserved consumer segments. million).76 Regardless of their origin, these new players
This development also creates opportunities for new are targeting segments closely related to the economic
startups and entrepreneurs or established players from activity of developing markets, such as remittances and
non-financial industries with a strong customer base, trade finance.

Jun 2014 Jan 2015 Jun 2015 Jan 2016 Jun 2016 Jan 2017
DATE OF DEAL

FIGURE 9  The march of financial services firms into bitcoin and blockchain start-ups, 2014 to
February 2017
Source: CBInsights, cbinsights.com

32
This is a significant phenomenon, indicating that and secure digital identity. The blockchain can be
emerging markets can become a dynamic testing viewed as a decentralized certification authority that
ground for new business models, where a high demand can maintain the mapping of identities to public keys.
for financial inclusion and a relative absence of Smart contracts can add sophisticated logic that helps
entrenched legacy systems can accelerate the adoption with key revocation and recovery, decreasing the key
of new technologies—and specifically of blockchain. management burden for the end user. The potential
The potential for extending banking services in these positive impact of this innovation in reliable digital
markets is huge, with two billion adults worldwide identification has broad implications for a host of
lacking access to financial and credit services.77 Global financial services, including trade finance and cross
payments and remittances is a case in point: it is a $4 border payments and digital wallets (see below), and
trillion market with transaction fees that range from 5 also for the future evolution and mainstreaming of
to 30 percent. blockchain technology beyond fintech, into industrial
applications and Internet of Things integration.
Blockchain potential use cases and applications in
financial services industries. Blockchain’s potential to Using distributed ledger technology to store financial
disrupt the financial services ecosystem has been widely information can eliminate errors associated with
discussed, including its capacities for operational manual auditing, improve efficiency, reduce reporting
simplification, regulatory efficiency improvement (real- costs, and potentially support deeper regulatory
time monitoring of financial activity between regulators oversight in the future.
and regulated entities), counterparty risk reduction Currently there is no standardization in the identifying
(agreements are executed in a shared, immutable information customers must submit to financial
environment), disintermediation for clearing and institution, and these institutions often duplicate
settlement of transactions, and transparency and fraud efforts in performing Know Your Customer checks,
minimization in asset provenance and capital raising. with burdensome transaction costs on both banks and
Given the wide range of potential use cases, we have customers. With a distributed ledger technology, a
chosen to focus on three dynamic and well documented rigorous professional validation is done once and this
subsectors, where use cases are being tested and have verified identity document can be used for all subsequent
concluded or are in the process of concluding a proof of transactions. On a blockchain, that identity can develop
market, including in the context of emerging markets. over time as a person accrues attestations, property, and
Anti-money laundering and customer identification other types of licenses and authoritative powers. As the
programs. The reinforced regulatory framework that U.S. Financial Crimes Enforcement Network regulations
followed the financial crisis has significantly increased and European Anti Money Laundering directives
the costs of compliance for banks (anti-money- move toward stricter customer due diligence and data
laundering compliance costs have risen 53 percent collection, blockchain-based Know Your Customer
since 201178). This has forced banks to exit certain systems are likely to help government and financial
markets and segments and has left emerging markets in institutions simplify Know Your Customer syndication.
a derisking downward cycle. In 2015, European banks A blockchain identity system will allow end users to
reduced their cross-border lending to emerging markets own and control their personal identity, reputation,
by $700 billion, according to the Bank of International data, and digital assets; securely and selectively disclose
Settlements.79 In addition to the financial costs, their data to counterparties; log in to and access
Know Your Customer requests can delay transaction, digital services without using passwords; digitally sign
stretching them to 30 to 50 days to complete. claims, transactions, and documents; control and send
A blockchain-based automated compliance system can value on a blockchain; and interact with decentralized
provide an innovative and cost-effective alternative applications and smart contracts.
to managing regulatory requirements by acting as a Companies can establish a corporate identity, easily
decentralized public key infrastructure to establish onboard new customers and employees, reduce liability

33
by not holding sensitive customer information, and be it credit, insurance or guarantee.82 The size of the
increase compliance. trade finance market itself exceeds $10 trillion per
Sample use cases. Several startups from around the year.83 However, its supply chain system is cumbersome
globe are taking the concept to market. U.S.-based and time-consuming, creating potential risks for the
UPort has developed an Ethereum-based digital identity parties involved, where Anti-Money Laundering and
management product to deliver a ‘self-sovereign identity’, authenticity issues weigh heavily.
targeting both end-consumers and enterprises. Cambridge Exporters use invoices to secure short-term financing
Blockchain LLC is developing digital identity software from multiple banks, which increases the consequences
with several leading global financial institutions, with a should the delivery fail. Parties use different platforms,
deployment planned for late 2017. Gem focuses on getting raising the odds of miscommunication, fraud,
companies within the same industry to share information and problems with version compatibility. Multiple
on Know Your Customer via blockchain technology, checkpoints delay payment and slow the shipment
where banks would be able to vet a customer by relying of goods. Additionally, trade finance is particularly
on the work another bank has already done. affected by increased compliance requirements and
London-based CreditsVision is looking to create de-risking, as outlined in the previous section.84
a blockchain of blockchains, connecting various Respondents to 2016 IIC Global Survey on Trade
permissioned and public systems so that a digital Finance identified anti-money laundering and Know
identity could be truly universal. Singaporean Your Customer requirements as the largest impediment
investment portal KYCK! has partnered with IBM to trade finance.85 The consequences for global trade
to develop a secure blockchain network to enhance and emerging market growth are enormous.86
identification validation, shared between banks and Blockchain can positively transform a number of
government organizations. Indian startup Elemential industries by introducing transparency, traceability,
provided the blockchain technology for a Know and immutability to their supply chains. Using
Your Customer data trial in a collaboration with the distributed ledger technology to store financial details
National Stock Exchange of India and several banks— can prevent documentary fraud, facilitate the real-
ICICI Bank, IDFC Bank, Kotak Mahindra Bank, time approval of financial documents, unlock capital
IndusInd Bank and RBL Bank—as well as HDFC tied up in the process of waiting for clearance, reduce
Securities, a Mumbai-based brokerage. counterparty risk, and enable faster settlement.
This represents an opportunity for incumbent financial With blockchain, multiple copies of the same document
institutions to adapt their traditional banking models no longer need to be stored on numerous databases
and to gain a competitive advantage vis-a-vis new across various participating transaction entities, and
entrants, by positioning themselves as ‘the stewards of the approval process does not need to be sequential.
identity’, in effect serving as authenticators.80 Since each participant on the network quickly updates
the chain to reflect the latest transaction, it removes
Trade finance the need for multiple copies of the same document of
Trade finance is the lifeline of global trade. The information stored on numerous databases.
International Chamber of Commerce estimates that the A single blockchain has all the necessary information
global trade financing gap is around $1.6 trillion, with in a single digital document, simultaneously accessible
particularly dire consequences for small and medium- to all members of the network. Documents on
sized businesses and for growth in emerging markets.81 the distributed ledger allow all parties to conduct
In this segment, financial institutions bridge the gap diligence for credit adjudication, check for anti-money
between exporters, who need guarantee of payment laundering and trace the location and ownership of
before they can ship, and importers, who require data goods. Banks no longer need intermediaries to assume
on whether goods have been delivered. Roughly $18 risk, and compliance officials can enforce anti-money
trillion of annual trade involves some form of finance, laundering and customs activities without delay.

34
Additionally, using smart contracts (self-executing uncertainty in making cross border payments. Money
digital contracts) to codify agreements could lead to Transfer Organizations including Western Union,
new products for alternative financing, securitization of MoneyGram, and Euronet Worldwide spent decades
trade obligations, and downstream factoring. building franchise businesses across the globe. The
Sample use cases: If banks and incumbent institutions size of the market is also considerable, with 2016
do not seize the opportunity, upstart innovators remittances estimated at over $601 billion.88 Today,
probably will. This rationale seems to be the motivation the global remittance industry takes out $40 billion
behind some early live trials conducted by global annually in fees.89 Such fees typically stand around
banks in partnership with innovators in trade finance two to seven percent of the total transaction value,
blockchain applications to provide a proof of concept. depending on the volume of the corridor, and foreign
exchange fees represent 20 percent of the total cost.90
The Society for Worldwide Interbank Financial
Bank wire transfers are even more expensive, with
Telecommunication (SWIFT) has announced an
fees of 10 to 15 percent. Banks also tend to focus only
initiative exploring the use of blockchain in trade
on specific corridors with a strong branch network,
finance. Seven major European banks (KBC, Deutsche
leaving some corridors without access to the money
Bank, HSBC, Natixis, Rabobank, Société Générale and
transfer services they need.
UniCredit) are partnering on a new blockchain-based
permissioned trade finance platform, Digital Trade The market segment is already being unbundled by a
Chain, to manage open account trade transactions number of dynamic fintech start-ups such as Transferwise
for both domestic and international commerce, from and Remitly (see EMCompass Note 22 on remittances).91
initiation to settlement. DTC allows authorized parties Blockchain technology can drive efficiency in the process
to track the progression of those transactions. and reduce associated costs for financial intermediaries
and customers by: (i) providing a cost-efficient process
The goal is to cut transaction costs for European
to establish digital identity and by extension Know Your
businesses, particularly those of modest-sized firms.
Customer verifiability; and (ii) providing a digital fiat for
Similarly, Standard Chartered is leading the Distributed
currency conversion. With distributed ledger technology,
Ledger Technology Trade Finance Working Group
the sender’s digital identity profile sufficient for banks
(formed under the Hong Kong Monetary Authority’s
and Money Transfer Operators.
Fintech Facilitation Office) to deliver a proof of
concept, developed in collaboration with the Bank of
China, Bank of East Asia, Hang Seng Bank and HSBC BOX 2  BitPesa
and Deloitte Touche Tohmatsu.87
In another pilot, HSBC joined forces with Bank Kenyan start-up Bitpesa, a company providing
of America Merrill Lynch and the Infocomm foreign exchange and business-to-business
bitcoin based payment services in Kenya and
Development Authority of Singapore (IDA) to
several African countries, has been able to
developed a prototype solution built on blockchain for
leverage the existing financial ecosystem by
letters of credit in a smart contract. The consortium
connecting to the M-Pesa money network,
used the Linux Foundation open-source Hyperledger a subsidiary of telecom company safari.com
Project Fabric (whose development was supported and provider of mobile payments and a major
by IBM). In the United Arab Emirates, Infosys has incumbent player (more than half of Kenya’s
partnered with Emirates NBD and ICICI to deliver the adult population has an M-Pesa wallet).
first blockchain based trade finance (and remittances)
Despite a legal confrontation with the mobile
solution in the region. money network in 2015, BitPesa has raised
Global payments (remittances). Cross-border payments additional financing from several venture
is a sector ripe for disruption. Currently, both capital firms in 2016 to move forward with its
individual consumers and small- and medium-sized international expansion across East Africa.
enterprises face high transaction fees, long delays and

35
A smart contract containing the remittance information From the regulatory and governance perspective, we
delivers the funds directly to the beneficiary’s institution are far from having a clear framework and industry-
while simultaneously notifying the appropriate wide standards that stakeholders will need for full
regulator. Distributed ledger technology could enable adoption of the new technology. According to a 2017
new business models (for example micropayments) and study by the Cambridge Center of Alternative, less
institute newer models of regulatory oversight. than half of payment companies based in Asia-Pacific,
Sample use cases: There are numerous startups Europe, and Latin America hold a formal government
license, and forty percent of companies surveyed would
proposing crypto-based global payments and peer-
like to see more regulatory clarity.92
to-peer digital cash solutions: Abra and Ripple in the
United States, BitPesa in Kenya, BitSpark in Hong Regulation will have to reflect and accommodate the
Kong, OkCoin in China and OkLink/Coinsensure in novel features of blockchain and recognize their legal
India, CoiNnect Mexico/Argentina, Rebit and Coin. validity (digital identity, Know Your Customer, dispute
ph in the Philippines. In addition, large banks are in resolution mechanisms, smart contracts), particularly
the process of testing different applications as consortia for open distributed ledger technologies where there is
and in partnership with technology providers to reduce no entity in control of the ledger.
transaction costs in their value chain. Financial giant Recent defections from the R3 blockchain consortium
SWIFT is participating in the Hyperledger Fabric have highlighted the governance and design
Project; South Korean bank KB Kookmin is partnering complexities of collectively designing a globally relevant
with CoinPlug, Indian ICICI’s blockchain is developing and adoptable solution.
a blockchain remittance project with Emirates NBD
Bank and others.
CONCLUSION
Challenges Ahead Financial institutions, fintech technology companies
Distributed ledger technology is still evolving and and even governments are still experimenting and
will face numerous hurdles, some technical, some participating in proofs of concept to better understand
regulatory, and some institutional, as it moves toward the possibilities and limitations of blockchain. As
maturity. Concepts are being market-tested but they financial markets evolve with respect to distributed
will not be able to reach their full network potential ledger technology, companies will face game-theory-
without industry collaboration, common standards, type decisions. Being early adopters of distributed
and significant transition costs to enable the migration ledger technology across the ecosystem may provide
from the existing financial infrastructure. them with a competitive advantage but it may also
derail their ongoing business interests.
On the technological side, concerns relate to the (i)
scalability and transaction speed of distributed ledger If they are too late to enter the market, they may
systems, for permissionless blockchains such as bitcoin irreversibly lose ground to competitors. This dilemma
(ii) the interoperability of different ledgers and those is exacerbated by the fact that the biggest impact from
with the existing legacy systems and transition costs; distributed ledger technology will be achieved only
(iii) network security and resilience of the system when a critical mass of the ecosystem participates and
against potential cyberattacks (a recent setback for network effects are realized.
Ethereum); (iv) the protection of data privacy. The most valuable distributed ledger innovations
The recent rise of customer acquisition costs for crypto cannot be developed in isolation; they require
payment solutions providers and their continued collaboration among participants, exchanges, and
dependence on traditional networks to reach customers regulators. The adoption process will not be smooth
indicates that the market will require the coexistence and there will be winners and losers.
of both traditional and digital players for some time in With respect to emerging markets, the ecosystem
order to build bridges to the broader economy. seems fertile for adoption, propelled by high demand,

36
particularly in serving financially excluded segments,
as well as a hedging strategy through bitcoin and other
“Experiment patiently, accept failures, plant
crypto currency in conditions of currency instability
seeds, protect saplings, and double down when
and political risk, as is the case in parts of Latin you see customer delight.”
America and Africa.
—JEFF BEZOS, CEO, Amazon.com,
Less financially developed markets are focusing on Letter to Shareholders, 1997
financial inclusion initiatives with blockchain-run digital
wallets and mobile payments. In addition to the factors
identified in the predictive framework based on market Innovation is only as good as the effectiveness and
structure (see EMCompass Notes 40 and 41), three profitability it can deliver. This is the promise that
additional critical success factors can weigh heavily distributed ledger technology-associated initiatives
on the penetration of the technology. These are: (i) the will be called on to deliver in a sustainable fashion,
degree of development of the general technological whether in the form of creating/growing a market or
ecosystem and the availability of the requisite skill generating cost savings through greater transparency
pool; (ii) the ability to mobilize capital for innovators; and efficiency. Only then will move beyond the pilot
and (iii) a regulatory environment that encourages stage to full-scale industry adoption, thereby leveraging
experimentation and public-private collaboration to the full network effects and triggering the tipping point
establish standards and resolve related issues. of the transformation process. n

37
 EM COMPASS NOTE 44

CHAPTER 5
Blockchain in Financial Services in Emerging
Markets—Selected Regional Developments
By Marina Niforos

Blockchain, or distributed ledger technology, is now disrupting the financial services industry
as part of a larger wave of external innovations by digital financial technologies. Emerging
markets—due to their higher banking risks, lower bank penetration, and greater presence of digital
financing—are an ideal backdrop for the adoption of blockchain-based financial solutions, and
benefits could include a technological leap forward and a boost to financial inclusion and growth.
This note focuses on selected regions in emerging markets where distributed ledger technology is
already affecting the provision of financial services, including Africa, Latin America, and Asia.

The blockchain innovation landscape is still dominated country’s adult population holds a M-Pesa digital
by the United States and Europe. The United States wallet.94 With relatively small legacy systems in the
represents 54 percent of the blockchain global deal region, the adoption of blockchain becomes easier due
share, followed closely by Western Europe.93 This to lower transition costs and less cultural resistance.
dominance is, however, being challenged by Asia, This provides the backdrop for the disruption in the
according to a 2016 CB Insights analysis of venture remittances and payments segment, described in
capital financing. It shows that Asia, driven by China, EMCompass Note 43. Peer-to-peer payments with digital
increased its share of the pie from 14 percent in 2015 to currencies have started to become an alternative to
23 percent in 2016, a remarkable rise (see Figure 10). local currencies, with a number of growing blockchain
African-run startups, including Kenya’s BitPesa and
Africa
Bitsoko, Ghana’s bitcoin exchanges BTCGhana, and
Sub-Saharan Africa, with its 70 percent unbanked South Africa’s Luno and Ice3X and GeoPay, BitSure and
population, provides enormous potential for the Chankura. South African mobile money network PayFast
adoption of blockchain-based solutions as an
alternative to traditional payment options. Economies
with a history of frequent political turbulence or ABOUT BLOCKCHAIN IN AFRICA
those with high currency risk and capital controls are
also fertile ground for individuals and households to
“The opportunity is to produce new constructs
that bring together unique opportunities and
embrace a solution that permits them to bypass the
competencies—things like the blockchain and
system’s inefficiencies, overcoming fears of potential
mobile-money movement on the phone, and
risks in the execution of transactions. mesh networking. It’s a matter of using Africa’s
The overwhelming presence of alternative payment unique potential right now to come up with
solutions in Africa could potentially pave the way for things that defy Western logic in many terms or
blockchain, since households may be less resistant to just don’t fit that classical model.”
new technology. Seventy percent of all transactions —BRETT KING, co-founder of Moven
in Kenya are already digital and over half of the

38
recently integrated bitcoin payments options and now In 2014 South Africa’s central bank indicated that
provides access for bitcoin payment to 30,000 merchants it will have no supervisory obligations over virtual
outlets across the country.95 currencies, giving stakeholders relative ‘carte blanche’
to conduct cryptocurrency transactions in that country.
Prospects for rapidly developing blockchain technology
Furthermore, the South African Reserve Bank, along
into a full range of financial services, beyond just
with the Payments Association of South Africa and top
digital payments, are considerable, due to strong
banks, circulated Africa’s first ever private Ethereum-
support from financial players and local governments.
based smart contract among several of the country’s
In Nigeria, the central bank approved an industry-wide
financial institutions in an attempt to test the technology
e-payment incentive scheme and awareness campaign to
for potential future implementation in its financial
encourage Nigerians to embrace the use of e-payments system. They are also participating in a regional
by consumers and commercial agents. consortium of leading banks, including ABSA, Standard
Similarly, Senegal announced plans to introduce a Bank, Nedbank, and others, to develop a blockchain
cryptocurrency (eCFA) overseen by the West African based solution for loan syndication and securitization.
Economic and Monetary Union, which can be used in South Africa also boasts a blockchain-curious and
Benin, Burkina Faso, Cote d’Ivoire, Niger, and Togo. active financial sector looking to improve existing
South Africa is also home to a friendly regulatory company operations through process re-engineering
environment and a vibrant fintech ecosystem, a and cost reduction. Rand Merchant Bank has launched
necessary precondition for blockchain innovation. a blockchain initiative to develop blockchain solutions

