This time last year, the dust hadn’t settled on the Blockchain hype, and several key players within Fintech and Financial Services were quite upbeat about the possibilities. However, as results of PoCs from various consortiums, central banks and payment providers emerged, the results were mixed. Daily Fintech covered an article on R3’s miseries towards the end of last year when Goldman Sachs left the consortium.
Since then, R3 publicly moved away from Blockchain, into a Blockchain inspired world using an open source distributed ledger named Corda. The R3 consortium lost three major banks towards the end of last year. This is vastly attributed to the fact that they chose to move away from a pure Blockchain implementation to a Distributed Ledger implementation for Corda.
The three banks Goldman Sachs, Santander and JP Morgan left the consortium and invested in Axoni that was a pure Blockchain firm. It got worse when R3 blogged that they were not a Blockchain firm, and had always been a distributed ledger company and got trolled on social media for that.
This was shortly followed by the news that SWIFT had launched its inter-bank payments platform that it believed would be the future of its cross border payments platform. The platform was called GPI (Global Payments Innovation), and had a founding consortium of 12 global banks. The GPI, at that time was based out of traditional technologies and not Blockchain. However, earlier this month, SWIFT announced that GPI was being beta tested on Blockchain with 22 new banks validating the system. Verdict on this PoC is going to be at Sibos later this year.
Apart from this, the Bank of England (BoE) haven’t delivered a conclusive verdict on the PoC with Ripple for Cross border payments. The detailed report on the PoC was released earlier this month. The key message was:
” Cross-border payments when applied to wholesale markets present different challenges than when compared with retail and corporate transactions, which the Ripple product is designed to handle. The availability of liquidity is one such challenge, and the PoC allowed the Bank and Ripple to begin exploring these questions. “
In other words “Ripple’s solution wasn’t fit for purpose”, although Ripple chose to see it differently. A few days later, Ripple announced that a pure Blockchain based approach was not scalable for banks and advocated a “Hybrid approach”.
Wearing my technology hat on, I see some fundamental lessons here, and I may be repeating what has been so often mentioned.
Find technologies that can solve your problems – it may not have to be Blockchain.
Do not interchangeably use Decentralised Ledgers and Blockchains. You can photocopy on a Canon machine too (not just on Xerox).
Innovation doesn’t always have to be on sexy technology. SQL Server and Oracle can do the job too.
Simplicity is often overlooked and massively underrated.
I believe that SWIFT’s announcement of the results of their Blockchain PoC at Sibos could provide a decisive direction for Blockchain in Financial Services/Payments. And it might well be “Let’s Move On”.
Internet should ensure citizens’ sovereignty over their own data and protect privacy;
Internet should ensure diversity, pluralism and a right to choose; and
Internet should avoid the concentration of data in a few proprietary platforms.
Personal Data Spaces was seen as a very important technology area for all the above top ranked values.
In this post, I take a look at this broad, complex, and crucial topic and a venture, the Pillar project, that is focused on solving the problem of Personal Data Spaces.
We live in a world that is entangled in a web of cyber-security issues. Accounts are one of the main entry points for hackers and cyber-terrorists.
Wouldn’t governments, enterprises, and the crowd, love to solve this?
We live a world in which our digital assets are held by several centralized entities. They offer us access to them via accounts and monetize all the data we generate. Corporates have learned to live with complex custody and counterparty risks, and we “accept terms” blindly.
Wouldn’t corporates and the crowd, love to get rid of this?
We live in a world that operates via apps which don’t even talk to each other. Our life goals and projects live in silos. Interoperability remains a huge challenge for enterprises, and for us, it seems too far from being possible.
Wouldn’t corporates and the crowd, love to personally control from a dashboard access to only what is necessary?
Enterprises are swimming in an ocean of cyber-security issues that drain financial and human resources. We, the people, we are all plagued by inertia around all these issues: Accounts-Passwords-Apps-Custody-Privacy.
Don’t we all dream of a new world that tackles these issues at scale?
The Pillar project
The Pillar project aims to address these issues by replacing Accounts with Atomic Ownership and replacing Apps with Services.
This will be done by first creating an open-source wallet that will be the dashboard for all assets. From IDs, financial records, health records, education, professional engagements, and much more.
David Siegel, blockchain expert, author of the book Pull (Penguin), and godfather of the Pillar project, says “We’re starting with a wallet, but we’re aiming to replace the iOS and Android operating systems with the Pillar system that has no apps. It uses tokens, smart contracts, and a growing ecosystem of online services that let you pull the information you want, find what you’re looking for, buy what you need, manage the ownership, and interact with hundreds of other systems easily and securely.
