Can Blockchain Solve Economic Problems?

While Blockchain technology was specifically developed for the cryptocurrency system Bitcoin, it could play a crucial role in addressing challenges encountered by infrastructure-poor economies today.

The technology, which provides a decentralized ledger system that contains and distributes data in a secure, largely anonymous way, is primarily used to keep a record of financial transactions. This means it could easily be utilized in the financial and banking sector as a payments system, with traditional monetary units being replaced by cryptocurrencies. All that’s really needed is a stable internet connection, and people across the globe would be able to make transactions instantly, securely, and with no remittance, resulting in a blockchain economy grounded in a peer-to-peer system of exchange.¹

As a result, although blockchain technology has many applications in various sectors, it’s the financial services and banking industry in particular that it’s most disrupting. Because blockchain circumvents the need for a middleman to process and verify transactions as correct and valid, it would mitigate the costs involved to make and receive payments. In addition, records stored as part of a blockchain are tamper-resistant, reducing the potential for corruption. The technology also makes banking services more accessible: Whereas banks only operate at certain hours of the day, the banking applications linked to blockchain are available 24/7.

But despite blockchain technology’s various applications, does it really have the power to solve worldwide economic problems? And equally, what are the fundamental challenges that blockchain still needs to overcome?

Explore the applications of blockchain technology on the MIT Sloan School of Management Blockchain Technologies: Business Innovation and Application online short course.

Four economic problems that blockchain can address

“Technologies like blockchain don’t ensure anonymity, but with the proper understanding, they can provide privacy, security, and even freedom,” says cybersecurity expert Dr. Mashael Al-Sabah in the MIT Technology Review.²

1) The advancement of underdeveloped nations

Despite the digital revolution and subsequent growth that has been experienced in first-world countries over the past 20 years, rules and regulations regarding pollution combined with infrastructure challenges place developing nations at a severe disadvantage. For example, the World Bank Group has recognized that the lack of broadband across Africa is severely limiting the continent’s access to digital technologies critical for economic development, educational advancement, and the continuity of public services.³ Many developing countries don’t have the robust banking, internet, or electronic systems needed to benefit from global digital transformation, however adopting blockchain technology and cryptocurrency could be key to helping these nations “leapfrog” – a process that involves taking advantage of new technologies to bypass traditional stages of infrastructure development and close gaps.⁴

In societies with underdeveloped financial systems, cryptocurrencies such as Bitcoin can be greatly beneficial, negating the need for heavy investment in banking infrastructure. The potential is so great that PWC suggests that, by 2030, the technology could boost the global economy by $1.86 trillion through raising levels of tracking, tracing, and trust.⁵

2) Global trade and regulation

The Peterson Institute for International Economics defines globalization as “the growing interdependence of the world’s economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, and flows of investment, people, and information.”⁶ Over time, countries have built economic partnerships to facilitate these movements, but many challenges remain.

With 54 countries and different currencies, exchange rates, and legalities in Africa alone, cross-border transactions are difficult if not impossible. Research by the United Nations Conference on Trade and Development (UNCTAD) indicates that between 30 and 40 percent of regional, cross-border trade in Africa is informal, and is mostly run by women. Black-market money exchanges cause problems, and the female traders face many obstacles such as harassment and corruption. The fees can also be crippling. In 2018, for example, the average cost of sending $200 using mobile money was 1.7 percent of the transacted amount, yet the cost of remitting that $200 in Sub-Saharan Africa came in at a steep fee of 9.4 percent.⁷ By the fourth quarter of 2020, that fee decreased to 8.2 percent; however, the fee is 19.6 percent when sending money from South Africa to Botswana, and 14 percent when sending money to Zimbabwe, along with 16 percent when sending money to Malawi.⁸

When adopted and used correctly, blockchain and cryptocurrency can increase the speed and convenience of international transactions while cutting costs, helping level the playing field between those who can afford financial services and those who can’t. Blockchain can offer financial inclusion for traders in developing countries, allowing them to fully participate in the global economy by providing a safe, affordable solution to cross-border transactions. Globally, the technology is also driving better communication and collaboration across the financing industry and banking sector, and radically improving supply chain management.

3) Property rights and real estate

Real estate and property rights can be difficult to track in countries with developing infrastructures – data may not be backed up, transactions may be formalized with a handshake, and documents may be stolen or get lost. As a result, transparency and accountability are two major concerns in this sector.