100%

80%

60%

40%

20%

0%

FIGURE 10  Bitcoin and blockchain annual deal share by continent 2012-2016

Source: CBInsights, cbinsights.com

39
for its business, while Absa Bank, Barclays Africa avoid the transaction costs associated with traditional
and Standard Bank have joined the R3 Consortium financial services. Several early experiments are under
to collaborate with other international financial way, both at large institutions as well as new digital
institutions in the development of blockchain systems finance players.
for the banking sector.
Brazil, a country with solid banking penetration, has
Insight: Bitcoin and blockchain have the potential seen the industry mobilize with the participation of
to leverage pre-existing mobile penetration to Banco Itaú and Banco Bradesco in the R3 consortium.
create a cross-border and decentralized system of Banco Bradesco is launching pilots, including a
alternative finance in sub-Saharan Africa. This system new digital wallet using blockchain technology in
can reach previously underserved and unbanked partnership with startup eWally, as well as Bit.One,
population segments and has the potential to provide to address cross-border payments. In Mexico, under
the infrastructure for inclusion of Africa’s largely threat from a potential block on remittances by the
unbanked population. Governments and regulatory Trump administration, startup Bitso received $2.5
authorities are compelled to adapt quickly to these million in funding in early 2017, while Mexican
emerging trends as digital financial services account venture capital fund INGIA invested in Abra, the US
for up to 85 percent of volumes in certain geographies. blockchain mobile payments startup. In Argentina,
Many have started strategic initiatives to provide Rootcamp provides smart contract solutions for bitcoin
regulatory sandboxes and encourage public-private technology, while SatoshiTango and Xapo provide
collaboration. Stakeholders are increasingly recognizing
bitcoin based payments solutions.
blockchain as an emerging disruptor and enabler,
and they are studying and fostering the technology Insight: In Latin America, political uncertainty and
to ensure they are not excluded from its future the impact of de-risking are driving cryptocurrency
developments and potential benefits. adoption and blockchain-based financial products, but
the region as a whole still lacks robust technological
Latin America ecosystems, sufficient access to venture capital
funding, and the regulatory clarity to boost wide
While Latin America has a smaller percentage of
adoption levels.
unbanked population than Africa (49 percent,
according to World Bank Findex96), it has been subject
to cyclical political and currency fluctuations that have
undermined trust in local currencies. Additionally, ARGENTINA: THE CASE OF RIPIO
the penetration of illegal activity (including drug
Ripio’s (formerly BitPagos) bitcoin financial
trafficking and related money laundering activities)
services suite utilizes the blockchain and
have intensified the de-risking effect on economies
traditional payment rails to allow Latin
in the region, as traditional financial institutions America’s unbanked and underbanked
have exited markets due to increased compliance population (as high as 70 percent in some areas)
requirements and costs. to buy and sell bitcoins using local currencies,
Smaller and more vulnerable economies, particularly and to pay for goods and services through a
simple, direct transfer to peers and merchants.
those in the Caribbean, have been the hardest hit,
according to the Economic Commission for Latin The platform currently has over seventy
America and the Caribbean.97 This phenomenon could thousand users across Argentina and Brazil, and
provide fertile ground for blockchain adoption and is in the process of expanding to other countries
in the region, including Mexico and Colombia.
its corollaries to deal with de-risking’s impact, both
It raised close to $2.4 million in 2017 to expand
through its automated compliance with Know Your
internationally.
Customer requirements and through digital currency
platforms and cross-border payments systems that

40
Asia
Asia is becoming a global leader for venture capital
investment and testing of blockchain solutions.98 INDIA
There are nevertheless stark differences across Asian
“Blockchain Technology (BCT) provides tamper-
nations, with China, Hong Kong, and Singapore
evident recording of the linked transaction in a
leading the way (consistent with the Fintech trends distributed network, and has the potential to
outlined in EM Notes 34 and 42.99 Asia is also home disrupt the financial business applications. The
to the most forward-looking regulatory environments. nature of BCT addresses risks and inefficiencies
Japan and South Korea have regulated cryptocurrency in multi-party systems, and that is where the
environments and their central banks are in the process benefits will be most widely received.”
of licensing exchanges. —R. GANDHI, Deputy Governor,
Singapore and Malaysia have set up regulatory Reserve Bank of India
sandboxes for developing blockchain solutions by Regulators in India have been among the first
partnering with industry and technology providers. to promote financial inclusion initiatives for
Similarly, China’s government strongly supports banking and remittances, triggering strong
adoption of blockchain technology, as announced in its adoption of electronic payments and the rise of
most recent five-year plan, and is providing a flexible new market entrants (M-banking transactions
regulatory environment. The government is piloting a tripled between 2012 and 2014). New entrants,
sovereign blockchain digital currency, led by the central offering m-wallets, have attracted consumers
bank, the People’s Bank of China.100 and have motivated banks to invest in their
own digital payment offerings. Building on
Asia’s venture capital financing community has taken this momentum, blockchain-based startups
notice, with deal activity rising to an all-time annual high launched exchanges and digital wallets, such as
in 2016, at $119 million, up from $37 million in 2015. Unocoin and Coinsensure.
This is in contrast with North America and Europe,
Source: PwC,Emerging Markets—Driving the Payments
which each saw decline in deals during that period.101 Transformation, 2016

China. With the largest banking system in the world,

China is the world’s dominant bitcoin trader, in terms
of global transactions. Its bitcoin transactions are close
and piloting initiatives, sometimes partnering with
to 98 percent of market volume, up from 10 percent
startups and other financial service providers.105
in 2012.102 China’s strong appetite for blockchain
goes beyond cryptocurrencies, and is anchored in its Driven by the prospect of cost reduction, the Postal
enormous demand for financial inclusion.103 Since Savings Bank of China has tested a blockchain-
China aims to develop a robust Internet finance based asset custody system—a core business—in
industry, the strong support to blockchain-enabled collaboration with IBM and Hyperledger. Large
alternatives is a natural development. Internet players are incorporating blockchain into their
Fintech and blockchain-specific start-ups are springing business models, such as AntFinancial (subsidiary of
up across many segments: brokerage, digital wallets AliBaba) that is introducing a bitcoin mobile wallet
and money services, exchanges, post-trade clearance and Tencent, which is planning to use the technology
and settlement, middleware, infrastructure, and base to offer digital asset management, authentication,
protocols. Capital markets are aggressively pursuing and “shared economies” through a new platform,
opportunities in the industry, with significant funding TrustSQL.106 The Chinese Internet giants and banks
going into the payments sector.104 Supported by strong are also active venture capital investors on a global
profit margins, Asia’s traditional banking institutions scale: Baidu recently invested in U.S.-based bitcoin
are also adopting a ‘prototyping’ approach to blockchain payments startup Circle, Huiyin Blockchain Ventures

41
FIGURE 11  Global bitcoin and blockchain companies 2012 to Feb 13, 2017
Source: CBInsights, cbinsights.com

invested in US-based Purse.io and Indian UniCoin, and life insurance. And Qianhai International Blockchain
Crefir China FinTech invested $30 million in US/Dutch Ecosphere Alliance aims to combine Mainland China
BitFury. Several Chinese blockchain/bitcoin based and international talent, technology, and capital to
startups raised significant funding in 2016, including accelerate the commercialization of blockchain research
Juzhen Financials ($23 million), OkCoin ($10 million), and development, and promote its application to
BTC China ($5 million), and AntShares Blockchain support China’s social and economic development.109
($4.5million).107 Insight: Asia can be the global emerging markets
Key stakeholder collaboration is well under way, leader in blockchain-based solutions for the financial
bringing together financial institutions, innovators services industry. The technology’s adoption in the
and government actors to establish standards and region has been facilitated by the massive digitalization
develop the institutional framework of the ecosystem. of payment solutions, particularly in China, which
The China Ledger comprises regional exchanges to onboarded the unbanked and shaped consumer
create an open source Blockchain protocol to support behavior in the process.
an eventual ‘Internet of Everything’ for China.108 Asia has evolved to become the most comprehensive
Financial Blockchain Shenzhen Consortium intends ecosystem for blockchain development due to a
to collaborate on research and group-wide Blockchain combination of strong government and regulatory
projects, with a focus on capital markets technology, support, and mobilization of capital from both industry
securities exchange, trading platforms, banking and players and venture capitalists.

42
Cryptocurrencies are being adopted and integrated into the path that it will take. However, developments seem
mature and well-functioning financial systems (both to indicate that a proof-of-concept phase is underway
private and public) and innovative solutions are being across emerging markets, in varying degrees of intensity
tested for trade finance and securities trading, as well as and orientation, and that policymakers in these
for non-financial processes such as e-proxy voting, land countries are keen observers of and participants in the
registry management, and supply chain management. evolving policy demands surrounding blockchain.
This combination of these factors, coupled with While blockchain can have a decisive impact for an
Chinese companies’ global ambitions, will most innovation ‘leapfrog’ for all emerging market regions,
probably guarantee that China will be a global hotbed Asia appears to be a rising champion for blockchain
for blockchain innovation in the financial services implementation, as it brings together regulatory
sector and beyond. activism, a vibrant technological/fintech ecosystem,
supportive governments, collaboration of industry and
entrepreneurial players, and sustained access to venture
CONCLUSION capital. And China and Singapore are emerging leaders
The adoption of any new technology is often difficult to in developing articulated global blockchain development
discern in real time and nearly always unpredictable in strategies that combine all critical success factors. n

43
 EM COMPASS NOTE 45

CHAPTER 6
Beyond Fintech: Leveraging Blockchain for
More Sustainable and Inclusive Supply Chains
By Marina Niforos

One of the most noticeable and important developments of the advance of free trade over
the last half century has been the emergence of global value chains. These production and
supply networks cross multiple borders and connect advanced and emerging economies. They
are vehicles that can deliver on many of the promises of globalization. Yet operating them is
complex and costly. Global trade since the great recession has slowed, in part because of a lack of
transparency and interoperability within these networks. Blockchain, a technology with unique
abilities to record, track, monitor, and exchange assets without need of an intermediary, may be
the solution to many of the logistical, cost and transparency issues that plague the growth and
operation of global value chains, especially in the case of food, agribusiness, and pharmaceuticals.
It also has potential to address issues of inclusion.

Globalization has made supply chains significantly international trade is facing a global slowdown112 and
more complex, involving multiple players from around industries have signaled several critical challenges to
the world and a great deal of coordination. This global value chains, including: (i) a lack of transparency
increases the cost of operating these global networks— due to inconsistent or not readily available data;
with goods and services channeled across emerging (ii) a high proportion of paperwork; (iii) a lack of
and advanced economies. Imagine the complexity of a interoperability; and (iv) limited information on the
product sourced in Ethiopia or Indonesia, assembled in product’s journey in the chain.113
China, and sold in the United States. Experts have called for trade facilitation measures,
The cost of operating supply chains makes up two- including a simplification in the movement of goods
thirds of the final cost of traded goods. Seven percent of along global supply chains, in order to reduce
the global value of trade is absorbed in documentation companies’ governance costs, increase speed, and
costs alone, according to the Global Alliance for Trade reduce uncertainty.114,115
Facilitation.110 Faced with a dynamic and volatile While digitization of supply chains is already
environment, companies are increasingly turning underway with technologies such as cloud computing,
to technological innovation to make their supply artificial intelligence, and the Internet of Things—
chains more cost-effective, resilient, and responsive to which allows physical objects to communicate—
potential market disruptions. blockchain appears to be the missing element in the
Between the late 1980s and early 2000s, the emergence mix. Beyond providing innovative financial services,
of global value chains—which were to become the blockchain—a digital distributed ledger—can provide
main vehicle of international trade—was enabled in a platform that offers contracting parties the ability
large part by advances in information technology that to verify that every link in a supply chain network is
drastically reduced the cost of coordinating production authentic, without need of an intermediary such as a
stages carried out in different countries.111 Today clearing house or banking institution.

44
Blockchain can be used to record, track, monitor, services industry, with a special look at trade finance
and transact assets, both physical or digital, in a and payments systems. Meanwhile, this paper examines
cost efficient and transparent manner. By doing so, blockchain’s ability to integrate data flows and
the technology can act as a ‘plug and play’ trust processes and to provide efficiency and transparency
mechanism that enables other emerging technologies across digital supply chain networks and to allow
to achieve scale. These include artificial intelligence, for the inclusion of previously underrepresented
machine learning, drones, and 3D printing, among economic groups. The paper further examines two
others. In addition, the combination of Internet of sectors with significant economic and social impact
Things, smart contracts and blockchain could provide a on emerging economies, food and agribusiness, and
new model to reengineer supply chain logistics and the pharmaceuticals, and also discusses the inclusion of
business models they support, and by doing so render women in global supply chains.
them more efficient and transparent—and ultimately Food and agribusiness: Cost-efficiency and
more inclusive. Hence, Blockchain promises to: transparency of the supply chain. Global food
• Provide faster and more affordable payment and and beverage manufacturers, retailers, and service
finance options companies want to reduce supply chain costs while
• Leverage distributed-ledger capabilities to remove also reducing their carbon footprint, meeting consumer
third-party intermediaries, streamlining processes demands to sustain the environmental quality of
farmland, improve and maintain high quality food
and promoting increased security across the value
standards, promote health and safety, and maintain
chain in multiple industries, with a focus on lowering
the economic viability of farming and farmers’ wages.
the barriers to entry for small and micro-enterprises
With roughly 40 percent of the global workforce,116
• Provide solutions for increasing transparency across agriculture is one of the leading job providers
supply chains. worldwide and a critical sector for boosting economic
EMCompass Notes 43 and 44 highlight the positive growth in developing economies. For emerging markets
impact that blockchain could have on the financial and their industry leaders with global market ambitions

SUPPLIER PRODUCER DISTRIBUTOR 3PL RETAILER STORE CUSTOMER

Uploads data Gets information Automatically Is informed Runs machine Has full Scans QR code
on anti-bacterial on cow and receives notification about origin and learning-based transparency via app
fodder designated beef about receipt of destination of forecasting on delivery
products, cuts beef products beef products time Gets insights into
Cow is tagged and prepares Adds potential beef origin, ageing
with RFID chip, meat acoordingly Chooses suiting Reviews instructions recipes and wine Adapts, duration, etc. and
providing free 3PL based on fully how to store the suggestions to orders, suited recipes
range Adds QR code available data on products the data record promos, etc. and wines
to packaging customer, delivery accordingly
date, etc. Flexibly optimizes Provides app for Earns points in
network flows end-customer cross-company
loyalty program

FIGURE 12  The efficiency dividend—Re-engineering processes

Source: End to End Blockchain-Enabled Supply Chain, Oliver Wyman

45
and footprint, adherence to sustainable supply chain Similarly, U.S.-based SkuChain aims to connect
practices will become more and more important in financiers in advanced economies with clients in
the years to come.117 In this quest for efficiency and emerging and developing economies, despite their lack
transparency, blockchain offers the ability to: of history of trade or data with these emerging market
1. Integrate and manage supply chain transactions and firms. The venture proposes ‘a collaborative commerce
processes in real-time; and platform,’ combining payments, including a letter of
credit or wire transfer; finance (operating loans or
2. Identify and audit the provenance of goods in every
short-term trade loans); and visibility (integration with
link of the chain.
back office systems such as Systems Applications and
EMCompass Notes 39 and 43 examine how blockchain Products in Data Processing or an Enterprise Resource
can provide more cost-efficient trade finance solutions, Planning system.120
one of the levers to innovate the financial aspects
Another U.S. startup, Hijro, develops a blockchain-
of supply chain management. In the context of
based financial operating network for global
agriculture, this Note underlines how it can diminish
commerce, featuring real-time business-to-business
risk and boost efficiency for all stakeholders in the
payments, supply chain financing, and a peer-to-peer
supply chain through real-time settlement of physical
working capital marketplace that provides banking
commodities in a secured environment.
partners and non-bank lenders alike—including
Automated blockchain supply chain finance and alternative finance providers, asset-based lenders, and
know-your-customer systems can reduce the need for hedge funds—with an alternative platform for lending
agents, brokers, and reduce physical documentation. to actors along the global supply chain.
For growers and suppliers, blockchain could shortcut Meanwhile, Memphis-based Seam—partly owned by
cumbersome procedures and facilitate faster and more trading giants Cargill, Olam, and Louis Dreyfus—
secure payments. is working with IBM to “lead an industry-wide
For example, payment terms in the Australian grains collaboration initiative” to create a supply chain
industry range from two to five weeks, and these and cotton trading ecosystem based on blockchain.
terms pose counterparty or credit risk to growers.118 The company claims to have smart contracts that
The elimination of this risk means growers can be can reduce the time needed to settle a trade from the
secure in their cash flow, liberate working capital, and standard three days to just a few minutes.121 And China
better manage their businesses. For buyers, there are Systems is working with the Emirates Islamic Bank to
both back-office and liquidity benefits. A blockchain- develop a blockchain solution that allows them to share
enabled workflow automation (via smart contracts and information on a distributed ledger with Islamic banks
integration with key machinery and data collection on sharia-compliant halal goods.122
points) and auto-reconciliation for inventory can reduce Blockchain promises to make the supply chain leaner,
cost and risk to buyers. Additionally, the distributed simpler, and more cost-effective—not just providing
ledger model could also improve access for regulators financing but integrating know-your-customer, inventory
and authorities with respect to collecting taxes and management, and traditional legacy systems to work
customs duties. seamlessly with existing supply-chain technology. This
A number of blockchain-based projects are now coming element provides an enforcement mechanism. It can
to life. A European Union consortium of seven banks identify where the goods came from and who was paid
called the Digital Trade Chain is collaborating with for them. This can help avert fraud, such as the Qingdao
IBM to develop a supply chain management and trade scandal in 2014, where volumes of copper, alumina,
finance platform using blockchain technology. The goal steel, and other metals where used as collateral for
is to make cross-border commerce easier for European multiple loans. With blockchain, all actors along the
small and medium enterprises (SMEs).119 supply chain are visible and accountable.