We envision all consumer devices and wearables being eventually powered by the Pillar wallet. Because the data is decentralized and stored in secure blockchains, it is of little interest to hackers, thus, providing high-level security.”
The Pillar project will offer end-users personalized assistance in very simple and secure ways that are unimaginable today. By being able to securely access the relevant personal data and get rid of the usual silos of the Apps world, the Pillar wallet will let you manage everything you own, everything you want to look for, everything you consume online; without logins, searches, and multiple step requirements.
Imagine a world where you walk into a new doctor’s office – all the paperwork, test results, prescriptions, billing, and insurance are taken care of automagically by your Pillar wallet.
Imagine a world that governments and corporates, get rid of accounts and account-management entirely. Everyone had his/her own assets in their own wallet and simply plugs into the government or enterprise system as needed – i.e. to use the necessary services via existing APIs that are now modified to accept Pillar tokens.
The Pillar project development
The open source Pillar Wallet, will allow the development of the necessary ecosystem on top of it. This will include a browser, an exchange, a calendar etc.
All digital assets will be residing in the decentralized world of various blockchains (which are behind the Pillar wallet) and you will be the owner of these private keys. This will replace the existing centralized ownership structure with the new Pillar atomic ownership capabilities and will get rid of the inherent, systemic cyber risks.
The ecosystem that will be built on top of the Pillar Wallet will be partly built by the Pillar project team and partly by other parties. The vision is to eventually, connect all consumer devices and wearables to the Pillar wallet.
The Pillar system will use its own native utility token, called the pillar (symbol: PLR). The PLR is a meta-token which will be used “behind the scenes” to cover all your needs and offer all the services seamlessly and in a “pay-as-you-go” fashion. From identity, to energy, to golf, to job engagements.
The Pillar project is a Big Hairy Audacious Goal that will offer to governments, enterprises and individuals, the decentralized empowerment needed to change the current operating systems and processes. The vision is to become the dashboard used by e-Government services and the medical industry for identity and security, by financial service providers for wealth management, or by enterprises for employment (and for any other high value service).
There are three development phases towards making this open source dashboard reality:
Phase 1 – by Q4 2017 – Building the Pillar multi chain wallet and integrating it with the various systems.
Phase II – by Q1 2018 – Enhancing the multi chain Pillar wallet with an exchange platform, an escrow messaging, a browser etc.
Phase III – by Q2 2018 – Enhancing the Pillar wallet with the creation of the personal data locker and the personal assistant that will separate the Pillar wallet from other wallets (e.g. Jaxx, Shapeshift, Lykke, etc).
Disclaimer: I am an Advisor to the Pillar project, a Bold venture looking to create a smart and secure alternative to our world of apps, logins and increasing centralized risks. I am lured to it because it is Open-source, Multi-chain, and can solve major pain points for governments, enterprises, and individuals.
The Pillar Token (PLR) sale will take place on July 15, 2017. See more details on the Pillar web site where you can also read the white paper and more.
The Pillar token is key to the decentralized empowerment of our personal digital lives and of government and enterprise processes.
Colu, a blockchain based payments app is pioneering the concept of localising cryptocurrency for a better community. Colu offers peer-to-peer payment platforms facilitating digital financial transactions at local businesses, creating a closed-loop economy to bolster the economic well-being of the community. Earlier this week they launched the “Local Pound, East London”.
Founded in 2014 by Amos Meiri, who had also founded ColouredCoins.org before then, Colu use the blockchain for various types of financial transactions – both physical and digital. They initially created local currencies for some parts of Tel Aviv, and as the community and the customer base increased, they brought them together under an umbrella currency for Tel Aviv (Florentine Shekel). They now have local currencies for Jaffa (Pishpesh Shekel) and also have created the local currency for Barbados (Barbadian Digital Dollar).
“What we did is, we developed what we call an economy in a box. A solution to manage digital currencies on top of the Blockchain”
Many British towns and cities are already familiar with the concept of a local currency, usually supported by the local council. Bristol, Brixton, Exeter, Kingston, Glasgow, Birmingham all have their local currencies. Colu have added to this list by launching their first UK based local currency for Liverpool in 2016, and now for East London.
Research by Local Multiplier 3 shows that every £1 spent with a local supplier is worth £1.76 to the local economy, and only 36 pence if it is spent out of the local area. That makes £1 spent locally worth almost 400 % more to the local economy. That’s a much better proposition than paying multinationals for the same products and services.