Blockchain provides a valuable tool for determining ownership and keeping untenable property records in place. In this way, the technology also replaces the middleman, reduces fees, and helps verify information in real estate transactions.⁹

A non-fungible token (NFT) on a blockchain can contain the entire history of a property and any other information governments and municipalities would typically keep on record. “[This] token proves ownership of an asset. For example, a deed to your house is a sign of ownership to that plot of land and building,” Joseph Raczynski, technologist and futurist for Thomson Reuters, explains. “The best part about a token on the blockchain is the ability to track ownership and therefore authenticity, undeniably proving ownership.”¹⁰

4) Proof of identity

Blockchain offers a groundbreaking way to keep personal identification and information secure.¹¹ As such, it can create new solutions for refugee identification.

Refugees often flee their countries without having formal identification on their person. In 2020, the United Nations Refugee Agency (UNHCR) estimated that 82.4 million people were forcibly displaced worldwide.¹² Without identification, refugees can’t open a bank account, vote, or obtain a loan. They may even have difficulties accessing healthcare, and failure to show proof of identity can lead to innumerable delays in obtaining legal documents. It’s estimated that at least 1 billion people globally don’t have a valid identity document.¹³

The UN aims to ensure everyone has a legal identity by 2030, and blockchain can play a critical role in facilitating this process.

Four fundamental challenges that blockchain must overcome

Blockchain is still in its infancy and has inherent risks that must still be addressed. It should also be recognized that the technology isn’t a complete solution for the challenges already mentioned.

Learn more about the challenges of blockchain and how to overcome them on the MIT Sloan School of Management’s Blockchain Technologies: Business Innovation and Application online short course.

1) The complexity of blockchain deters its use

Blockchain can have a significant, positive impact on the global economy, but it’s a complicated technology. Because many don’t understand its applications and advantages quite yet, it isn’t always easily implemented.

Blockchain can be a complicated concept both to grasp and apply. With the general idea being that it helps facilitate payments and assists with fraud prevention, many could assume that banks already do this well, with a minimal cost to the user. However, what’s not understood yet is that blockchain’s removal of the middleman would lower those costs and the technology would provide even more secure protection from fraud.¹⁴

Therefore, broad adoption of blockchain across businesses and society is likely to take many more years until it is fully understood and trusted.

2) Blockchain is slower than cash and credit cards

We’re in an instant-gratification society where we shop via online stores, look up any information in seconds, and swipe a card or use a QR code to purchase an item in the blink of an eye. Cash is even faster, depending on whether or not you receive change.

However, blockchain transactions can take several hours to finalize. This means that there needs to be an element of trust: Your payment with blockchain for something as simple as a cup of coffee won’t be instantaneous, and the vendor will have to take on the risk that they will actually be paid.

Even a few minutes of waiting could feel like an eternity to someone who is used to instant gratification, which might deter some from using blockchain. If it takes a few hours, or even days, for data to populate, you’re looking at time people and companies aren’t used to accounting for.

3) It’s not in everyone’s best interest for blockchain to succeed

Blockchain has the ability to make the current financial services industry nearly obsolete. As a result, the established financial services industry has reason to want blockchain to fail, or have less availability. It’s not in the best interest of the financial services industry for blockchain to succeed.¹⁵ The problem is that blockchain cuts into banking profits.

The impact on profits is a significant hurdle to overcome and draws attention to the fact that there are many stakeholders to consider in the blockchain economy and the economics related to the technology.

4) Blockchain is just another tool in your business’ toolbox

Blockchain is a product of technology, and as such, a tool. It may not be appropriate for every situation, even though many think it’s a blanket solution. The reality is that individuals, countries, and organizations won’t benefit from the security of a decentralized system by controlling it like it’s a centralized one. Be that as it may, there are also situations where blockchain is a better solution and can be quite beneficial to use. For struggling economies, blockchain can certainly eliminate the stucks of traditional financing issues for lower-income earners.

There are many situations in which blockchain offers a better solution than the traditional approach to economic problems. For example, blockchain technology can eliminate some of the difficulties associated with conventional banking and financial systems in struggling economies, such as having a physical location and infrastructure issues.

Would you like to update your skills, learn how to utilize blockchain in your organization, and keep pace with a changing world? Then take a look at what’s covered in the Blockchain Technologies: Business Innovation and Application online short course from the MIT Sloan School of Management.