46
The transparency dividend: Some of the largest players in the industry are taking
Enforcing sustainability and safety standards notice and are experimenting with blockchain to
provide proof of concept, using the technology to
Research by the Organisation for Economic Co-
improve visibility into their supply chains. IBM and
operation and Development indicates that “green
a group of leading food companies, including Dole,
trade” is rising in political and economic importance,
Driscoll, Golden State Foods, Kroger, McCormick
“with a global market of $1 trillion a year for
and Company, Nestlé, Tyson Foods and Walmart,
environmental goods123 and services close.”124 At
formed a consortium in 2017 to test IBM’s blockchain
the same time, the Sustainability Consortium’s
solution, which aims “to identify and prioritize new
2016 Impact Report found that the majority of
areas where blockchain can benefit food ecosystems.”128
consumer goods manufacturers lack visibility into
This follows a successful pilot that IBM launched
the sustainability performance of their supply
with Walmart earlier in 2017. Through this program
chains. The ‘greening’ of global supply chains
Walmart discovered that, while it normally takes more
requires traceability and transparency. The former is
than six days to trace a package of mangoes from
necessary to track hazardous products and materials,
the supermarket back to the farm where they were
allocate responsibilities, and monitor environmental
grown, blockchain can reduce this time to seconds.129
compliance. The latter is a precondition for achieving
Blockchain not only identified the farm where the
credibility, legitimacy, and fairness, and to avoid
mangoes were harvested but also the exact path they
“green-washing” or shifting polluting activities to
took on the way to the retail shelves. IBM’s blockchain
developing countries.”125
solutions are also being adopted by Everledger, a firm
In food and agriculture, transparent supply chains that is pushing transparency into the diamond supply
are vital to ensuring quality and conformity to the chain network, with the aim of addressing a market
expected standards of production (bio, fair-trade, fraught with forced labor and violence across Africa.130
circular economy), meeting environmental standards In Asia, Chinese retailing giant Alibaba is
and combatting fraud, as well as monitoring launching a similar initiative in partnership with
supplier inclusion mandates. A 2016 survey on the PricewaterhouseCoopers, Blackmores, and the Australia
investment priorities of industry leaders, conducted Post to fight counterfeit food products being sold across
by the consultancy the Boston Consulting Group China. Similarly, China’s second-largest e-commerce
and AgFunder, an investment marketplace for the platform, JD.com, is working with Kerchin, a
agriculture industry, found that supply chain and Mongolian-based beef manufacturer, to use blockchain
logistics was a top-five priority for 40 percent of their to track the production and delivery of frozen beef.
respondents, with food security and traceability cited
A number of innovative startups around the world
most often as a priority.126 Food safety is a major
are also entering the space. UK based Provenance
concern for consumers, and companies are feeling
launched a successful pilot program in Indonesia using
the impact after some notable incidents such as the
blockchain-enabled smart-tagging to track tuna fishing
Chipotle norovirus and salmonella outbreaks in 2015
in Indonesia. German startup Slock aims to provide the
that caused its profits to plummet by 44 percent.127
benefits of the transparency, security, and auditability
In contrast to inefficient labelling systems that are to real-world objects by integrating blockchain nodes
easily manipulated, blockchain provides businesses in connected objects. US-based RipeIO’s algorithms
and consumers with a system that cannot be tampered crunch data to calculate sustainability scores, as well
with. It can provide much more reliable information as scores for spoilage and safety levels.131 California’s
on where food originated, the date it was created, Filament is working to develop ‘smart farming’
and how it was produced. Blockchain quickly traces solutions with a decentralized network allowing
contaminated products to their source and ensures safe Internet of Things sensors to communicate with each
removal from store shelves. other. By encrypting down to the hardware level

47
and leveraging blockchain technology, Filament’s Blockchain could intervene to provide greater
decentralized network allows any device to connect, transparency, help detect fake drugs and, ultimately,
interact, and transact independently of a central reduce tracing costs by:
authority.132 And Bext360, a coffee-supply platform, • Tracking and tracing pharmaceutical raw materials
uses blockchain, artificial intelligence, and the Internet and finished products, from manufacturer to
of Things to support fair trade for coffee growers in end-user, in a distributed ledger that is tamper-proof
developing nations.
• Requiring participants to verify the authenticity
of data
Addressing a public health challenge:
Blockchain and the pharmaceuticals • Integrating anti-counterfeit devices into the
supply chain ‘Internet of Things’ to authenticate genuine drugs
and detects fakes.
Over the past two decades, the pharmaceutical
industry’s supply chain networks have become globally • Serving as an open-source platform for drug
diversified and complex, resulting in several new standards to enhance information-sharing across
actors being introduced into the value chain—from unrelated databases, and among different actors in
development, manufacturing, and packaging to the drug supply chain.
delivery. The industry has been under phenomenal Blockchain’s distributed ledger technology presents an
pressure to fight counterfeit products and to check innovative alternative to existing systems: It can provide
abuse in its supply chain. Medicines constantly change a record of all transactions, including location, data,
hands and undergo multiple transactions between quality, and price; it is visible to all involved entities, in
production and end-user patient, with each transaction real time; and it minimizes record tampering.
increasing the risk of falsified and substandard Several initiatives are currently underway to develop
products infiltrating the supply chain.133 The growing blockchain-based solutions that can provide more
number of e-commerce platforms creates more channels visibility into the pharmaceutical industry’s supply
for fake medicines to enter the market. A 2014 report chain. Rubix, a spinoff of Deloitte, is working in
by American Health & Drugs Benefits estimated that Canada with pharmaceutical companies to build
counterfeit drugs provide approximately $75 billion in applications for drug safety, drug channels, and public
annual revenue to illegal operators (U.S. Department safety. And U.S. based startup iSolve has developed
of Commerce estimates are $75-200 billion134), and BlockRx, a private-blockchain solution for the life-
have caused more than 100,000 deaths worldwide. The sciences industry that provides traceability in drug
profit loss to pharmaceutical companies is estimated at supply chains.
$18 billion annually.135 BlockRx’s goal is to connect systems that do not readily
For developing countries, the problem is dire. The communicate, establish data provenance that satisfies
World Health Organization estimates that 50 regulatory and business requirements, and create
percent of drugs consumed in developing countries a network of trading partners that are incentivized
are counterfeit, the majority of them anti-malarial to facilitate the transfer of information within a
medicines and antibiotics. These fake drugs can harm secured environment. Blockverify, a UK startup, has
patients while failing to treat the disease, and may developed anti-counterfeit solutions that may make the
create a resistance to the original product. The problem verification of a drug’s authenticity as easy as scanning
of counterfeit drugs is exacerbated by the opacity of a bar code with a mobile phone. Each product will have
the global pharmaceutical industry’s supply chain. its own identity on the blockchain to record changes of
Existing solutions to detect fake drugs, including ownership, and will be accessible to everyone.
radio frequency identification tags, have been largely Similarly, Chronicled, a California company, builds
ineffective due to the disaggregated nature of the open protocols and hardware and software solutions
industry supply chain and the high cost of adoption. that incorporate blockchain’s cryptographic technology

48
with the Internet of Things, to ensure that transactions identity (see EMCompass Note 42, 43), which can
and actors cannot be falsified. It recently launched help overcome women’s comparatively low access to
CryptoSeal, a platform that provides tamper- formal identification140 and offer an entry to formal
proof adhesive seal strips containing a Near-Field roles and remuneration in supply chains. It could also
Communication chip to seal and track shipments of help women establish ownership of disputed land titles.
drugs. Meanwhile, French startup Blockpharma has Finally, it could promote financial inclusion by helping
developed a private blockchain application that creates women establish credit scores through alternative credit
a bridge between existing programs and the blockchain data sources, bypassing traditional intermediaries
consortium. The laboratories release medicine boxes and banks. Finally, blockchain’s auditability and
with bar codes that can be traced throughout the traceability can provide a tool for the monitoring
supply chain via a smartphone. and enforcement of supplier inclusion and gender
empowerment initiatives that are currently difficult to
A case for inclusion: Women in the global monitor and enforce.
value chain Investors and credit agencies are now paying greater
Women represent a significant portion of workers attention to non-financial performance issues, including
in many value chains. However, informal roles and human rights and gender equality. Development-finance
comparatively low access to credit and identification institutions such as IFC require their clients to adopt
are an obstacle to women’s access to jobs and assets, performance standards on environmental and social
as well as to the creation of productive, sustainable sustainability issues, which include a commitment
markets. Blockchain technologies can help address to inclusion.141 A series of similar standards has been
some of these challenges. In terms of business established by private sector institutional investors.
ownership, there are approximately 10 million women- And consumers are also paying more attention to
owned small and medium enterprises (SMEs) around environmental and social standards. As a result,
the globe, representing around 30 percent of all SMEs companies are increasingly aware of the importance of
in emerging markets. Seventy percent of these women- these issues to their brands and reputations.
owned enterprises are unbanked or underbanked,
While blockchain technology alone is not sufficient to
which represents a finance gap of roughly $300 billion
address the cultural and structural issues underlying
per year.136 Access to financial services such as credit,
the challenge of gender equality, it does present a
savings, and insurance are considered one of the major
strong toolkit to tackle significant facets of the issue.
barriers to growth for women-owned businesses.
The potential benefits of even marginal change can
Laws and cultural norms that restrict women from be significant for both the private sector and entire
opening a bank account are common causes of economies.
exclusion.137 Women comprise just over 40 percent of
the agricultural labor force in the developing world, Challenges
a figure that ranges from about 20 percent in the
As discussed in previous EMCompass notes,
Americas to almost 50 percent in Africa and Asia.138
blockchain needs to overcome multiple challenges in
At a global level, one fourth of all economically
order to become a mainstream technology. One key
active women were engaged in agriculture in 2015.139
challenge is linked to the development and governance
Supporting women’s roles in agricultural value
of the technology.142 Without a set of standards that can
chains can increase productivity, profitability, and
ensure the interoperability of systems across industry
sustainability for actors along the chain. and supply chains, it will be difficult for the technology
Blockchain offers the potential to address some of the to achieve scale. Coexistence with legacy systems, as
barriers to women’s financial inclusion and economic well as that of private and public blockchains in supply
empowerment, both as individuals and as business chains, will need to be negotiated. The blockchain
owners. It could provide a cost efficient digital development community also needs to provide a

49
FIGURE 13  Blockchain Maturity Cycle
Source: Gartner

roadmap for continued blockchain innovation, legal and regulatory jurisdictions. In a recent industry
particularly in rendering smart contracts more agile survey, 56 percent of participants identified regulatory
and ensuring scalability and security. Full network uncertainty as a major barrier to adopting the
benefits will not be realized without widespread technology, followed by a lack of alignment among
adoption by industry, an issue that renders blockchain’s stakeholders, and of technological maturity.143
takeoff more difficult.
This will take time, as blockchain is a relatively new
CONCLUSION
concept and the number of people able to use it is
small. While companies in advanced economies will Blockchain technology is still at a nascent stage of
attract the best talent in the global workforce, those in development, but there are signs that it is exiting the
developing countries may require more time to catch hype-cycle of inflated expectations and entering a more
up. A lack of sufficient digital skills will be an obstacle pragmatic phase of exploration (Figure 13). Educating
to adoption, especially for SMEs and micro-enterprises key stakeholders, both in the private and public
that do not have the financial means to attract talent. sectors, about the technology’s benefits remains a big
Large players that act as hubs would have to require challenge. Supply chains are an ecosystem that prefers
their supply chain partners to align accordingly. Failing conservative innovation and is dominated by industrial
to do so may lead to their eventual exclusion from the players with complex business models that are not easy
supply chain. In the case of SMEs, the digital skills gap to reengineer. However, companies cannot afford to sit
may intensify their marginalization from the digital out the evolution of blockchain. They must be realistic
supply chain instead of advancing their inclusion. about their expectations and use pilot schemes to learn
Moreover, with the growing number of regulators and adapt their strategies. The closer the use case is
concerned about potential risks, the regulatory to a real business challenge, the better the chances of
framework for the technology is uncertain and productive feedback will be. Companies will also need
unpredictable. Supply chains are currently governed by to weigh the risks of adopting the technology against
a highly complex, overlapping nexus of the numerous opportunities it has to offer. n

50
 EM COMPASS NOTE 57

CHAPTER 7
Blockchain Governance and Regulation as an
Enabler for Market Creation in Emerging Markets
By Marina Niforos

Developing a proper governance and regulatory framework for blockchain-based applications

will be essential to providing market participants the stability they need to fully engage with
the technology, and allowing innovation to flourish. Given the global, multi-sectoral reach of
blockchain, regulators and industry will have to work in a collaborative manner to ensure they can
both experiment and learn, and so shape the future of the technology in a way that benefits all
parties and society as a whole.

Blockchain has the potential to enhance and adapt quickly to the fast-paced nature of the
competitiveness and increase connectivity across ecosystem, while businesses should strive to think more
markets, increase inclusion of underserved market like regulators and assume governance responsibility,
segments, boost sustainability and transparency of creating ground rules to protect the reputational
global supply chains, and build resilience against integrity and the value of the ecosystem.
external attacks—all of which are necessary to The 2017 exuberance surrounding cryptocurrencies
the creation of markets.144 The global regulatory and Initial Coin Offerings (ICOs) has led to greater
environment has been slow to adapt to the technology, scrutiny due to the fraudulent nature of many ICOs.
hindering its growth. This has marred the reputation of cryptocurrencies in
Previous EMCompass Notes (Notes 40, 41, 43, 44 particular and blockchain by association, mobilized
and 45) argued that blockchain, a distributed ledger a defensive response from regulators against potential
technology, can create new markets and products across risks, and detracted attention from the efforts of
emerging and developing economies, and thereby presents serious players developing useful applications.
an opportunity to leapfrog the developmental cycle. As a result, some investors will be hesitant to
Blockchain promises to make peer-to-peer (P2P) significantly finance new blockchain-enabled business
transactions more transparent, global, and inclusive. models. Moving forward, if blockchain-enabled markets
This, in turn could empower a sharing economy that are to mature, policymakers and businesses must create
challenges powerful digital platforms such as Google, the rules of engagement together. Regulators should
Amazon, Facebook, and Apple,145 as well as Baidu, provide guiding principles to attract private-sector
Alibaba, Weibo, and Tencent. Market incumbents investors, ensure consumer protection and citizens’
see blockchain as both an opportunity and a threat, rights, and provide safeguards against anti-competitive
and so are moving into the space, as witnessed by the practices.147 The private sector can undertake initiatives
proliferation of blockchain initiatives by these firms. to ensure industry-wide interoperability and compliance
Yet leapfrogging requires a proper regulatory with existing legislation and overall public-sector
environment to stimulate competition, investment, objectives such as the collection of taxes and the
and innovation.146 If blockchain-enabled markets are prosecution of illicit activities.148
to come to life, regulators and businesses must work For burgeoning technologies such as blockchain, finding
together. Regulators should think more like innovators a balance between risk mitigation and innovation will

51
not be straightforward. As long as distributed ledger ICOs and bitcoin speculation, forcing regulators to
technology (DLT) is applied by businesses to marginally take action due to the possibility of cryptocurrencies
improve existing processes, current legislation should being used for tax evasion, fraud, and other illicit ends.
suffice, as those processes are already subject to Although regulators have become more vocal, issuing
regulatory requirements. By contrast, highly disruptive warnings to industry players as well as investors,
use cases springing out of the blockchain ecosystem, blockchain’s terminology is still evolving, complicating
with new and at times unpredictable technology and the legal classification of its assets.156
business models, will be far more difficult to regulate Attempting to regulate a permissionless system like
through current legislative frameworks. bitcoin, where there is no controlling legal entity, is a
Adopting definitive legislation at this early stage may complicated task. Consequently, regulation so far has
be premature and hamper future innovation. And yet, targeted cryptocurrency business applications such
legislators can’t afford to do nothing in the face of as exchanges and wallet providers.157 In contrast, for
blockchain’s growth. They will need to think outside permissioned DLTs where access is conditional and the
the conventional legislative toolbox and innovate, participants are pre-screened, the existing regulatory
as happened in the early days of the Internet.149 framework should be able to provide sufficient
Collaboration will be key, with participation by public oversight since the actors already submit to regulatory
authorities and industry to accommodate the multi- obligations (see EM Note 40 for a description of
sector, cross-border nature of the technology.
1 Anonymity reduction through KYC, AML and CFT Directives
Regulation and self-governance
There are two primary ways to regulate a market:
2 Legal nature of DL including territoriality and liability
regulation and private rule-making or self-
3 Recognition of DL as immutable tamper-proof sources of truth
governance.150 The first occurs through public
regulators enacting legally binding statutes, also known
4 Conciliation of “Right to be forgotten” and DL immutability
as “hard law.” The second is through private actors
that self-regulate or co-regulate, or “soft law.” National Legal validity of documents stored in a DL as proof of
and supranational entities exercise statutory oversight
5 possession or existence
with a wide or specific mandate in their jurisdiction.
Actors may prefer “soft law”151 or rulemaking by 6 Legal validity of financial instruments issued on a DL
private parties, as a more flexible approach to dealing
Real-world enforceability, territoriality and liability of
with uncertainty and finding compromise among 7 smart contracts
different actors.152 In the finance industry, an example
of the latter is Visa’s Core Rules, where the rules govern Treatment of shared information in DL from the perspective
the actions of participants using the Visa payment
8 of cross-border flow of data and data protection
system.153 A hybrid example is the Basel Committee
on Banking Supervision and the Financial Stability 9 Use of DL as a valid ruling register for the IoT
Board bringing policymakers from around the world to
Regulatory reporting information standards definition on the
reach accords that can be translated into legislation in 10 blockchain
specific jurisdictions.154
11 Definition of a regulatory sandboxes approach to test
Public policy perspective:
Key regulatory challenges
FIGURE 14  Distributed Ledgers’ Main Regulatory
Until early 2017, actors in the blockchain ecosystem Challenges
operated with little regulatory oversight.155 The second Source: BBVA Research, 2016. CIT = Combating Financing
half of that year saw an exponential rise of dubious Terrorism; DL = Distributed Ledger; IoT = Internet of Things.