Colu have chosen Liverpool and East London because they believed there was a strong sense of community pride and a booming tech landscape that would help build a local digital economy. The Liverpool Pound now has about 16000 users and about 30 businesses accepting the currency. Businesses pay a £20 monthly fee to Colu. Customers then pay via the app on their phone, and Colu pays the businesses what they’re owed on a monthly basis.
Local currencies have had challenges in sustaining the initial momentum, as its essential for local businesses and their suppliers to be using them consistently. Local currencies created in the UK so far have been supported by their councils, and when the currency loses steam, they can get behind it.
Not sure if Colu would receive such support if needed. However, they have reached 50,000 customers and $1 Million in transactions on their platform. Momentum is certainly there.
Lykke has been ahead of the curve in the Capital Markets 3.0 evolution, in multiple ways. I confess it is difficult to put an order to all the aspects of the Lykke venture, simply because it is a Big Hairy Audacious one.
Lykke is open-source (if you fancy, go to Github here and download here). And maybe retail like you and me, doesn’t care, but it is a big deal in the 4th industrial revolution. Open source is the first pre-requisite to hope for network effects. Financial markets and especially, asset trading has not been used to business models with network effects. On the contrary, it has been operating in proprietary mode either on the data side or on the modeling side.
Lykke is real, live and way beyond beta mode. You can register on the Lykke App and not only get quotes for several cross pairs (from fiat exchange rates to crypto crosses) but you can also see the order book real time!
Lykke seems for now, like an FX trading app that keeps adding more crosses. True that it keeps adding more “assets” to its menu of capabilities; the most recent one being Ether crosses. True that it also has some commodities like Gold, Palladium etc; and some less known colored coins like the Solar colored coin, the Tree colored coin etc.
Lykke isn’t just another trading app using the colored coins protocol. Lykke wants to become a global marketplace for all digital assets. All the magic is hidden in the new understanding of “Digital assets” and “marketplace”.
Coming from an upbringing in the old world, we can imagine mapping “Digital Assets” to fiat currencies, all sorts of financial instruments typically issued by businesses (currencies, public or private equity shares or bonds from corporates or governments ect.). Such thinking is a linear extrapolation from current reality; i.e. take shares in a public company or gold in a vault and create a digitized version of it.
But Lykke is going after the new world that is allowing for the creation of new asset classes, the true digital assets, the tokenization of all: e.g. utility tokens in the protocol layers that are being built as we speak (e.g. Tezos TEZ, Golem GNT etc), or tokenized values like the TREE colored coin which entitles the holder to a Mangrove tree CO2 certificate or the TIME colored coin from Chronobank which is a labor market; or tokenization of business processes like the IATA token.
Lykke wants to be the global marketplace with the new understanding. They want all business to be launched and executed on their app. When I say all, I literally mean all. The Lykke app wants to be the center of the world. Whether you are a retail individual (investor, trader in the old sense, or not) or a business (to be built or grown up with complex business processes) or a government; Lykke wants to serve your needs. The accelerator they launched recently, will grow the ecosystem and have the desired network effects. Lykke is open of course, to all sorts of business partnerships, for example, the recent partnership with Splendid, a Swiss student loan lender, for servicing international students via blockchain transfers, a process which cuts costs of such cross border transactions and simplifies the process.
Lykke is using the colored coins protocol, not the ERC20 token standardization which has become the most popular software during the recent ICO boom. The colored coin protocol is of open-source and requires programming to be used (one of the reasons that the ERC20 standard has been massively adopted is the ease of use).
The colored coin foundation started in 2013 and is based on the Bitcoin ecosystem. Currently, there are 4 entities that have joined the consortium: Lykke, Colu, Bitt, and Etoro. Bitt is the venture focused on the launch of the Barbados Dollar on the blockchain with the local central bank. Colu is an Israeli venture focused on standardizing the colored coin protocol and the development of their mobile wallet. EToro the social trading platform just recently announced a pilot crypto-wallet that aims to tap into the ICO market.
Lykke’s approach
The exchange that Lykke has created is running on the colored coins protocol. What differentiates it from the newly launched (only beta version running) Bancor venture which broke the record in terms of ICO funding, is that it Lykke’s exchange is based on a P2P matching process whereas Bancor claims to have a secret sauce that creates liquidity and allows for automatic price discovery without requiring a counterparty (which is a breakthrough). Lykke is on the colored coin protocol and Bancor is using the ERC20 standard.