52
permissioned and permissionless networks). According Hyperledger Fabric and R3’s Corda, both examples of
to international law firm Hogan Lovells, “arguably, permissioned DLTs, allow participants to control who
supervisory oversight is less necessary in regards can see what information about transactions submitted
private blockchains (notwithstanding antitrust and to the ledger.160
competition matters, or powers necessary to supervise Anti-money-laundering and illicit financing. Well-
possible illegal activities).”158 designed distributed ledgers could improve compliance
Regulatory authorities are thus faced with different with anti-money-laundering (AML) and know-your-
challenges, depending on the sector and their mandate customer (KYC) requirements, provided they include
(Figure 14), and whether the blockchain is public a secure identity system.161 However, given that false
or private. The paradox is that the same features of identities can hide behind the anonymity of open
distributed ledger technology that can be forces for blockchains, and their past use for illicit activities,
improvement and efficiency can also engender risks, authorities in 2015 began to provide specific anti-
depending on how the technology is used. This makes money-laundering guidance and crack down on illegal
clear-cut answers on regulation extremely difficult. activity linked to digital currencies.
While deliberation on these issues is taking place in The U.S. Financial Action Task Force (FATF) has
many forums, a consensus around some key guiding urged virtual currency exchanges to comply with
principles has yet to emerge. Nevertheless, there are AML legislation by recording customer identities
cross-cutting challenges that require guidance and and conducting enhanced due diligence. European
potentially regulatory oversight. These include (but are governments, in coordination with the Organisation
not limited to): for Economic Co-operation and Development, are
Cross-jurisdictional harmonization. Distributed ledger pushing for global coordination on this issue. The
technology has by its very nature a global, cross- European Union’s fourth anti-money-laundering
jurisdictional deployment. It requires regulators and directive requires interconnected registries to record
lawmakers to collaborate across national borders beneficial ownership of companies and trusts, and to
to harmonize legal and regulatory regimes, while share with local tax authorities (OECD-BEPS Action
managing potential risks, including issues of monopolies 12).162 Japan has also amended its primary anti-money-
and market manipulation.159 Addressing these would laundering law to bring virtual currency exchange
require significant legal and organizational changes and services within scope.163
a mechanism for collaboration to ensure alignment. Scalability and interoperability. Setting technology
Security and data privacy. The distributed nature of standards could provide genuine interoperability
public blockchains provides greater safeguards against between nascent protocols and legacy computer
potential external attacks and promises enhanced systems, thus promoting the scalability of distributed
security. However, regulators fear that the system’s ledger technology. To this effect, the International
anonymity for users could encourage illicit activities Standards Organization, with the participation of 33
such as money laundering and terror financing. nations, is already working on standards for distributed
Another concern is the compatibility of blockchain ledgers that might remedy some of these issues. While
with the ‘right to be forgotten’ in the EU General Data scalability is not an issue of regulatory oversight, it
Protection Regulation (GDPR), given the immutability addresses concerns that the sustainability of the system
of data on a public blockchain. is in question and could lead to market failure in the
These are some of the frictions emerging between long run.164
the potential benefits and risks associated with the Risk to fair competition. The development of
technology, for which there is no immediate policy blockchain-enabled applications, in particular by
recommendation. In private blockchains, accessibility consortia in a permissioned system, could potentially
can be controlled by design and participants can ‘opt give rise to concerns about unfair competition
in’ to the desired level of disclosure and shared access. issues in a number of areas.165 These include: (i) the

53
prospect of market dominance by some participants, formed a task force on distributed ledgers and launched
with negative consequences for cost and quality of a joint research project with the Bank of Japan.169 For
services; (ii) a gating effect that may exclude new financial services, the European Securities and Markets
entrants; (iii) the adoption of technical standards Authority has recognized the need to strike a balance
that prevent participation by competitors; and between ensuring safety in transactions and preventing
(iv) the risk of collusion and market manipulation unnecessary complexity, so as not to discourage
between participants. Companies collaborating with participation by new entrants.170
competitors through a consortium will have to consider United States: The response from regulators has been
the nature of the information they make available to fragmented since regulatory authority crosses agencies
competitors through a shared ledger, to avoid potential (the Securities Exchange Commission (SEC), the
price fixing and exposing participants to potential Commodity Futures Trading Commission, and the
antitrust liability. Treasury Department, among others), as well as federal
and state jurisdictions. While the tax authorities treat
Early responses from policymakers virtual currencies as property, the SEC has refrained
A result of this fluctuating environment is that from providing a legal definition for bitcoin and virtual
regulatory reactions have varied widely across different currencies,171 preferring to consider developments
jurisdictions. The only consistent reaction has been on a case-by-case basis, a “facts and circumstances
that no jurisdiction has recognized bitcoin as legal analysis.”172 The SEC Chairman has suggested that
tender.166 A few have taken the step of enacting relevant ICOs173 seem to fall in the realm of securities.174 He
legislation. For example, the U.S. state of Arizona also sent a clear message to market participants: “those
passed legislation that qualifies blockchain-enabled who would use distributed ledger technology to raise
signatures secured as valid electronic signatures. capital or engage in securities transactions must take
appropriate steps to ensure compliance with the
Similarly, Delaware voted to allow blockchains for
federal securities laws.”175
corporate record-keeping. Russia has created a legal
framework to legalize initial coin offerings, while Singapore: Singapore is a major player in Asia’s
France has authorized debt-based crowdfunding innovation ecosystem. The Monetary Authority
recorded on distributed ledger technology. Most of Singapore is taking a collaborative, “risk
jurisdictions, however, have maintained a wait-and-
see approach to the underlying technology and have
Financial
avoided comprehensive legislation. This approach gives 26
services
regulators time to observe how blockchains develop.
10 Cross-sector
Experts are advocating for regulators to focus on
regulating specific use cases of blockchains rather than 3 Life sciences &
health care
the technology itself, a practice that has been adopted
with other disruptive technologies such as the Internet 1 Energy &
resources
and digital platforms.
1 Technology, media &
telecommunications
Public authorities around the world have adopted
different approaches: 1 Public sector

Europe: The European Union has opted for a balanced Consumer &
0 industrial products
approach.167 The European Commission is actively
0 5 10 15 20 25 30
monitoring related developments, and in February 2018
launched the EU Blockchain Observatory Forum to
FIGURE 15  Consortia Distribution
gather information from EU members on use cases and
Source: Deloitte analysis; see also Gratzke, Peter, David Schatsky and
engage experts and practitioners before formulating Eric Piscini. 2017. “Banding Together for Blockchain - Does it Make
concrete policies.168 Also, the European Central Bank Sense for Your Company to Join a Consortium?” August 16, 2017.

54
proportionate”176 approach to blockchains, and innovation and the divergent interests of participants.
has launched a regulatory sandbox where fintechs, Trust is introduced through an entity, acceptable
banks, and regulators work together. The regulator to all, that exercises control over access and makes
is collaborating on an international scale with other decisions about membership and management of the
regulators, including the Hong Kong Monetary alliance. As the size of consortia increase, however,
Authority, to develop a cross-border blockchain- so do the governance challenges of each group, which
based trade finance system. It has issued a public essentially consist of classic organizational problems
notice to qualify token sales as securities and has of cooperation and coordination. A 2017 CoinDesk
announced that it would develop a new payments survey on digital innovation in financial services
service framework to ensure anti-money laundering found that over 70 percent of respondents considered
compliance for companies involved in the dealing or industry consortia as vital to the development of
exchange of virtual currencies.177 solutions.181 Yet a similar percentage had serious
reservations about the format, from the system of
Private sector governance challenges: incentives to the lack of control. Smaller, use case-
The case of consortia focused consortia start to emerge and even large
consortia are segmenting into different working groups
Technology industry analyst Gartner predicts
to facilitate governance.
that the value added for blockchains will grow to
more than $176 billion by 2025, and exceed $3.1 Establishing clear rules for engagement, decision-
trillion by 2030.178 To capitalize on the opportunity, making, and accountability is critical. Participants
industry players are forming consortia to co-develop must address how rules will be changed in the future
applications with innovators, while finding ways after the distributed ledger technology is implemented.
to minimize costs and potential risks. Blockchain An important consideration for participants is the
technologies have a major impact when network effects question of intellectual property, particularly if one
can be realized and consortia provide a vehicle to or more of the participants come to the table with
leverage them. pre-developed technology, as there might be a risk of
vendor lock-in (although open source is most likely the
A blockchain consortium is a hybrid, semi-private appropriate route for many consortia).182 During the
blockchain that allows organizations to establish early stages, most of the focus will be on converging
‘compartmentalized trust’ relationships and to around a technical solution. But as the business
condition access to the network accordingly. “A rationale adapts to changes in market conditions,
consortium platform provides many of the benefits decisions will have to be made about which course to
affiliated with private blockchain — for example, pursue and how to effect changes to the code. Dispute
efficiency and transaction privacy — without resolution, sanctions for violations, and appropriate
consolidating power with only one company.”179 enforcement mechanisms need to be foreseen to address
Participants involved in a blockchain consortium may potential conflicts.183
have different priorities and may even be in direct
competition with each other. Consortia can have a Self-governance and regulation:
functional objective, such as solving a specific business The importance of public-private collaboration
problem. They can also be technical, seeking to develop
While computer codes by default are self-regulatory,
universal interoperable and modular blockchain
they should not operate in isolation from a legal
platforms across multiple industries. At present, there
framework.184 Regulations create legal certainty,
are over 40 blockchain consortia across the globe,
allowing entrepreneurs to innovate without fear of
which have attracted significant funding, mostly from
breaking the law. Blockchain-based systems need
the financial sector (Figure 15).180 robust governance mechanisms even though regulators
Governance is critical to running an effective are hard-pressed to keep up with the technology’s
consortium, given the volatility of blockchain unpredictable nature. ICOs exploded onto the market

55
with such speed that regulators were unprepared for The model is already being tested in various
the outcome. jurisdictions. The UK Financial Conduct Authority
Michele Finck of the Max Planck Institute proposes a (FCA) was the first to introduce a sandbox specific
collaborative effort between regulators and innovators to blockchain. While the most experienced and firm-
to account for the specificities of the technology focused sandbox, its attractiveness may diminish with
and provide stability.185 Given the still experimental Brexit, a potential loss of a “passport” regulatory
phase of blockchain, businesses and regulators alike approval into other EU markets. Other countries have
are struggling to learn quickly and define regulatory followed the UK’s example: Singapore, Abu Dhabi,
boundaries. At this stage, it is important to maintain Australia, Canada, Denmark, Hong Kong, Switzerland,
flexibility and encourage engagement from both Malaysia, and South Africa have all launched some
policymakers and industry to work on specific use cases. form of a sandbox.

Initiatives for engagement can be advanced by either The main drawback of regulatory sandboxes is
party, such as regulatory “sandboxes” (see below) that they are limited to a single jurisdiction and do
from public authorities or industry-led public private not accommodate the global reach inherent in the
partnerships. An industry-led example is the U.S.- technology. While a global process of multi-stakeholder
based Blockchain Alliance, which brings together co-regulation has been proposed, it is unlikely to
stakeholders from the blockchain industry with emerge any time soon.
law enforcement agencies from the United States An intermediate step could be the creation of a multi-
and around the globe. The European Commission jurisdictional sandbox. The FCA has proposed a global
has launched two initiatives, the EU’s Blockchain regulatory sandbox, uniting regulators from several
Observatory and the European Blockchain Partnership, jurisdictions and firms with multi-market ambitions
to coordinate the actions of Member States in the to work together on policy and regulatory challenges.
context of a digital single market.186 As a first step, the initiative proposes to create an
international “college” of regulators, each with its
Regulatory sandboxes: own mandate or sandbox models, giving firms access
Toolkits for public-private dialogue to multiple regulators. It is a pragmatic, go-to-market
Sandboxes and similar government-backed initiatives approach that aims to provide firms with some guiding
are useful approaches that allow startups and principles rather than a full-fledged set of standards
regulators to learn together in practice and in a across participating jurisdictions. Other experts have
controlled “safe space,” so that they may make more put forth a long-term vision of a full multilateral
informed decisions about the boundaries of their sandbox, perhaps under the mandate of a global
respective responsibilities. These are also a way multilateral institution such as the World Bank Group
to attract innovation to one’s jurisdiction without or the IMF. Entities like the European Commission
committing a priori to a binding legislation. may be in a position to encourage and coordinate such
projects among member states. The recently signed
Sandboxes typically have the following features:187
European Blockchain Partnership is a promising start
• Customizing rules for each firm/business proposal, “to exchange expertise in technical and regulatory
rather than a one-size-fits-all approach. fields and prepare for the launch of EU-wide blockchain
• A small number of customers/clients, testing for a applications across the Digital Single Market.”188
limited time-period, and safeguards for consumer
protection (such as requirements of informed Corporate governance disrupted:
consent). The impact of blockchain on the role of the firm
• Restricted authorization/licensing, individual Blockchain’s distributed trust mechanism has far-
guidance, waivers/modifications to rules for that reaching implications for governance. Yet there has
project, and no enforcement action letters. been limited research on how new crypto-corporate

56
governance models may emerge and challenge the do not have unintentional effects in marginalizing
board-centric existing model. segments of participants or undermining the freedom
Decentralized Autonomous Organizations—also of individuals.
known as DAOs—operate without a corporate In response to these pressures, the corporate
hierarchy. The evolution of smart contracts has the governance of companies stands to be disrupted as
potential to revolutionize economic activity, displacing much as their business models, as they attempt to adopt
the firm as the primary organizational vehicle. A DAO and adapt to the technology. Traditional structures
promises to self-govern, with bylaws and decision- are already experimenting with blockchain and smart
making codified into algorithms, and potentially little contracting applications to take advantage of potential
or no human mediation. Such a structure may be able efficiency gains from its auditability, immutability, and
to address an inherent agency problem in existing digital identification. Specifically, blockchain initiatives
governance structures, where the interests and risk are underway to address some of the procedural flaws
preferences of board members and shareholders may and costs for small shareholders of the Annual General
diverge.189 DAOs are organized around the concept of Meeting by facilitating voting and registration of
a “town hall,” with the potential to give voice to all shareholder lists. The Nasdaq announced a successful
investors.190 The original DAO, which was launched pilot for e-voting in Estonian Annual General Meetings
by Slock.it in 2016 on the Ethereum platform and in 2017 and similar initiatives have been undertaken
raised $150 million, was the first example of a such a by the Abu Dhabi Securities Exchange, the Russian
structure. It had no directors, managers, or employees National Settlement Depository, and the Toronto Stock
and the governance structure was built with software, Exchange Group. Eventually, corporate actions such
code, and smart contracts. as the payment of dividends and coupons could be
Yet, the 2017 hacker attack on the original DAO distributed through a fully automated process. This
that stole $55 million exposed the vulnerability of could result in lower costs for trading, faster transfer
the network and raised issues of liability for loss of of ownership, and greater accuracy and transparency
value. The decision by the majority of shareholders throughout the process.192 At present, experiments are
to recapture the siphoned funds by breaking the marginal. But with the prospect of further automation
immutability of the code splintered the community through smart contracts, the question arises as to
of developers/shareholders and undermined trust in whether DAOs should have a legal corporate charter
the system and in the concept of “Code is Law.” This and what form these should take.
reputational damage of blockchain was compounded Corporate governance under a blockchain system can
by the fraudulent use of ICOs, in the absence of clear profoundly alter the power relations among managers,
rules. shareholders, regulators, and other stakeholders.
The model of “crowd” blockchain governance is being The transition from a centralized world of corporate
tested. The question becomes whether the technology hierarchies to a distributed one still defies our
can and should fully replace a transparent democratic established notions of economic production around the
debate on governance, essentially a political process, vertical firm. Disintermediated corporate governance
with a technical rule-making system defined by elite structures and practices can perhaps offer a more cost-
developer communities.191 The more distributed ledger effective and efficient way for management to access
technology penetrates business use, the more it will market information and shape strategy. However,
be confronted with existing legislation. Blockchain efficiency gains may be hampered by the ability of the
will need to evolve and provide a clearer governance platform and the nodes to extract rent for their efforts,
structure to guarantee transparency, accountability, proportionate to their market power. In any case,
and the protection of investors and shareholders. It such changes will require significant reform and legal
will also need to recognize the socio-political context adaptation of the existing rules as well as a shift in the
in which it operates and ensure that technical solutions incumbent organizational culture.193

57
CONCLUSION Ideally, a global multi-stakeholder process should be
put in place to pursue a uniform, rules-based system
Despite the exuberance surrounding cryptocurrencies,
across national jurisdictions. But as the Internet
the distributed ledger technology is still at an early
stage of development and remains a marginal economic has shown, implementing a global coordination
phenomenon. Blockchain faces challenges of scalability, mechanism can become mired in geopolitics, making
security, and mass adoption. With respect to its the prospect of a global arbiter seem distant. Less
governance, the system is struggling to transition ambitious scenarios for transnational cooperation
from a techno-libertarian model to one that can are underway to develop public standards for
accommodate friction with the real economy. Yet for the code, with international agencies working on
optimal governance, the deliberation process cannot some aspects of standards harmonization and
take place in isolation. Innovators and regulators need
for regulatory sandbox coordination. Whatever
to engage with each other to learn and shape the future
the process selected, a purely technological,
of the technology in a way that benefits all parties,
amoral model cannot ensure the governance and
and society as a whole. Aware of the potential and the
magnitude of the challenge, regulators in emerging sustainability of the blockchain ecosystem without
markets, whether in Asia, the Middle East or Africa are acknowledging the real political and social pressures
actively observing the space and testing policy options surrounding any change as fundamental as the one
(see discussion on regulatory sandboxes above). blockchain promises to bring about. n

58
 EM COMPASS NOTE 61

CHAPTER 8
Using Blockchain to Enable Cleaner,
Modern Energy Systems in Emerging Markets
By Douglas Miller and Peter Mockel

Emerging markets must attract significant international financing to meet their goals for
mitigating carbon pollution and increasing access to clean, affordable, reliable, and resilient
energy. The authors of this note examine how blockchain technology can—if paired with smart,
interconnected devices—promote needed investments by both improving investment processes
and promoting the adoption of modern energy systems and business models. Given the nascent
status of both blockchain technology and blockchain applications specific to the energy sector,
this note offers guidance to better assess where and how to apply blockchain technology to
achieve a modern, clean, energy future including in emerging markets.

The Paris Agreement (“the Agreement”)194 on climate Applying Blockchain Technology to Energy
change indicates greater appetite by emerging markets Sector Investments in Emerging Markets
(EMs) to deploy and track new methods of generating Blockchain’s ability to establish greater trust and
and delivering electricity in order to meet their support more automated transactions may allow it to
commitments to reduce greenhouse gas emissions.195 transform sectors and solve the pain points of emerging
However, to tackle climate change and increase market investments. 200 Such investments can lend
people’s access to reliable, clean energy, emerging themselves to blockchain-based solutions because they
markets must mobilize trillions of dollars from various typically involve a shared repository of information,
sources.196 multiple sources and contributors of information to
that repository, minimal trust between parties, one
Also, rather than operate centralized one-way, energy
or multiple intermediaries, and various dependencies
generation systems to meet inflexible demand, energy
across energy infrastructure and management. 201
providers should use renewable, distributed, and
Blockchain is compelling as an enabling technology for
responsive energy resources197 that manage themselves
scaling energy systems powered by renewable energy
through bi-directional198 communication, and enable
and responsive distributed energy resources. Energy
investors and other stakeholders to easily track and
sector stakeholders believe blockchain technology may
evaluate the impact of energy investments.
in fact be the critical additional ingredient to smart
Given the opportunities and challenges involved in IoT-enabled devices and big data that unlocks the
meeting the goals of the Agreement, and increasing new business models necessary for this energy sector
people’s access to affordable electricity, to improve transformation where millions (or even billions) of
the investment process and bolster the impact of their customer devices are being managed. 202
energy sector investments,199 policy makers, regulators, Historically, electric utilities and energy companies
and investors could increase the use of blockchain produced value through energy generation,
technology, in combination with “smart” devices, transmission, and distribution in order to meet
Internet of Things (IoT), and big data. inflexible energy demand from ratepayers. However,

59
the opportunity to generate value in the energy sector
is shifting as ratepayers become prosumers203 and
provide greater demand flexibility on electric grids. 204 Clean
For example, in order to balance electricity loads, energy
commercial, industrial, and residential customers financing
can now use smart, interconnected devices that can
automate the powering down of their electricity-
consuming systems, battery storage, and other grid
New
services in response to variability in renewable (or
business
conventional) generation.
models
This shift toward focusing on devices at the grid-edge
(e.g., smart thermostats, appliances, and batteries) Blockchain
also implies strong growth in the number of market technology
participants that electric utilities manage—from
thousands of ratepayers today, to millions or billions of
customer devices in the future. Blockchain technology
offers great promise for value because it can automate
and reduce the costs of managing this growth in
market participants.
FIGURE 16  Convergence of Opportunities
As electric utilities manage the grid from the device Source: Authors
level, they can automate operational decisions and
maximize efficiencies across electric grids by using
demand response “event” is signaled to power down
smart contracts. These run on blockchain to trigger,
smart devices based on the specifications written into
track, and settle the various grid services that smart,
the smart contracts governing them.
interconnected devices enable. The adoption of this
leaner management of electric grids by utilities and Battery storage to address oversupply of electricity
system operators is expected to reduce operational generation: To store excess generation from wind
costs and unlock revenues from new services. It power resources during evening hours when electricity
is also expected to help meet policy mandates for consumption is low, a battery storage “event” notifies
implementing cleaner grids through the combined use electric vehicles and other battery storage systems
of variable renewable supply, and responsive demand- to store excess capacity, based on the specifications
side resources. written into the smart contracts governing them.

To better understand how this manifests in real-

Key Blockchain Application Domains
world applications, consider the following blockchain
in the Energy Sector
applications using smart contracts. In both scenarios,
the grid services provided through demand response There are many application domains for blockchain
and battery storage are tracked, and any associated technology in the energy sector that can deliver
compensation is settled with customers for their grid billions of dollars in global value annually through
services in real time on blockchain and system operators cost reductions—driven by greater automation and
gain confidence about these demand side resources disintermediation—and revenue growth. Investors
actually delivering valuable services to the grid: should consider application domains such as the
Demand response to address undersupply of electricity following that offer the promise of value creation
generation: To avoid turning on a natural gas-fired across the energy sector:205
peaking power plant on a hot summer day when there • Certificate-of-origin systems for renewable energy
is a gap between electricity supply and demand, a markets: any application that documents the

60
 provenance of renewable energy generation, issues explanations of how these can support energy sector
certificates about the green attributes of each unit investments in emerging markets, which can provide
of renewable generation, and tracks ownership a greenfield for introducing leapfrog technologies
transfers between market participants for their compared to existing markets:
green energy claims, and related voluntary or • LO3 Energy builds on its existing Brooklyn
compliance reporting needs. Microgrid project in New York City with various
• Utility billing systems: any application where products and applications such as Exergy and
customers transact using cryptographic identities to the Quantum Hedging System. Exergy offers a
manage metering, customer settlement, advanced system for managing the physical characteristics
rate implementation, or customer switching. and transactions for decentralized electric grids,
• Demand response programs: any application that which will help enable the adoption of transactive
conducts aggregation, real-time measurement energy and new relationships between utilities,
and verification (M&V), settlement, and trading prosumers, and consumers—especially in cities
associated with participation in a given demand and communities worldwide that already have
response event. independent grid edge projects. The Quantum
Hedging System, which is being implemented in
• Electric vehicle charging networks: any application partnership with Direct Energy, enables enterprise
that manages customers, vehicles, and charging customers to micro-hedge their energy purchases on
infrastructure using cryptographic identities. an hourly basis to automate energy management and
• Transactive energy systems: any market design reduce costs.
where electric grids are balanced and controlled • Electron promotes the adoption of smart grid
through intelligent software agents that perform infrastructure by developing products for energy
grid communication and control functions for sector market participants. Its various applications
physical assets by responding to temporal and offer tools to register meters, trade demand response
locational price signals. event actions, and coordinate distributed energy
Some additional applications that could deliver resource management—all of which help create new
billions of dollars in global annual value to the energy energy sector business models in emerging markets.
sector include wholesale clearing and settlement, Work to date has been in the United Kingdom (UK).
regulatory compliance, metered energy efficiency • OLI enables transactive energy systems by
programs, grid asset procurement, and direct (energy- optimizing and automating the management of
specific) climate finance. decentralized renewable generation and energy
Investors financing energy sector projects in emerging consumption with modular design. This application
markets that overlap with these application domains provides utilities with a new set of open-source
should consider using blockchain technology to hardware and software that enables a shift in their
maximize private returns and broader social impacts. business model—thus, increasing the viability of
The landscape of companies, consortia, and startups decentralized, digital utilities. Work to date has
developing energy sector-specific blockchain platforms been in Germany.
and applications is growing. 206 The suite of blockchain- • Share&Charge is a decentralized protocol for
based solutions being developed and tested now—and electric vehicle (EV) charging, transactions, and
those coming in the future—can enhance the vision, data sharing, and was developed by MotionWerk
financial transfer, project implementation, and tracking to promote EV usage. The protocol simplifies
associated with emerging market investments in the access to EV charging stations, participation in
energy sector. Below are a few examples of promising demand response events and other grid services,
blockchain applications that are testing commercial and proof that electricity used to charge EVs comes
viability through existing or upcoming pilots, and from renewable generation. This application helps

61
 harmonize fragmented EV charge point markets and • Sun Exchange increases solar power access for
grid service offerings to improve the experience of schools and businesses specifically in emerging
existing EV owners, and increase the appeal of EVs markets through an innovative fundraising
to prospective owners. Work to date has been across approach that creates rental income for those
Europe, and includes a pilot in the UK. who buy solar cells and lease them to those using
electricity from successfully funded projects. This
• Slock.it enables transactive energy systems through
application combines aspects of crowdfunding and
its “Economy of Things” technology that allows
“as-a-service” business models to pool funding from
for any object to be rented, sold, or shared securely. multiple sources, and deliver solar power to solar
Its applications, including Incubed Client, allow cell lessees. This approach increases the viability
machines to operate and respond to different of solar access by eliminating upfront cost barriers
energy sector scenarios autonomously, which offers to prospective solar electricity users, and creates a
a solution for emerging markets to implement long-term revenue stream for solar cell investors.
transactive energy systems. Work to date has been Several of these projects have been implemented in
across Europe. South Africa.

BOX 3  CERTIFICATE-OF-ORIGIN SYSTEMS FOR RENEWABLE ENERGY MARKETS

Renewable energy markets have experienced significant their systems for tracking and reporting on their carbon
growth over the past decade and are positioned to emission reductions. Because renewable energy generation
continue expanding due to enabling policies, increasing assets lead to carbon emission reductions when they
consumer demand, technological advancements, and displace polluting energy sources, countries in emerging
cost reductions.207 However, to catalyze investments markets want to promote renewable energy investments
to meet the goals of the Paris Agreement and unlock as part of a portfolio of options to reduce their carbon
access to renewable energy, the process of tracking emissions. While there is a parallel opportunity to develop
and reporting renewable energy investments must be separate blockchain applications for carbon markets
simplified, disintermediated, and modernized. due to shared pain points,212 investors should consider
collaborating with emerging market stakeholders to
Currently, renewable energy markets depend on
determine how blockchain applications developed for
certificates-of-origin, including the guarantees of
certificate-of-origin systems can streamline documenting
origin (GOs) used in the European Union, renewable
the carbon mitigation impacts of new renewable energy
energy certificates (RECs) used in the United States, and projects.
international renewable energy certificates (I-RECs) in
about 25 countries. These certificates of origin provide EWF is developing EW Origin, an open-source and
blockchain-based toolkit for certificate of origin trading
detailed proof for each megawatt-hour (MWh) of
and tracking systems, and running tests of real-world
renewable generation,208 and are required because once
scenarios in several countries with various energy
electrons enter the shared electric grid, it is impossible to
sector market participants.213 EW Origin can be used to
distinguish whether they were generated by renewable
build dApps that record the provenance, support direct
or fossil fuel resources.209
trading, track ownership, and create reports for the
There is need to improve the operation of existing green attributes of renewably generated electricity at
renewable energy markets, and the certificate-of-origin the kilowatt-hour (kWh) level, as well as the associated
markets underpinning them that, for example, better avoidance of carbon dioxide emissions.
enable smaller renewable energy generators and buyers
By adopting new technological tools that increase trust,
to aggregate their supply and demand to gain greater
simplify investment tracking, and reduce administrative
market access.210 costs, blockchain-based solutions like EW Origin should
To achieve their Paris Agreement nationally determined enable countries to leapfrog existing energy systems by
contributions (NDCs),211 emerging markets must improve encouraging more renewable energy investments.

62
• Swytch encourages more sustainable behaviors Key Assessment Criteria for Blockchain-based
and the broadening carbon markets by providing Solutions in the Energy Sector
a financial reward for those engaging in a range of Emerging market investors who are planning to
behaviors, and aggregating their collective impact. deploy financing in any energy sector application
This application encourages people, companies, domain where blockchain technology provides value,
and other organizations to adopt sustainable should compare the viability and quality of different
behaviors—starting with renewable energy blockchain solutions before selecting one. Some of the
production. It also tracks the execution of any criteria and associated questions for investors to use in
sustainable actions with an open-source oracle that their assessment include:
acts as a distributed authority—offering a means by • Technical architecture: How is the technology
which to motivate and prove dispersed sustainable stack structured—from the underlying blockchain
actions. A pilot has been carried out in Germany. platform to the specific applications running on the
• WePower enables financing for new renewable blockchain? How do applications interface with the
blockchain itself? What components are executed
energy generation projects by using tradable
on-chain versus off-chain?
smart contracts to establish digital power
purchase agreements (PPAs) between parties. For • Governance: Is the blockchain public or private?
renewable energy projects in emerging markets, What is the blockchain consensus protocol, and
this application gives renewable energy developers what are the resulting implications for throughput
greater ability upfront to secure financing, on the blockchain? Who are the governing and
administrative bodies? What is the protocol for
and demand for energy from buyers such as
permissioning, system improvements, emergencies,
multinational corporations, cities, and universities.
and other actions? What controls and liabilities do
It also offers buyers greater liquidity with these
users, governing bodies, and administrative bodies
digital PPAs. The app is expected to become
have? Who are the key stakeholders to engage who
available for projects in Australia, Estonia, and
do not have a direct governance role, and at what
Spain in the last quarter of 2018.
junctures should this occur?
These and other applications are setting the stage • Features: What are the users’ key functional
for a suite of blockchain-based solutions that will requirements? Does the blockchain solution meet
promote investments in renewable energy, demand users’ business and regulatory needs?
response, EVs, transactive energy, and other application
• Data collection and reliability: What are the data
domains where blockchain plays an important role
sources? What is the methodology for sending data
in maximizing investor value and social impacts.
from these data sources to the blockchain? What
Accelerating and coordinating these currently- data are stored on-chain versus off-chain, and how
dispersed blockchain applications, is the Energy Web is this managed? What are the protections and
Foundation (EWF)—a global nonprofit based in processes in place to ensure data security, privacy,
Switzerland that is accelerating blockchain adoption in and reliability?
the energy sector. EWF is developing an open-source,
• Throughput: How much throughput can the
energy sector-specific blockchain and convening an
blockchain solution handle? What are the gas limits
ecosystem of users, developers, and regulators to and gas fees, where gas is the computational effort
inform the development of EWF’s digital infrastructure a given transaction needs in order to be executed
and promote the development of new energy sector on blockchain? What is the average block time?
applications. How do users pay for transactions, and how are
transaction costs minimized?214

63
• Development process: What methods are
TOP KEY ASSESSMENT
programmers using to develop the blockchain
APPLICATIONS CRITERIA
solution? Who is managing this development
process, and how transparent is it? Who owns • Certificates of origin • Technical architecture
the intellectual property, or does the solution • Utility billing • Governance
use an open-source license? How is the solution • Demand response • Features
being audited and how are any identified issues or • Electric vehicles • Data collection and
shortcomings resolved? How is the development • Transactive energy reliability
funded, and what (if any) funding needs remain? • Throughput
• Development process
• Ecosystem: Who are the current or potential users
• Ecosystem
of the blockchain solution? Who advised on its
• Innovation
development? How extensive and available is the
• Regulatory alignment
community of programmers who can support and
build on the particular solution?
• Innovation: What are the licensing rules? To FIGURE 17  Top Applications and Key Assessment
what extent does the solution promote further Criteria for Blockchains in the Energy Sector
innovations? What programming languages can be Source: Authors

used? To what extent is the solution interoperable

with others? Given the regulated nature of energy markets across the
• Regulatory alignment: What are the relevant globe, regulatory support is especially critical to scaling
regulations? What is the extent of regulators’ blockchain applications. Regulators, who are still
oversight over the solution? To what extent do deepening their understanding of how this technology
works, identifying concerns, and the regulatory
regulators understand and support the solution?
oversight that may be needed—should be engaged early
Because blockchain is a nascent technology, additional and often so that they can increase their understanding
assessment criteria for investors to consider will of particular blockchain platforms or dApps, provide
continue to emerge. Depending on the solution’s input, and draw on this experience to identify best
maturity level, investors should also evaluate its practices and regulatory implications. For example,
performance and suitability, based on its existing use in EWF is collaborating with a national certificate-of-
the market, and consider testing through pilots before origin issuing body (or registry) to develop a national
promoting or adopting a specific solution. Nevertheless, reference on the implementation of EW Origin that
the authors of this note recommend that investors meets regulatory needs. After the target completion
and policymakers prioritize open-source, public date of October 2019, this will serve as a freely
blockchains with permissioned consensus protocols, available open-source technology “template” for use by
as these can be expected to maximize participation, national regulators for issuing, trading, claiming, and
innovation, and throughput. reporting on certificates of origin in their markets.
Emerging market investors, and any regulators and Both before and after running simulations or pilots,
market participants with whom they work, can use and based on existing regulations, this engagement
the key assessment criteria listed above to evaluate the could include proactively seeking early feedback from
suitability of applications and platforms such as EW regulators about the platform or dApp’s technical
Origin, and the Energy Web blockchain infrastructure architecture, governance, and data sources. Also,
on which it runs. They can also use these key criteria to develop best practices for adopting blockchain
to assess other applications promoting clean energy solutions for different markets, investors should
investments that also run on the EW blockchain, or share their insights with regulators about their own
others in the fast-growing energy sector landscape. blockchain assessments and pilots.

64
CONCLUSION Provided that blockchain applications meet business and
regulatory needs, in combination with smart devices,
Investors have a tremendous opportunity with the blockchain technology can deliver significant value across
Paris Agreement to accelerate and scale the adoption of a range of energy sector application domains. Moving
clean, affordable, reliable, and resilient energy access in forward, investors and emerging market policymakers
emerging markets. To tackle the challenges associated and regulators should use the assessment criteria provided
with deploying financing in emerging markets, and above as a starting point to evaluate different blockchain
capture the opportunity presented as the energy sector solutions. Ultimately, these solutions can help unlock
modernizes, investors should leverage blockchain greater financing across the globe for democratized,
technology when they invest. decentralized, digitized, and decarbonized electric grids. n

65
 EM COMPASS NOTE 63

CHAPTER 9
Blockchain and Associated Legal Issues
for Emerging Markets
By John Salmon and Gordon Myers

Blockchain, or distributed ledger technology (DLT), is a tamper-evident and tamper-resistant

digital ledger implemented in a distributed fashion. 215 This emerging technology, which enables
direct transactions within a ledger without need for a central authority or trusted intermediary,
has the potential to re-engineer economic models and enable the creation of markets and
products previously unavailable or unprofitable across emerging markets. However, in considering
the potential benefits of blockchain, organizations must also consider the associated risks and how
they can be managed.

These risks include jurisdictional challenges, crypto assets, privacy and data protection, double
spending, and distributed denial-of-service (DDoS) attacks. Several risks have been identified
and overcome at similar innovative leaps in the recent past, including the commercialization of
the Internet and cloud computing. It is essential that enterprises understand all risks inherent
in blockchain systems, including being able to clearly identify who is accountable and legally
responsible.

Blockchain’s key characteristics present challenges Organizations wishing to develop a decentralized

to the existing legal and regulatory framework. It is application on a blockchain therefore face a new
comprised of digitally recorded data in “blocks” that set of risks and issues to manage. Most of these
are linked together in chronological order in a manner stem from the fact that we live in a world where
that makes the data difficult to alter once recorded, centralized governance and control is the norm.
without the alteration of all subsequent blocks and Accordingly, the vast majority of countries’ laws
collusion of a majority of the network. and regulations envision centralized businesses
Each node on the network generally contains a or structures with a singular seat of control and
complete copy of the entire ledger, from the first responsibility. Deviating from this arrangement poses
block created—the genesis block—to the most recent a challenge from a legal and regulatory perspective
one. Each block contains a hash (a fixed length and raises enforcement issues.
alphanumeric string generated from a string of text) This is particularly the case when it comes to regulated
pointer as a link to a previous block, a timestamp, sectors such as financial services. In this sector
and transaction data. By its nature, distributed ledger there has traditionally been some form of central
technology allows for transactions and data to be counterparty, which often is regulated. Within a
recorded and shared across a distributed network particular system or process, that central party is
of participants without the need for a trusted accountable and takes responsibility for the provision
intermediary. The original instance of blockchain of the services to all of the other participants through
(bitcoin) was to enable peer-to-peer transactions a contractual framework underpinned by the legal and
without the requirement for, or cost of, a central party. regulatory structure. An example of this would be the

66
 Read Write Commit Example
Public Open to anyone Anyone Anyone* Bitcoin, Ethereum
permissionless
Open

Public Open to anyone Authorized All or a subset Sovrin

BLOCKCHAIN T YPES

permissioned participants of authorized

participants
Consortium Restricted to an Authorized All or a subset Multiple banks
authorized set of participants of authorized operating a shared
participants participants ledger
Closed

Private Fully private or Network operator Network operator Internal bank ledger
permissioned restricted to a only only shared between
(“enterprise”) limited set of parent company
authorized nodes and subsidiaries
*Requires significant investment either in mining hardware (proof-of-work model) or cryptocurrency itself (proof-of-stake model)

FIGURE 18  Main types of blockchains segmented by permission model

Source: Hileman, Garrick and Michel Rauchs. 2017. “Global Blockchain Benchmarking Study.” Cambridge Centre for Alternative Finance.

role of a central bank or other institution in clearing to a given application. There is a risk that transactions
and settlement processes. performed by an organization could fall under every
However, in many blockchain use cases there is no jurisdiction in which a node in the blockchain network
such centralized party that takes responsibility for the is situated, resulting in an overwhelming number of laws
provision of services or controls associated data sets. and regulations that might apply to transactions in a
Instead, each party in the blockchain network holds a blockchain based system.
copy of the data, rather than relying on a single central In a public blockchain system it will be important to
party to hold and maintain a master copy. For example, consider what law might apply to transactions and
blockchain technology is being used to simplify cross- consider appropriate risk management that should
border payments, removing the need for transfers to apply. However, with a permissioned or private system
pass through multiple parties (with associated charges) it is easier to create some form of legal framework
before reaching their destination. 216 While such and internal governance structure that will dictate the
decentralization can bring benefits, it also poses a legal governing law that will apply to transactions. In private
and regulatory challenge if there is no central party systems it would also be beneficial to consider some
that is responsible and can be held accountable. form of agreed dispute resolution process.
The key issues that present risks to firms using
Crypto assets
blockchain, which are explained further below, are:
blockchain systems spanning multiple jurisdictions; The difficulties of applying the existing regulatory
crypto assets; data protection; privacy compliance; and regime can be seen clearly when it comes to the use of
cyber attacks. crypto assets. We currently see a huge range of opinions
from regulators on crypto assets, from outright
scepticism and bans in some countries, 217 to more
JURISDICTIONAL PROBLEMS cautious investor warnings from others, 218 while yet
As the nodes of a decentralized ledger can span multiple other countries have introduced regimes to attract more
locations around the world, it is often difficult to crypto activity. 219These divergences of opinion and the
establish which jurisdictions’ laws and regulations apply resulting pitfalls are well documented in the example