BNT (the $153million ICO) are utility tokens for their exchange (to be built). LKK the colored coins trading on the Lykke app (for now) are not utility tokens but equity shares. 100 LKK coins represent one share in the Swiss registered and regulated company. Lykke is going international in Asia but is not yet available in the US.
The shares of the company have surged in the past months (read more about this from the CEO Richard Olsen here).
Lykke was early in using the ICO funding mechanism. They placed their first public shares last October and raised CHF1m and in February-March this year they innovated in placing 1yr forward Lykke shares (LKK1Y colored coins) raising CHF2m. They are leading the way in showing others how Capital markets 3.0 can work on their app. I expect that they will be innovating more going forward.
Their most recent innovation already operational (for now only for Bitcoin) is the Offchain Settlement integration on their exchange. This makes the network faster but still has the safeguards of the blockhcain.
Disclosure: I am a shareholder of the LKK coins and look forward to the experience of the first Digital annual shareholder meeting on the 29th of June, were more than 3000 shareholders from 87 countries will come together and vote. Stay tuned.
The race has picked up speed at the protocol layer and at the Dapps layer (payments, exchanges etc). Lykke was live early with a stunningly simple UX and will now has to compete with the recent “white papers” and “MVPs” that are getting piles of funding to accelerate their development. The Lykke “Go-to-Market” strategy is taking the regulatory route (i.e. obtaining exchange licenses in Singapore and the US, payment licenses and even investment licenses in Europe) and aiming to become the center for exchanging value for everybody (from consumers to businesses).
The invitation to join the great global conversations referring to Lykke on the Fintech Genome, is open. Join to learn and contribute here.
Efi Pylarinouis a Fintech thought-leader, consultant, and investor.
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In one of my previous posts, I discussed how startups in the Nordics were working with their governments to help refugees get on the social and economic ladder. With due respect to the work being done there, use cases of providing banking and payments capabilities to refugees, is a tactical short term fix almost. The real problem is that refugees do not have an economic identity. BanQu, led by Ashish Ghadnis and Hamse Warfa (an ex-refugee from Kenya) are trying to solve this problem. They are using proprietary blockchain technology to drive financial and social inclusion through economic identity for about £2.7 Billion unbanked people globally.
Between the two founders at BanQu, they have various stories to tell on why they embarked on this journey. Hamse Warfa was refugee himself from Kenya when he was 12. He lost his identity (not just a name), when he had to flee his country with his family. After twenty years, he now has a doctorate in public administration at Hamline University, left a job with Margaret A. Cargill Foundation to start BanQu. However the experience of being a refugee in the process made him realise the criticality of economic and social identity.
The average stay for a refugee in a camp is 17 years. This long duration of economic exclusion is compounded by high poverty settings that refugees live in, given that 90% of refugees come from regions considered economically less developed.
Ashish Ghadnis the CEO and Co-Founder of BanQu, is a serial entrepreneur. He sold his previous business in 2012, and started volunteering in Africa. During his charitable endeavours in Africa, he identified problems that many Africans face.
A woman farmer feeding a family of eight people at $300 a year, who has an acre of land on which she has been growing corn, and using the income to run her family for thirty years. This lady has no identity or financial history. But it is just common sense that she deserves financial inclusion and would be highly credit worthy. This is true for many women in countries like Myanmar, Bangladesh, Syria, Congo, Somalia, CAR, Burundi, Colombia, El Salvador.
True transformation, true inclusion, and true fairness and 100% worldwide inclusion in the global economy can ONLY come from a massive shakeup; a massive redesign that fundamentally changes the foundation of the world’s economy.
So how does BanQu provide economic identity using blockchain? In four simple steps.
Create an identity for the unbanked on BanQu’s Distributed Ledger platform
Onboard the banked, financial institutions and other financial stakeholders to BanQu
Allow connections between the parties (banked and the unbanked) to build a mini financial network
Create history of transactions on the platform, which would eventually become the economic identity of the unbanked, using which they can scale their access to various financial avenues.
The integrated approach of using principles of Social Media and DLT in a financial context seems quite powerful. Some use cases BanQu are addressing are,
Remote Purchase: Say, A is banked and B is a unbanked friend/family living elsewhere. B can connect to A on BanQu. This allows A to provide funding to B, which B can use to purchase goods from say C.