67
of Initial Coin Offerings, or ICOs. The popularity An organization wishing to sell tokens may be seeking
of selling tokens via ICOs as a means of start-up investment, yet it may also be attempting to build a
fundraising has exploded in the last few years. Figures user base through a network effect. If the organization
show approximately $21.7 billion has been raised is looking for an investment, it is perfectly reasonable
through some 935 ICOs over the period from January for regulators and policy makers to expect it to
to November 2018 alone, dwarfing the amounts comply with the usual investor protection laws; it
raised for blockchain projects via traditional venture would not seem equitable for an organization using
capital during the same period. 220 However, given the cryptocurrency to circumvent these laws where the
divergence of regulator opinion on the specific legal money raised from the tokens is an investment.
implications of a token sale, organizations that fail to However, it is often the case that organizations using
consider at the outset whether their token sale may be a token model want to build a network of users by
compliant in the jurisdictions in which they plan to offering cryptocurrency to use within the particular
offer tokens may face an uncertain future. ecosystem being built. The objective in this case is to
Organizations may also have to ensure that the encourage people to become users of the organization’s
sale of tokens is limited to buyers in their desired services, with the cryptocurrency used to pay for
jurisdictions in order to remove the risk of the their provision. If the organization proves successful,
offer extending to jurisdictions that are more the value of the token should increase accordingly, as
heavily regulated or have outright bans on ICOs. usually there is a finite amount of the new currency
In the United States, the Securities and Exchange sold. In this way, it is the users of the ecosystem who
Commission (SEC) has expressed concerns that many can contribute to and benefit from its success (and
ICOs are either scams or attempts to raise money popularity), rather than equity investors. These types
without complying with investor protection laws. of tokens are often referred to as utility or consumer
Other countries’ policy makers and regulators have tokens, in that they are designed not as an investment
sought to clarify the position by agreeing that not but rather a device (or currency) to consume or use a
all ICOs would be required to comply with the same particular service.
investor protection laws as would be the case with an In many jurisdictions, regulators have acknowledged
initial public offering. that there is a place for such tokens, and that they
This has led to real difficulties for organizations may not be regulated as an investment. A difficulty
that wish to use tokens in a legitimate way and arises when organizations wish to sell tokens both to
are committed to complying with the regulatory potential users of the system (utility tokens) and to
regime wherever the token is made available. These organizations that do not intend to use the prospective
organizations must deal with varying approaches service (for example, an investment bank or a venture
across different countries, and the position also looks capital company). Other challenges arise when the
set to change—potentially very significantly—over the purchaser of the token buys many more tokens than
next few years. the purchaser could possibly use or where there is no
These problems are particularly stark when one usable service at the point when the token is issued.
considers the reasons organizations wish to adopt Utility tokens that are sold as investments blur the line
cryptocurrency as part of their infrastructure. The between what is regulated and what is not regulated,
traditional methods of raising capital to fund the making it uncertain which regulations an organization
growth of a business are debt financing and equity must comply with in each jurisdiction in which a token
financing. This is clearly seen by both sides as a is offered for sale.
transaction in which the lender or investor should These issues, together with the lack of a consistent
expect some form of return if the business is successful, global regulatory environment, can make it very
but with an appreciation of the risk involved, challenging for those organizations that wish to benefit
particularly with early stage businesses. from the creation of their own crypto asset. There

68
are many reasons why such organizations may want under GDPR, as they determine the details of
to create their own crypto asset, such as the payment processing, whereas nodes that only process personal
and settlement systems example and the benefit of the data are more likely to be processors, as they simply
network effect mentioned above. facilitate the blockchain network’s operation. However,
this determination is not straightforward, as not all
blockchain systems operate in the same way, and there
PRIVACY AND DATA can be different types of participants carrying out
PROTECTION various activities.
The issue of privacy and blockchain technology The nodes in a blockchain system might be compared to
has been intensely debated. Many practitioners and autonomous systems on the Internet. Each autonomous
academic commentators have claimed that blockchain system receives packets and routes them autonomously
technology is incompatible with privacy laws such as the to another node, repeating until the packets reach their
EU General Data Protection Regulation, or GDPR.221 destination. The kind of processing that blockchain
As mentioned above, the original purpose nodes perform is arguably similar. The only purpose of
of blockchain was to facilitate peer-to-peer the nodes is to ensure the integrity of the blockchain and
transactions without the need of a central party. In to validate the addition of supplemental blocks. Privacy
a permissionless public blockchain system, no single can be further protected through blockchain systems
party takes responsibility for the availability or that use zero-knowledge proofs. This allows nodes in the
security of a particular blockchain network, and all system to verify transactions without the details of the
users of the system may have access to the data on transaction or the public key, ensuring personal data is
the network. These attributes conflict with the thrust not processed by nodes.
of privacy laws, which require the party controlling In the same way that a cloud service provider may
personal data of an individual to safeguard the not know what data a customer uploads to its cloud
security and privacy of that data on behalf of the environment, administrators of a blockchain will not
individual or “data subject.” necessarily know whether personal data is present on
Both a controller (the party that determines the the blockchain. Generic blockchains can be put to a
purposes and means of processing particular personal wide variety of uses, and there can be different data
data) and a processor (a party responsible for and configurations, making it very difficult for the
processing personal data on behalf of a controller, developer to build in privacy protections adapted to the
such as an outsourced service provider) have distinct nature of the data processed on the blockchain.
obligations under the GDPR, making it important to At best, governance rules can regulate users of the
determine whether a party qualifies as a controller or a blockchain to respect privacy laws when they upload
processor when processing personal data. With a cloud personal data to the blockchain. For private or
computing system, typically those uploading personal permissioned blockchains, for particular purposes,
data to the cloud environment are the controllers and governance rules can be much more developed,
the operator of the cloud system is the processor. This for example, by prohibiting users from uploading
is a key area in which blockchain systems differ. Many particular types of data to the blockchain.
blockchain systems are operated by all the users in
a peer-to-peer network environment, which makes Transfer of data
it difficult to define whether users are controllers or
There have been debates in the cloud industry about
processors. It is necessary to consider to what extent
when personal data is “transferred” overseas for
the different participants in the blockchain network are
privacy law purposes, and blockchain is likely to raise
controllers based on their respective activities.
similar questions. For example, if a copy of a hash
Participants who submit personal data to the derived from personal data is made in Singapore,
blockchain are more likely to be considered controllers does this mean that data has been “transferred” to

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Singapore for the purposes of privacy law? In the sense being intercepted compared to traditional methods
that data may be transferred to a node in any location, of transfer and storage, making blockchain a risk
data put on a public blockchain is similar to data management system.
posted to the public Internet.
Risk of cyber-attack
The reasoning of the European Court of Justice (ECJ)
in the Bodil Lindqvist case may apply to the question Despite the high level of security that blockchain
of transfer, although this case was in respect of the systems provide to the data recorded on them, there are
European Data Protection Directive, which preceded some key cybersecurity risks that remain.
GDPR. 222 The ECJ held that it cannot be presumed The unique challenge to decentralized systems,
that the word “transfer,” which is not actually defined particularly public blockchains, is that data input
in the Directive, was intended to cover the loading can be from any number of nodes, meaning there
by an individual of data onto an Internet page. A is a risk of tampering at each node. The benefit of
similar pragmatic approach is required for data on using a ‘tamper proof’ technology is negated if the
a blockchain to ensure that it is not “transferred” to information stored on the ledger is compromised
every jurisdiction in which a node is present, causing to begin with. This type of attack is not aimed at
unnecessary breaches of privacy regulations. As there the blockchain itself, but at external systems such
is no single model for blockchain systems, each project as cryptocurrency wallets. There is a risk that
will have to be analyzed on its own distinct merits. individuals might target the data input point (rather
than the ledger itself), leading to the dissemination
Data security on blockchain of inaccurate information. Users operating on
Blockchain technology is often referred to as “tamper the blockchain would then unknowingly rely on
proof.” This is generally because each new digital misleading or false information. A 15-year-old boy
‘block’ containing a record of transactions is connected from the United Kingdom proved this attack possible
to all preceding blocks. In order to tamper with by developing a proof-of-concept code that allowed
any of the records contained in a block, a dishonest backdoor access into hardware wallets sold by
participant would need to change all subsequent blocks Ledger. 223 Using this approach, it would be possible to
in the chain to avoid detection. change wallet destinations and amounts of payments.
Given that blockchain is a decentralized ledger, there An attacker could divert payments to his own account
is no single point of failure that dishonest participants while making it appear to be the intended destination,
can override. Instead, they would require a huge ensuring the attack is undetectable to verifying nodes.
amount of power to override and alter every node Another way data on a blockchain can be compromised
simultaneously. This is especially prominent in public is by a targeted brute force attack on certain nodes.
blockchains where there can be any number of nodes In some blockchain networks, a concentrated number
existing anywhere in the world. Blockchain therefore of nodes carry out almost all of the processing. If
presents a lower risk of attack than with centralized someone were to identify and attack the nodes covering
systems, in which key servers can be targeted and the required consensus level, the chain could be
altered without trace. compromised. However, such an attack requires an
Blockchain also uses advanced public key cryptography enormous amount of computing power.
to secure its data, which relies on users having two In some systems an attack would only need to control
cryptographically matched keys. When someone wants more than half of the computing power of all nodes.
to send a user a file, they send the file to a user’s public Such attacks are more likely to be successful if the
key. The file can then only be opened by the user’s attacker specifically attacks the nodes with the highest
correlating private key. Together these features make computing power in which most transactions are
blockchain a very secure method of recording data. concentrated.
There is relatively low risk of data tampering or data

70
Double spending and DDoS attack smart contract to ensure that any hack can be corrected
Double spending attacks occur when the same currency retroactively.
unit is assigned to multiple users, enabling them to use As mentioned above, traditional contract law may well
the same coin simultaneously. apply to the underlying transactions embodied by smart
A distributed denial-of-service, or DDoS, attack contracts and, as such, the same liability issues apply to
is a type of cyber-attack in which a perpetrator smart contracts. Software developers could therefore be
attempts to render a service unavailable to its users liable for poorly written software code that results in a
by overwhelming its bandwidth, often by flooding it loss for their client, either through exploitation such as
with traffic. Blockchain systems are less susceptible to the DAO hack, or as a result of the code executing in a
these kinds of attacks than are traditional centralized way not intended by the parties to the transaction.
systems, given the lower numbers of potential points
of failure and ability to include denial of service GOVERNANCE IMPACTS
prevention. However, where ledgers are concentrated
on a few high-performing nodes, the likelihood of a Accountability
successful DDoS attack is increased. In relation to decentralized systems, a key question
for regulators is who should be held accountable for
Smart contracts
breaches of law and regulation. This is similar to the
Smart contracts are self-executing software code that problem of determining accountability on the Internet
runs on a blockchain. They are not in themselves before the emergence of blockchain. Accountability
contracts, and often are not particularly smart. of the various parties carrying out relevant activities
Contract law will likely apply to the underlying on the Internet has been a vexing problem since its
transactions between the parties using smart inception. Prior to the Internet, information and
contracts, assuming that the arrangement between other content, such as music and video, could only
the participants otherwise fulfils the requirements for be published through existing publishers with an
contract formation. established distribution network. Where there were
The code in the smart contract defines the terms of legal issues about content, for instance issues with
an agreement on an “if” and “else” basis and then copyright infringement and defamation, the publisher
automatically enforces those terms if and when the was clearly accountable.
specific criteria programmed into the code are met. In the case of Google Spain v AEPD, the Court of
For example, the execution of a smart contract can Justice of the European Union (CJEU) ruled that
be verified by the network of users on a blockchain a search engine could be held accountable for the
system, removing the requirement of a trusted third- protection of personal data in respect of third party
party intermediary. Smart contracts therefore have the websites accessible through its service. 225 It was
potential to reduce costs in areas that typically rely on emphasized in this case that the search engine’s
an intermediary today, such as clearing and settlement. activities could be clearly distinguished from those of
As demonstrated in 2016 by the hack of the the original publisher of the data. The harm to the data
Decentralized Autonomous Organization (DAO) public subject was not a result of the publication, but rather
blockchain, it is possible to target smart contracts from the widespread availability of this information
that are run on blockchain systems. 224 In the instance through a search engine.
of DAO, the hacker was able to move approximately In a public blockchain system, by contrast, there is no
$50 million in investor funds to a sub-contract that one easily held accountable in the same way as a search
the hacker controlled. This type of attack is less engine. In a private blockchain system, where there is
likely to occur in private blockchain systems due to clear ownership and responsibility, regulators might
the number of users that have access to the smart expect those running the system to be accountable for
contract; however, features should be built into the data added to the system by all the network users. The

71
system owner could be seen as enabling the distribution Similarly, “smart contracts” more efficiently executed
of data through the blockchain in a comparable on-chain, may be moved off-line to centralized
way to a search engine. It would then be the system operations to ensure favorable tax treatment of ledger
owner’s responsibility to protect this data, despite not transactions. This solution may achieve compliance,
publishing the personal data itself. The owner would however, at the cost of the efficiencies and certainty
likely have to put in place a set of operating conditions argued to arise from using a blockchain-only
on the private blockchain that comply with regulations, architecture.
which all users would in turn agree to comply with.
Regulators working with the industry
Taxation challenges To allow the financial industry to enjoy the full
The application of existing tax frameworks to a benefits of blockchain technology, it will be necessary
digitalized economy has posed significant challenges for regulators to work with the industry to ensure
to national and global tax authorities. For example, that compliance with regulation can be achieved
digital economy concerns are at least partly within the while still allowing blockchain technology to be
scope of the OECD’s Base Erosion and Profit Shifting used to maximum potential. In some jurisdictions,
(BEPS) concerns. In some cases, governments have regulators may be required to move away from the use
suggested that broad-based “virtual” profit allocation of detailed and prescriptive rules in favor of broadly
rules, rather than existing permanent establishment stated principles that set the standards at which the
concepts, should apply. India has introduced an industry must operate. This would allow regulations
“equalisation levy” on payments made to certain non- to be flexible enough to encompass the wide variety
resident on-line service providers. 226 The European of systems that blockchain allows for. Even in these
Union has considered similar measures. Over the longer jurisdictions, however, regulators should work closely
run, a “virtual permanent establishment” concept is with stakeholders to ensure that their thinking on
envisaged. acceptable industry practices is transparent. As in
These ongoing discussions may have significant Singapore and the United Kingdom, these efforts can
implications for blockchain and distributed ledger support innovation by providing “bright line” certainty
technology platforms. For example, it seems evident to new and non-traditional industry entrants.
that cryptocurrency transactions will be taxed as One opportunity to adapt regulatory compliance
assets, that is, on a capital gains basis, without to distributed ledger technology could be the
application of VAT. However, issuances of utility use of regulatory sandboxes. These provide the
tokens, for example, to employees, may be more ability to test services with real customers in a
appropriately taxed as income. Similarly, for policy controlled environment without incurring regulatory
reasons, government authorities may prefer to defer consequences. Regulators can gain an understanding of
revenue recognition until disposition, or provision the function of the blockchain systems and cooperate
of the underlying services, as is the case in Israel. with the industry to identify and develop methods for
These are complex matters that, even within a BEPS compliance. This would help regulators develop a level
framework, may promote competitive tax practices that of regulation that encourages and enables innovation
other authorities may view with concern. while ensuring adequate protection for users—and
In the case of non-cryptocurrency platforms, BEPS- would encourage development of technology solutions
type concerns may well influence industry and (such as electronic identification, authentication, and
governance structures in unintended ways. For trust services that mitigate, for example, anti-money
example, industry DLT platforms for supply chain laundering and ultimate beneficial ownership concerns).
management may tend towards centralization, so that One challenge of regulatory sandboxes is ensuring they
they are owned and nominally governed (consistent are attractive to start-ups. Sandboxes should encourage
with BEPS limitations) from low-tax jurisdictions. innovation and allow for start-ups to grow, rather than
merely offering value for the regulator.

72
Another opportunity to adapt regulatory compliance building it into the system. For example, participants
may lie in careful application of existing regulatory could be locked out of the system unless and until
principles to the blockchain environment. For example, they had been through an appropriate anti-money
regulators will inevitably favor more centralized laundering compliance check.
blockchain and DLT platforms that provide a Beyond blockchain and DLT platform design,
“home” for regulatory supervision. Alternatively, in decentralized systems pose significant governance and
decentralized systems, they may take the view that capacity challenges for participants and platforms
all participants are liable for compliance issues. A alike. Fortunately, the industry and regulators have
more nuanced approach also may be possible. For coalesced around key principles for digital platforms
example, in relation to regulation of privacy issues and outsourced information technology operations,
in unpermissioned systems, France recently took the providing a strong basis for risk governance. Key
view that only active participants—those actively elements include careful management of information
inputting data into the system, and not mere “nodes” assets; board oversight of resilience and business
or “miners” providing verification of transactions to continuity; development of operational risk metrics and
the platform—are responsible as data controllers. 227 integration with robust enterprise risk management
This approach may more effectively balance the public capacity; and considered protocols for management of
interest in large-scale “trustless” systems, by ensuring data incidents.
meaningful accountability for privacy and personal
The proposed European Banking Authority outsourcing
data practices.
guidelines for banks in Europe are a good example of
Finally, tax issues may continue to challenge the how regulators expect banks to manage outsourced
industry. Absent global agreement on “digital risk, whether based on new technologies such as the
economy” principles, one can surmise a fragmented cloud or on more traditional models. It is inevitable
global tax environment, consisting on one hand that regulators will expect the same level of risk
of aggressively low-tax environments targeted at management, due diligence, and ongoing monitoring
attracting “producers,” and on the other hand, of suppliers of blockchain based systems. Where there
aggressively extraterritorial jurisdictions, targeted at is no “supplier” as such (as for a public blockchain),
realizing offshore income they believe has been derived regulators may be hard-pressed to establish oversight
from “consumption” in their home territory. Such a tax responsibilities beyond assuring robust diligence, risk
environment is uncertain for innovation, generating governance, and reporting by users.
risky tax structures and deterring investors.
We can safely assume that regulators will want
Meeting governance objectives to ensure that transparency and understanding of
smart contracts are embedded into blockchain and
Blockchain system designers may seek to incentivize DLT applications. We can similarly surmise that
good behavior by participants in order to meet legacy entities participating in blockchain and DLT
governance objectives and reduce the risk of non- platforms will want to “flow down” their requirements
compliance with regulation by the blockchain network. to governed platforms with a single point of
This may be done by setting rules that ultimately accountability. This would suggest at least that even
induce the right behavior. Bitcoin, for example, open permissionless systems will require thoughtful
incentivizes miners to verify legitimate transactions user understandings and allocations of liability,
by rewarding them with bitcoins. Bitcoin mining is perhaps resembling governing organizations for open
difficult and inefficient by design, making it costly for source software, to attract commercial users. For
any node that deviates from the correct protocol and the immediate future, it may also suggest that use of
fails to receive a reward. permissioned and limited applications is more likely.
Designers of blockchain systems could ensure Two other governance areas will require resolution if
compliance with the legal and regulatory framework by the opportunities inherent in open, trustless systems

73
are to fully emerge. First: decentralized autonomous verification; agreed risk reporting available to
organizations may present an entirely new mechanism participants and regulators, embedded in the platform’s
for the organization of capital and commercial information architectures; and perhaps some form of
activity. Yet the structuring of these vehicles—with overarching liability allocation framework, possibly
regard to risk management, minority protections, comprising strict liability principles paid from a pool
and transparency—remains an area for research established by participants and supported by insurance
and evolving practice. Second: there are concerns and liability limitations.
that the lack of a single point of accountability in a The alternative position is that—at least in the
blockchain or DLT platform makes that platform an short term—an accountable intermediary will be
unincorporated joint venture in which all participants required. One option is that industry foundations,
are jointly and severally liable for outcomes. similar to those that exist for key open source
This is partly reflected, for example, in the French software and content licenses, can facilitate the
GDPR decision discussed earlier. While, as with the transition to more comprehensive decentralization.
French decision, courts may ultimately limit this Another option is that a private sector technology
exposure to active participants and contributors, this company takes responsibility for the provision of
will not be the argument made by plaintiffs’ counsel. the blockchain system (some of which might be
It is possible that some combination of a strict liability provided in a permissionless way) in the same way
regime, together with statutory liability limitations and that private companies provide open source software.
support of an appropriate insurance product, will be This option may defeat the entire purpose of using
required. However, as in some public permissionless a decentralized blockchain system, as it effectively
systems, this approach may be problematic when centralizes the platform and requires users to trust
identity is not apparent, making apportioning that the provider is acting honestly (and will likely
liability difficult. This is yet another reason why we require that they pay a fee for the provision of the
view entirely pseudonymous systems as unlikely to system). A partially, but perhaps more effectively,
be acceptable to regulators, at least in regulated or decentralized model may include a consortium of
sensitive settings. private sector providers who share responsibility,
A number of recent articles suggest that development cost, and allocation of liability.
of significant, impactful blockchain applications
remains several years away. We do not believe this CONCLUSION
to be the case. At least for permissioned, governed
It is clear there are a number of important risk
systems, the regulatory and governance principles
management concerns for any organization wishing to
allowing public and private players to implement and
adopt blockchain technology. However, we have seen
operate these principles, on a risk assessed basis, are
many of these challenges before in the adoption of the
in place.
Internet generally, as well as other technologies such
The more significant concern is that the continued as cloud computing. The key is for the organization
relevance of these principles may deter realization to truly understand the risks inherent in the system
of the full range of opportunities inherent in open, and to ensure that these are adequately managed and
trustless systems. Our discussion suggests that mitigated where necessary. The critical remaining
the application of these frameworks effectively issue is that the structure of contractual frameworks
requires a point of accountability for governance and associated regulation was not designed for the
and liability, or in the alternative, some measure decentralized data world of blockchain. In particular,
of joint and several liability by all participants. understanding who is accountable and legally
More radical decentralization may require more responsible is a major challenge. It is clear to us that the
interesting “compliance by design” elements, such as adoption of the technology would be treated like any
digital identifiers and ultimate beneficial ownership other form of outsourcing. For those wishing to adopt

74
this new technology, there are three potential models to Three. Public blockchain systems where an
consider: organization takes on the responsibility and liability
One. Private or permissioned models where a single for running the system. This could be through open
party or group of parties takes responsibility for source systems such as Hyperledger, which has a core
operating the system. This is the easiest path and framework in place and the ability for organizations
would be no different from existing outsourcing/cloud to alter the network according to their needs, grant
arrangements. A node controlled by a regulator could permissions to those who need it, and keep out those
also be included to act as a neutral party. who don’t. 228

Two. Public blockchain systems where there is a clear It will likely be difficult for any organization
contractual framework between the participants—one that has to ensure effective risk management to
which reflects a more “joint venture” approach and consider a purely permissionless blockchain system
which looks to allocate liability and accountability to without some additional protections. Of course,
the parties. This could be accomplished effectively by a not all organizations have the strict requirements of
kind of end-user license agreement that conditions use financial services companies and other organizations
of the public platform on adherence; or perhaps even in highly regulated sectors. Regardless of the
something that feels like an open-ended fund, where model adopted by those seeking to use blockchain,
anyone can join but there is a clear legal structure it is important that regulators remain flexible in
and risk allocation. In general, it would seem that this their approach to this emerging technology—and
model would have to be implemented on the inception avoid viewing it through a lens designed for more
of the system. traditional, centralized platforms. n

75
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54 Readling, Kristofer, and Justin Schardin. 2016. “Why Blockchain Could Bolster Anti-Money Laundering Efforts.” Bipartisan Policy Center.
June 2. https://bipartisanpolicy.org/blog/blockchain-anti-money-laundering/
55 Financial Conduct Authority. 2015. “Regulatory Sandbox.” https://www.fca.org.uk/publication/research/regulatory-sandbox.pdf.
56 Readling, Kristofer, and Justin Schardin. 2016. “Why Blockchain Could Bolster Anti-Money Laundering Efforts.” Bipartisan Policy Center.
June 2. https://bipartisanpolicy.org/blog/blockchain-anti-money-laundering/
57 Williams, Robert Crane. 2017. “Prospects for Blockchain-Based Settlement Frameworks as a Resolution to the Threat of De-risking to
Caribbean Financial Systems.” United Nations Economic Commission for Latin America and the Caribbean.
58 Cantillon, Seamus. 2016. “Blockchain and Identity: Revolutionising KYC for Financial Institutions.” Marino Software Insights, November 3.
https://medium.com/marino-software/blockchain-and-identity-revolutionising-kyc-for-financial-institutions-96f4bd8e508f.
59 Olsen, Thomas, Ford Frank, Ott John and Jennifer Zeng. 2017. “Blockchain in Financial Markets: How to Gain an Edge.” Bain & Company,
February 9. http://www.bain.com/publications/articles/blockchain-in-financial-markets-how-to-gain-an-edge.aspx.
60 Commonwealth Bank of Australia. 2016. “Commonwealth Bank, Wells Fargo and Brighann Cotton Pioneer Landmark Blockchain
Trade Transaction.” Media Release, October 24. https://www.commbank.com.au/guidance/newsroom/CBA-Wells-Fargo-blockchain-
experiment-201610.html.
61 Ibid.
62 De Meijer, Carlo R.W. 2017. “Blockchain: Accelerated Activity in Trade Finance.” Finextra, January 26. https://www.finextra.com/
blogposting/13593/blockchain-accelerated-activity-in-trade-finance.

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63 Kastelein, Richard. 2017. “Blockchain Could be a New Operating System for the Planet Says Jeremy Wilson, Vice Chairman of Barclays
Corporate Banking.” Blockchain News, February 20. http://www.the-blockchain.com/2017/02/20/blockchain-new-operating-system-planet-
says-jeremy-wilson-vice-chairman-barclays-corporate-banking.
64 Williams-Grut, Thomas. 2017. “Deutsche Bank, HSBC and Five Other Big Banks are Collaborating on a Blockchain Project.” Business
Insider, January 16. http://www.businessinsider.com/deutsche-bank-hsbc-kbc-natixis-rabobank-socit-gnrale-and-unicredit-work-on-digital-
trade-chain-dtc-2017-1?r=UK&IR=T.
65 Ibid.
66 Iansiti, Marco, and Karim R. Lakhani. 2017. “The Truth about Blockchain.” Harvard Business Review. January. https://hbr.org/2017/01/the-
truth-about-blockchain.
67 Horowitz, Keith et al. 2016. “US Digital Banking: Could the Bitcoin Blockchain Disrupt Payments.” Citi Research Report.
68 Vanham, Peter. 2016. “Blockchain, Will Become ‘Beating Heart’ of the Global Financial System.” World Economic Forum.
69 Niforos, Marina. 2017. “Blockchain in Development—Part I: A New Mechanism of ‘Trust’?” EM Compass Note 40, IFC; “Blockchain in
Development—Part II: How It Can Impact Emerging Markets.” EM Compass Note 41, IFC.
70 Catalini, Christian and Joshua S. Gans. 2016. “Some Simple Economics of the Blockchain.” MIT Sloan Research Paper No. 5191-16.
71 Helms, Kevin. 2017. “India’s Supreme Court Seeks Answers as Bitcoin Legalization Focus Turns to Taxation.” Bitcoin, July 14. https://news.
bitcoin.com/india-supreme-court-bitcoin-legalization-taxation.
72 Mackie, Chuck. 2016. “Blockchain on the Brink: Report from the DTCC Block-chain Conference.” Maven Wave, April 12.
https://www.mavenwave.com/news-and-views/blockchain-on-the-brink-report-from-the-dtcc-blockchain-conference.
73 McKinsey. 2017. “Blockchain Technology in the Insurance Sector—Quarterly Meeting of the Federal Advisory Committee on Insurance
(FACI).” McKinsey & Company Report.
74 CB Insights. 2017. “Banking is Only the Start: 27 Big Industries Where Blockchain Could Be Used.” CB Insights Research Briefs, February 14.
http://fintechranking.com/2017/02/14/banking-is-only-the-start-27-big-industries-where-blockchain-could-be-used.
75 R3 has contested their labeling as a Blockchain based platform, associating the latter with open, cryptocurrency based models.
76 CB Insights. 2017. “The March of Financial Services Giants into Bitcoin and Blockchain Startups in One Chart.” CB Insights Research Briefs,
February 19. www.cbinsights.com/research/financial-services-corporate-blockchain-investments.
77 World Bank. 2016. “World Bank Financial Inclusion—Overview.” http://www.worldbank.org/en/topic/financialinclusion/overview.
78 Starnes, Susan, Michael Kurdyla, and Alex J. Alexander. 2016. “De-Risking by Banks in Emerging Markets - Effects and Responses for
Trade.” EM Compass Note 24, IFC.
79 International Chamber of Commerce. 2016. “Rethinking Trade and Finance.” ICC Report.
80 Yurcan, Bryan. 2016. “How Blockchain Fits into the Future of Digital Identity.” American Banker, April 8. https://www.americanbanker.com/news.
81 International Chamber of Commerce. 2016.“Rethinking Trade and Finance.” ICC Report.
82 Parker, Luke. 2016. “Bank of America Merrill Lynch, HSBC, and Infocomm Development Authority of Singapore (iDA) Develop a Blockchain
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ida-develop-a-blockchain-prototype-solution-for-trade-finance.
83 Deloitte. 2016. “Over the Horizon: Blockchain and the Future of Financial Infrastructure.” https://www2.deloitte.com/content/dam/Deloitte/
global/Documents/Financial-Services/gx-fsi-blockchain-deloitte-summary.pdf.
84 Starnes, Susan, Michael Kurdyla, and Alex J. Alexander. 2016. “De-Risking by Banks in Emerging Markets - Effects and Responses for
Trade.” EM Compass Note 24, IFC.
85 International Chamber of Commerce. 2016. “Rethinking Trade and Finance.” ICC Report.
86 Di Caprio, Alisa, Steven Beck, Ying Yao, and Fahad Khan. 2016. “2016 Trade Finance Gaps, Growth, and Jobs Survey.” ADB Briefs No. 64,
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87 PYMNTS. 2017. “Standard Chartered Pilots Blockchain Trade Finance Tool.” PYMNTS.com, April 3. https://www.pymnts.com/news/b2b-
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88 World Bank. 2016. “Migration and Remittances Factbook 2016, Third Edition.” World Bank Group.
89 Pitchbook. 2016. “Can Blockchain Live Up to the Hype?” Press Release, October 4.
90 “Distributed Ledger Technology (DLT) and Blockchain.” FinTech Note Series, forthcoming publication from World Bank Group.
91 Ramachandran, Vijaya. 2016. “Mitigating the Effects of De-risking in Emerging Markets to Preserve Remittance Flows.” EM Compass Note
22, IFC.
92 Hilleman, Garrick, and Michel Rauchs. 2017. “Global Cryptocurrency Benchmarking Study.” Cambridge Centre for Alternative Finance,
University of Cambridge.
93 CB Insights, 2017. “Blockchain Startup Investment Bounces Back.” CB Insights Research Briefs, April 28. https://www.cbinsights.com/
research/blockchain-bitcoin-startup-funding.
94 Kendall, Jake, Robert Schiff, and Emmanuel Smadja, 2014. “Sub-Saharan Africa: A Major Potential Revenue Opportunity for Digital
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95 Lielacher, Alexander. 2017. “The State of Bitcoin in South Africa,” BTCManager, April 3. https://btcmanager.com/the-state-of-bitcoin-in-kenya.
96 World Bank. 2017. “Global Findex Data: Latin America & Caribbean.” World Bank Group.
97 Williams, Robert Crane. 2017. “Prospects for Blockchain-based Settlement Frame-Works as a Resolution to the Threat of De-risking to
Caribbean Financial Systems.” United Nations, Economic Commission for Latin America and the Caribbean (ECLAC).
98 Niforos, Marina, 2017. “Blockchain in Development—Part II: How It Can Impact Emerging Markets”, EM Compass Note 41, IFC.
99 Alexander, Alex J., Lin Shi, and Bensam Solomon. “How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective”, EM
Compass Note 34, IFC; Saal, Matthew, Susan Starnes, and Thomas Rehermann. “Digital Financial Services: Challenges and Opportunities for
Emerging Market Banks”, EM Compass Note 42, IFC.
100 CB Insights. 2017. “Global Ledger: Mapping Bitcoin and Blockchain Startups Around the World.” CB Insights Research Briefs, March 6.
https://www.cbinsights.com/research/bitcoin-blockchain-startup-global-map.
101 Wong, Matthew. 2017. “Trends in Blockchain and Digital Currency.” CB Insights Research Briefing. https://www.cbinsights.com/research-
webinar-blockchain-trends.
102 Oyedele, Akin. 2017. “One Country Dominates the Global Bitcoin Market.” Business Insider, January 18. http://www.businessinsider.com/
bitcoin-trading-china-yuan-remnibi-2017-1.
103 In 2016, $5.5 trillion in digital payments were made in China, fifty times more than the United States in the same year ($112 billion):
http://wap.chinadaily.com.cn/2017-05/11/content_29295024.htm.
104 Ngai, Joseph Luc, John Qu, and Nicole Zhou, 2016. “What’s Next for China’s Booming Fintech Sector?” McKinsey & Company, July.
https://www.mckinsey.com/industries/financial-services/our-insights/whats-next-for-chinas-booming-fintech-sector.
105 Ngai, Joseph Luc et al. 2016. “Disruption and connection: Cracking the Myths of China Internet Finance Innovation.” McKinsey Greater
China FIG Practice, McKinsey & Company.
106 Higgins, Stan. 2017. “Internet Giant Tencent is Building a Blockchain Platform,” Coindesk, April 25. https://www.coindesk.com/internet-
giant-tencent-blockchain-platform.
107 CB Insights. 2017. “Global Ledger: Mapping Bitcoin and Blockchain Startups Around the World.” CB Insights Research Briefs, March 6.
https://www.cbinsights.com/research/bitcoin-blockchain-startup-global-map.
108 Mittal, Sachin, and James Lloyd. 2016. “The Rise of Fintech in China—Redefining Financial Services.” DBS Bank and EY.
109 Kastelein, Richard. 2017. “China Poised to Dominate Fintech and Blockchain Markets in 2017.” Blockchain News, January 10.
http://www.the-blockchain.com/2017/01/10/china-poised-dominate-fintech-blockchain-markets-2017.
110 http://www.tradefacilitation.org.
111 GVCs are Coasian constructs that exist only if the incremental benefit from improved complexity (GVC length) is higher than the increased
transaction cost. This means that (i) the total accumulated trade cost along the GVC is bounded by the GVC performance in terms of
efficiency but also that, (ii) for a given structure of efficiency gains, the length of the GVC is negatively correlated to trade costs. Gg2, 2017.
Accumulating Trade Costs and Competitiveness in Global Value Chains. https://www.wto.org/english/res_e/reser_e/ersd201702_e.pdf.
112 Lewis, Logan, and Ryan Monarch. 2016. “Causes of Slowdown in Global Trade.” International Finance Discussion Paper, Federal Reserve.
113 Lierow, Michael, Cornelius Herzog, and Philipp Oest. 2017. “Blockchain: The Backbone of Digital Supply Chains.” Oliver Wyman.
114 Korpela, Kari, Jukka Hallikas, and Tomi Dahlberg. 2017. “Digital Supply Chains Transformation toward Blockchain Integration.”
Lappeenranta U. of Technology and U. of Turku.
115 OECD, WTO and World Bank Group. 2014. “Global Value Chains: Challenges, Opportunities and Implications for Policy.” G20 Australia.
116 FAOStat in 2011, based on a global workforce of 3.3 billion people.
117 Sen, Astiava, and Barry Lee. 2016. “Sustainable and Inclusive Supply Chains are a Key Business Driver for Food Industry.” India Food
Report. http://www.ifc.org/wps/wcm/connect/30e5f0804b6540359967dd08bc54e20b/The+India+Food+Report+2016_IFC+Chapter_web_.
pdf?MOD=AJPERES.
118 Fintech Australia. 2016. “Full Profile’s AgriDigital Successfully Executes World’s First Settlement of an Agricultural Commodity on a
Blockchain.” FinTech Australia Newsroom, December 9. https://fintechaustralia.org.au/full-profiles-agridigital-successfully-executes-worlds-
first-settlement-of-an-agricultural-commodity-on-a-blockchain.
119 Niforos, Marina. 2017. “Blockchain in Financial Services in Emerging Markets Part I: Current Trends.” EM Compass Note 43, IFC.
120 Allison, Ian. 2016. “Skuchain: Here’s How Blockchain will Global Trade a Trillion Dollars.” International Business Times, February 8.
http://www.ibtimes.co.uk/skuchain-heres-how-blockchain-will-save-global-trade-trillion-dollars-1540618.
121 Parker, Luke. 2017. “The Seam and IBM Launch the First Cotton Industry Blockchain Consortium.” Brave New Coin, January 9.
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122 Bermingham, Finbarr. 2017. “The Big Sell: Blockchain for Track and Trace”, Global Trade Review, May 7. https://www.gtreview.com/
magazine/volume-15issue-6/big-sell-blockchain-track-trace.
123 The OECD defines environmental goods as “activities which produce goods and services to measure, prevent, limit, or minimize or
correct environmental damage to water, air and soil, as well as problems related to waste, noise and ecosystems.” See: Sugathan, Mahesh.
2004.“Environmental Goods and Services Negotiations: Challenges and Opportunities.” WTO Workshop on Environmental Goods - Para 31
(iii) of the Doha Development Agenda, International Centre for Trade and Sustainable Development, October 11.
124 International Trade Administration. 2016. “Top Markets Report Environmental Technologies.” US Department of Commerce.

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125 OECD, WTO and World Bank Group. 2014. “Global Value Chains: Challenges, Opportunities and Implications for Policy.” G20 Australia.
126 Walker, Decker et al. 2016. “Lessons from the Frontlines of the AgTech Revolution.” BCG and AgFunder.
127 Strom, Stephanie. 2016. “Chipotle Food-Safety Issues Drag Down Profits.” New York Times, February 2. https://www.nytimes.com/2016/
02/03/business/chipotle-food-safety-illness-investigation-earnings.html.
128 Wass, Sanne. 2017. “Food Companies Unite to Advance Blockchain for Supply Chain Traceability.” Global Trade Review, August 22.
https://www.gtreview.com/news/fintech/food-companies-unite-to-advance-blockchain-for-supply-chain-traceability.
129 Springer, Jon. 2017. “Walmart: Blockchain Tech a Boon to Food Safety.” Supermarket News, June 1. http://www.supermarketnews.com/food-
safety/walmart-blockchain-tech-boon-food-safety.
130 Dickson, Ben. 2016. “Blockchain Has the Potential to Revolutionize the Supply Chain.” TechCrunch, November 24. https://techcrunch.com/
2016/11/24/blockchain-has-the-potential-to-revolutionize-the-supply-chain.
131 Sorvino, Chloe. 2017. “The 25 Most Innovative Ag-Tech Startups.” Forbes, June 28. https://www.forbes.com/sites/maggiemcgrath/2017/06/28/
the-25-most-innovative-ag-tech-startups/#49391bec4883.
132 CB Insights. 2017. “Banking is Just the Beginning: 30 Big Industries Blockchain Could Transform.” CB Insights Research Briefs, August 25.
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133 Mackey, Tim K., and Gaurvika Nayyar. 2017. “A Review of Existing and Emerging Digital Technologies to Combat the Global Trade in Fake
Medicine.” Expert Opinion on Drug Safety, 16(5): 587-602.
134 Bajpai, Prableen. 2016. “Blockchain Technology Can Help Reduce Flow of Counterfeit Drug.” Nasdaq, December 14. http://www.nasdaq.com/
article/blockchain-technology-can-help-reduce-flow-of-counterfeit-drugs-cm721230.
135 European Union Intellectual Property Office (2016) estimates fake medicines cost the European Union (EU) pharmaceutical sector €10.2
billion each year, resulting in 37,700 jobs directly lost across the pharmaceutical sector in the EU alone. See European Union Intellectual
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136 Rogers, Claire. 2016. “The Numbers Don’t Lie: The $300 Billion Business Case for Banking Women-Owned SMEs”, Women’s World
Banking, February 17. https://www.womensworldbanking.org/news/blog/the-numbers-dont-lie-the-300-billion-business-case-for-banking-
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137 World Bank Group. 2015. “Women, Business and the Law 2016; Getting to Equal.” http://wbl.worldbank.org/~/media/WBG/WBL/
Documents/Reports/2016/Women-Business-and-the-Law-2016.pdf?la=en.
138 Doss, Cheryl. 2011. “The Role of Women in Agriculture.” ESA Working Paper No. 11-02, The Food and Agriculture Organization of the
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139 IFC. 2016. “The Business Case for Women’s Employment in Agribusiness.” World Bank Group.
140 World Bank Group. 2015. “Women, Business and the Law 2016; Getting to Equal.”
141 IFC. 2016. “The Business Case for Women’s Employment in Agribusiness.” World Bank Group.
142 Casey, Michael J., and Pindar Wong. 2017. “Global Supply Chains are About to Get Better, Thanks to Blockchain.” Harvard Business Review,
March 13. https://hbr.org/2017/03/global-supply-chains-are-about-to-get-better-thanks-to-blockchain.
143 Hackius, Niels, and Moritz Petersen. 2017. “Blockchain in Logistics and Supply Chain: Trick or Treat?” Hamburg University of Technology
and Kühne Logistics University.
144 IFC. 2018. “How Technology Creates Markets – Trends and Examples for Private Investors in Emerging Markets.” IFC, April 2018.
145 Finck, Michele. 2017. “Blockchain Regulation.” Max Planck Institute for Innovation and Competition Research Paper No. 17-13.
146 The World Bank. 2017. “Africa Leapfrogging Through Innovation: From Constraints to Investment Opportunities.”
147 IFC. 2018.
148 Paech, Philipp. 2017. “The Governance of Blockchain financial Networks.” Modern Law Review, LSE Law, Economy and Society Working
Papers 14/2017.
149 Finck, Michele. 2017.
150 Paech Philipp. 2017.
151 Senden. Linda. 2005. “Soft Law, Self-Regulation and Co-Regulation in European Law: Where do they Meet?” Electronic Journal of
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152 Abbott, K., and D. Snidal. 2000. “Hard and Soft Law in International Governance.” International Organization 54 (3), 421-456.
153 Lehdonvirta, Vili et al. 2016. “Distributed Ledger Technology, Beyond Blockchain. Chapter 3: Governance and Regulation.”, UK Government
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154 Paech Philipp. 2017.
155 Fuke, Daniel and Taisha Lewis. 2018. “Regulatory Net Tightening on the ‘Wild West’ of the Blockchain and Cryptocurrency Industry.”
Lexology.
156 Walsh, Angela. 2017. “The Path of the Blockchain Lexicon (and the Law).” Review of Banking and Financial Law.
157 Massari, Jai R. et al. 2018. “The Fragmented Regulatory Landscape for Digital Tokens.” Harvard Law School Forum on Corporate
Governance and Financial Regulation. March 26th.
158 Lovells, Hogan. 2018. “Blockchain: Facing up to the Regulatory Challenges in Multiple Jurisdictions.” Lexology, Jan. 19, 2018.

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159 Balkhe, Conrad and Marija Pecar. 2016. “Unblocking the Blockchain: Regulating Distributed Ledger Technology.” The Journal on the Law of
Investment and Risk Management Products 36 (10).
160 Woods, Paul. 2018. “Blockchain and Distributed Ledger Technology Loan Syndications and Trading Association - Part Two: Smart
Contracts.” The Loan Syndications and Trading Association.
161 Woods, Paul. 2018.
162 Ozelli, Selva. 2018. “EU Amends AML Laws for Crypto-trading as US Ponders.” CoinTelegraph, Jan. 8.
163 Patrick, Gabrielle and Anurag Bana. 2017. “Rule of Law versus Rule of Code: A Blockchain-Driven Legal World.” IBA Legal policy and
Research Unit Legal Paper.
164 European Securities and Markets Authority. 2017. “The Distributed Ledger Technology Applied to Securities Markets.”
165 Norton, Rose. 2016. “Unlocking the Blockchain: A Global Legal and Regulatory Guide.” Chapter 1.
166 Legal tender is any official medium of payment recognized by law that can be used to extinguish a public or private debt or meet a financial
obligation. The national currency is legal tender in practically every country. A creditor is obligated to accept legal tender toward repayment of
a debt. Legal tender can only be issued by the national body that is authorized to do so.
167 Bahlke, Conrad G. and Marija Pecar. 2016. “Unblocking the Blockchain: Regulating Distributed Ledger Technology.” The Journal on the Law
of Investment and Risk Management Products 36 (10).
168 https://www.eublockchainforum.eu/
169 Blemus, Stephane. 2017. “Law and Blockchain: A Legal Perspective on Current Regulatory Trends Worldwide.” Revue Trimestrielle de Droit
Financier (Corporate Finance and Capital Markets Law Review) RTDF No. 4-2017.
170 European Securities and Markets Authority. 2017. “The Distributed Ledger Technology Applied to Securities Markets.”
171 Statement of SEC Chairman Jay Clayton, Testimony on Virtual Currencies: The role of the SEC and the CFTC, Committee on Banking,
Housing and Urban affairs, United States Senate, February 6, 2018.
172 Clayton, Jay. 2018. “Testimony on ‘Oversight of the U.S. Securities and Exchange Commission’ Before the Committee on Financial Services
U.S. House of Representatives”. June 2018.
173 Clayton, Jay. 2017. “Statement on Cryptocurrencies and Initial Coin Offerings” SEC Public Statement. December 11, 2017.
174 Patrick, Gabrielle and Anurag Bana. 2017.
175 Clayton, Jay. 2018.
176 Anatol Antonovici. 2017. “Monetary Authority of Singapore Brings Encourages Blockchain and Fintech Projects.” CryptoVest.
177 Sujha Sundararajan. 2017. “Singapore’s Central Bank Outlines when ICOs are and aren’t Securities.”
178 Gartner. 2017. “Forecast: Blockchain Business Value, Worldwide, 2017-2030.”
179 Buterin, Vitalik. 2015. “On Public and Private Blockchain”. August 6, 2015. https://blog.ethereum.org/2015/08/07/on-public-and-private-
blockchains/
180 Peter Gratzke. David Schatsky and Eric Piscini. 2017. “Banding Together for Blockchain: Does it Make Sense for Your Company to Join a
Consortium?”. August 16, 2017. https://www2.deloitte.com/insights/us/en/focus/signals-for-strategists/emergence-of-blockchain-consortia.
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181 Acheson, Noelle. 2017. “The Next Phase of the Blockchain Consortium is Here.” CoinDesk, April 24.
182 Loan Syndications and Trading Association. 2018. “Blockchain and Distributed Ledger Technology (DLT) – Part Three Application of
Blockchain Technology to the Loan Market.”
183 Yermack, David. 2017. “Corporate Governance and Blockchains.” Review of Finance.
184 Finck, Michele. 2017. The World Bank. 2017. “Africa Leapfrogging Through Innovation: From Constraints to Investment Opportunities.”
185 Finck, Michele. 2017.
186 https://ec.europa.eu/digital-single-market/en/news/european-countries-join-blockchain-partnership
187 Agarwal, Khushboo. 2018. “Playing in the Regulatory Sandbox.”
188 European Commission. 2018. “European Countries Join Blockchain Partnership.”
189 Lafarre, Anne and Christoph van der Elst. 2018. “Blockchain Technology for Corporate Governance and Shareholder Activism.” ECGI
Working Paper No. 390/2018.
190 David Adlerstein. 2017. “The ICO Governance Deficit.” CoinDesk.
191 Filippi, Primavera dei and Samer Hassan. 2018. “Blockchain Technology as a Regulatory Technology: From Code is Law to Law is Code.”
CERSA/CNRS, Universidad Complutense de Madrid, Harvard University.
192 Yermack, David. 2017. “Corporate Governance and Blockchains.” Review of Finance, 2017.
193 Fenwick, Mark, Wulf A. Kaal and Eric P.M. Vermeulen. 2017. “How to Organize Now for Success Tomorrow: The Unmediated and Tech-
Driven Corporate Governance of Today’s Winning Companies”. Lex Research Topics in Corporate Law & Economics Working Paper No.
2017-1.
194 United Nations. “The Paris Agreement.” Accessed September 18, 2018. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-
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195 World Economic Forum (WEF). 2017. “The Future of Electricity—New Technologies Transforming the Grid Edge.”
196 Meltzer, Joshua P. 2018. “Blending Climate Funds to Finance Low-Carbon, Climate-Resilient Infrastructure.” Global Economy &
Development Working Paper 120, The Brookings Institution; see also: United Nations Framework Conference on Climate Change (UNFCCC).
2015. “Conference of the Parties—Twenty-first session, Paris, 30 November to 11 December 2015. Item 4(a) of the Provisional Agenda.
Durban Platform for Enhanced Action (decision 1/CP.17)—Report of the Ad Hoc Working Group on the Durban Platform for Enhanced
Action. Synthesis Report on the Aggregate Effect of the Intended Nationally Determined Contributions. Note by the secretariat.”
197 This includes various “smart” Internet of Things (IoT)-enabled devices that can be programmed to respond to various situations that arise in a
given electric grid.
198 Bi-directional flows of electricity and associated communications to/from an electric grid and grid assets (e.g., electric vehicles, batteries, and
smart devices) are an important feature of promoting and managing distributed energy resources. Utilities will have to make investments to
implement systems that can handle these bi-directional flows. See also: Sam Hartnett, et al. 2017. “The Decentralized Autonomous Area Agent
(D3A) Market Model—A Blockchain-based Transactive Energy Implementation Framework for the 21st Century Grid.” Concept Brief, Energy
Web Foundation, 2017.
199 A blockchain is a decentralized database of transactions between two or more parties that are split into blocks that are validated by the entire
network through encryption and added to the chain of prior transactions, where copies of the database are replicated across multiple locations
(or nodes). Each block contains key details about the transactions, and each block is added as long as the block is validated by the consensus
protocol used by the network. See also Niforos, Marina. 2017. “Blockchain in Development—Part II: How It Can Impact Emerging Markets.”
EM Compass Note 41, IFC.
200 Marina Niforos. 2017. “Blockchain in Development—Part I: A New Mechanism of ‘Trust’?” EM Compass Note 40, IFC; see also, Paul
Nelson. 2018. “Primer on Blockchain—How to Assess the Relevance of Distributed Ledger Technology to International Development”,
USAID, 2018. https://www.usaid.gov/sites/default/files/documents/15396/USAID-Primer-Blockchain.pdf.
201 World Economic Forum. 2018. “Blockchain Beyond the Hype—A Practical Framework for Business Leaders.” White Paper, WEF, April 2018.
https://www.weforum.org/whitepapers/blockchain-beyond-the-hype; see also Graham, Wesley. 2018. “Building it Better: A Simple Guide
to Blockchain Use Cases.” Blockchain at Berkeley blog, Feb 5, 2018. https://blockchainatberkeley.blog/building-it-better-a-simple-guide-to-
blockchain-use-cases-de494a8f5b60
202 Henderson, Kimberley, Emily Knoll and Matt Rogers. 2018. “What Every Utility CEO Should Know About Blockchain.” McKinsey,
mckinsey.com, March 2018.
203 In the case of energy, a prosumer is an individual that not only consumes energy, but also produces it. Christopher, Daron. 2017. “Consumer
vs Prosumer: What’s the Difference?” May 11, 2017, US Department of Energy. https://www.energy.gov/eere/articles/consumer-vs-prosumer-
whats-difference
204 Goldenberg, Cara, Mark Dyson and Harry Masters. 2018. “Demand Flexibility—The Key to Enabling A Low-Cost, Low-Carbon Grid.”
Insight Brief, Rocky Mountain Institute.
205 Miller, Douglas and Claire Henly. 2017. “Blockchain Is Reimagining the Rules of the Game in the Energy Sector.” Rocky Mountain Institute,
rmi.org, August 28, 2017. https://rmi.org/news/blockchain-reimagining-rules-game-energy-sector/.
206 Boersma, Thomas and Leoncio Montemayor. 2017. “Report: Comprehensive Guide of Companies Involved in Blockchain & Energy.”
Solarplaza.
207 Bloomberg NEF. 2018. “New Energy Outlook 2018—BNEF’s Annual Long-term Economic Analysis of the World’s Power Sector Out to
2050.” https://about.bnef.com/new-energy-outlook/; see also International Renewable Energy Agency (IRENA). 2018. “Global Renewable
Generation Continues its Strong Growth, New IRENA Capacity Data Shows.” http://www.irena.org/newsroom/pressreleases/2018/Apr/
Global-Renewable-Generation-Continues-its-Strong-Growth-New-IRENA-Capacity-Data-Shows.
208 See for example “The Definitive Guide to Global Energy Attribute Certificates for Commercial, Industrial, and Institutional Buyers.” Renewal
Choice Energy. https://3blmedia.com/sites/www.3blmedia.com/files/other/EAC.Definitive_Guide_-_ESS.pdf.
209 These data-rich certificates describe how, where, when, and who generated a given MWh. Any entity wanting to make a credible renewable
energy claim for regulatory or voluntary purposes must procure these certificates, either bundled with, or separate from, their physical
electricity purchases. As such, these certificates have their own markets, and serve as a de-facto consumer-driven subsidy for renewable energy
because they provide an additional revenue stream for renewable energy generators.
210 Certificate of origin markets rely on third parties, outdated technologies, and multi-step processes that vary across geographies to indicate
the proof of renewable generation. The resulting administrative costs, transaction costs, and other pain points, as well as the complexities
of proving renewable energy generation or purchases, frustrate the current (mostly large) market participants, and discourage others from
entering the market. For their renewable energy trades, certificate of origin systems should make it as easy as possible for market participants
to obtain proof for their voluntary- or compliance-reporting requirements, which is based on secure, reliable generation data. The user
experience associated with certificate-of-origin systems should also become more standard across markets to streamline investments for the
multinational renewable energy developers and buyers who are enabling renewable energy developments across the globe.
211 Meltzer, Joshua P. 2018. “Blending Climate Funds to Finance Low-Carbon, Climate-Resilient Infrastructure.” Global Economy &
Development Working Paper 120, The Brookings Institution; see also: United Nations Framework Conference on Climate Change (UNFCCC).
2015. “Conference of the Parties—Twenty-first session, Paris, 30 November to 11 December 2015. Item 4(a) of the Provisional Agenda.
Durban Platform for Enhanced Action (decision 1/CP.17)—Report of the Ad Hoc Working Group on the Durban Platform for Enhanced
Action. Synthesis Report on the Aggregate Effect of the Intended Nationally Determined Contributions. Note by the secretariat.”
212 “Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets.” 2018. World Bank Group; see also Chen, Delton.
2018. “Utility of the Blockchain for Climate Mitigation.” JBBA, Vol 1, Issue 1, April 26, 2018. https://jbba.scholasticahq.com/article/3577-
utility-of-the-blockchain-for-climate-mitigation.
213 See Energy Web Blockchain: https://energyweb.org/blockchain/; see also Miller, Douglas and Jens Griesing. 2018. “Engie, Microsoft, SP
Group, DBS Bank, TWL, E.ON, and Sonnen Test the First Version of EW Origin Blockchain App.” Energyweb.org, April 20, 2018. https://
energyweb.org/2018/04/20/engie-microsoft-sp-group-dbs-bank-twl-e-on-and-sonnen-test-the-first-version-of-ew-origin-blockchain-app/; EWF

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 will make the full open-source EW Origin toolkit publicly available for reference and use as a template by other REC, GO, and I-REC trading
and tracking systems so that application developers can build and deploy their own modernized technology services. In the context of emerging
markets, which generally do not have robust renewable energy tracking systems in place, EW Origin can be used to build blockchain-based
applications that reduce investors’ administrative burden for tracking the impacts of their wind, solar, and other renewable energy investments.
The regulators who oversee renewable energy markets can adopt and modify open-source blockchain applications such as EW Origin to deploy
modern trading and tracking systems for certificates of origin that meet their markets’ needs.
214 Krämer, Kai and Sam Hartnett. 2018. “When it Comes to Throughput, Transactions Per Second is the Wrong Blockchain Metric”. energyweb.
org, May 20, 2018. https://energyweb.org/2018/05/10/when-it-comes-to-throughput-transactions-per-second-is-the-wrong-blockchain-metric/.
215 Yaga, Dylan, Peter Mell, Nik Roby, and Karen Scarfone. 2018. “Blockchain Technology Overview.” National Institute of Standards and
Technology.
216 Deloitte. 2016. “Blockchain Technology – Speeding Up and Simplifying Cross-Border Payments.” Also: Arnold, Martin. 2018. “Ripple and
Swift Slug It Out Over Cross-Border Payments.” Financial Times. June 5.
217 One example is China.
218 Many EU jurisdictions have issued warnings on the use of cryptocurrency but continue to apply existing legal principles.
219 Gibraltar and Malta are examples of countries advocating cryptocurrency. See Gibraltar Finance. 2018. “Token Regulation: Proposals for
the Regulation of token Sales, Secondary token Market Platforms, and Investment Services Relating to Tokens.” Parliament of Malta, Virtual
Financial Assets Act 2018.
220 Figures as of 8 November 2018. https://www.coinschedule.com/stats.html
221 The General Data Protection Regulation (EU) 2016/678.
222 Bodil Lindqvist v Aklagarkammaren i Jonkoping, Case C-101/01.
223 See Goodin, Dan. 2018. “A ‘tamper-proof’ currency wallet just got backdoored by a 15-year-old”, arstechnica.com, March 31, 2018. https://
arstechnica.com/information-technology/2018/03/a-tamper-proof-currency-wallet-just-got-trivially-backdoored-by-a-15-year-old/.
224 https://en.wikipedia.org/wiki/The_DAO_(organization).
225 Google Spain SL, Google Inc. v Agencia Espanola de Proteccion de Datos (AEPD), Mario Costeja Gonzalez, Case C-131/12.
226 Indian Government. 2016. “Equalization Levy Rules.”
227 CNIL. 2018. “La Blockchain: Quelles Solutions Pour un Usage Responsable en Présence de Données Personnelles?”
228 Corriveau, Adrianna, Deanna Vitale, and Brittany Manchisi. 2018. “Hyperledger Fabric: What You Need to Know about the Framework that
Powers IBM Blockchain.” IBM Blog.

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About IFC and World Bank Group work on blockchain
The International Finance Corporation, or IFC—a sister organization of the World Bank and member of the World Bank
Group—is the largest global development institution focused on the private sector in emerging markets. IFC collaborates
with the Technology & Innovation Lab, which was launched by the World Bank Group’s Information and Technology
Solutions (ITS) in June 2017.
ITS provides advice and learning-by-doing guidance in a lab environment (both physical and virtual) for Bank Group
stakeholders. The ITS Technology & Innovation playbook applies design-thinking methodology, which leverages rapid
proof-of-values and prototyping to test new capabilities. This process expedites learning and understanding of the
appropriateness of emerging technologies for development.
For more information, please contact the ITS Technology & Innovation team at [email protected].
IFC
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433 U.S.A.

ifc.org/ThoughtLeadership

Contacts

MATTHEW SAAL | [email protected]
Principal Industry Specialist, Digital Finance, Financial Institutions Group, IFC

THOMAS REHERMANN | [email protected]
Senior Economist, Thought Leadership, Economics & Private Sector Development

NADINE SHAMOUNKI GHANNAM | [email protected]

Communications Lead, Economics & Private Sector Development