Funded Wallet: A could also remotely add funds to B’s wallet, and B can use this to purchase goods from C
Term Purchase: B purchasing goods from C could happen on pre-agreed terms, where payments can be spread over a period of time.
Remittance: Remittances can also happen using remote funding of wallets where, A can fund B’s wallet for a particular amount, and B can receive cash from C (instead of goods in the above case).
Credit Worthiness: All the above scenarios provide a track record for B to move from Unbanked to Banked. And over a period of time this could help B establish credit worthiness in the financial world.
Wearing my investor hat on, that’s too many use cases for a startup to handle so early in the game. And I often get sceptical and fear for the entrepreneur who starts with “I am going to change the world”. But BanQu somehow feels right, honestly.
The real challenge is setting up the financial network infrastructure and bringing onboard a good mix of credible unbanked and helpful banked. Once this happens growth could be viral and the financial network could be used for endless purposes.
A case study as described by Ashish: If you’re a poor female farmer on the Tanzania-Rwanda border, feeding a family of eight or ten on $300 a year, which is less than $2 a day. At harvest, the broker says to her that unless she sells her corn to him at a price it will get wasted. The mother is forced to sell the corn because she has no access to information. She has no identity. But if she has a piece of land and has been harvesting crops for thirty years, she should be able to produce 100 kilos of corn. Then the U.N. has orchestrated buyer contracts for that 100 kilos of corn.
Using BanQu, this mother/farmer has three things which she never had before.
One: On her phone, through the blockchain and BanQu, she gets to know that her one acre land can help her produce 100 kilos of corn for which she has a buyer (the U.N.), even if the harvest is a few months away.
Two: If you dry the corn to 13 percent moisture content, the price of corn doubles. With BanQu’s technology, the mother has an identity, she owns a piece of land, has a produce forecast and a buyer. And that buyer is now going to allow her to get collateral to get a dryer so she can dry her corn. All that becomes part of her history.
Three: The blockchain has given her an identity created by her transaction history. She can now borrow as lenders can see that she has a piece of land, a microloan, a harvest, a dryer and that she is selling them at market price. If that Rwandan woman farmer has her identity in the blockchain and she has gone through three farming cycles, the lender would not charge her 30 percent on $100, but would charge her 4 percent on $100 because she has history.
This makes me wonder if the current financial system needs some very fundamental changes. So many products, with very high barriers to entry, which effectively ignore 2.5 Billion consumers. Surely, its time to go back to the drawing board, and may be, that’s what Banqu are doing.
Like most Fintech use cases of blockchain, this is still in pilot mode, and is yet to be proven as a viable business model. However, once/if it takes off, there is no reason, why this can’t become mainstream and create yet another leapfrog moment.
Both subjects, Supply Chain Finance and Blockchain, get a lot of attention on Daily Fintech. So when we saw a solution combining them (called Chained Finance) we were intrigued. When we saw that the venture behind this initiative (Dianrong) is in China and that the Founder & CEO (Soul Htite) was a co-founder of Lending Club, we reached out to him to understand more.
I asked the questions that occurred to me. What questions should we have asked Soul? (tell us in comments).
Soul please tell us about your professional journey and what Dianrong does?
As a technologist and entrepreneur, I’m constantly looking out for new opportunities to harness the potential of fintech to solve every day financial challenges. This is what led me to co-found, firstly, Lending Club in the US and, more recently, Dianrong in China.
Dianrong has quickly grown into a leader in online marketplace lending in China, originating more than $300 million in monthly assets for 3.7 million retail lenders. We offer individuals and small and medium sized enterprises a comprehensive, one-stop financial platform supported by industry-leading technology, compliance and transparency.
We developed a sophisticated and flexible infrastructure that enables us to design and customize lending and borrowing products and services, based on industry-specific data and insights, all supported by online risk-management and operation tools. Dianrong’s specific offerings include loan originations, investment products and marketplace lending solutions.
As I understand it, Chained Finance is designed to provide financing to the vendors who are further down the supply chain. Supply Chain Finance works well today for the vendors who supply to the corporates who are investment grade. As I understand it, Chained Finance will get financing to the vendors who sell to that vendor. Can you give us an illustration about how this will work?
The complexity and scale of supply chain finance has posed major challenges in ensuring adequate funding and efficient operations. Chained Finance creates a unique ecosystem that will provide supply chains with easier access to funding at competitive rates. In return, supply chain operators will gain greater visibility of their suppliers and the many layers of finance embedded in the process.
Is it only one link in the chain (i.e. vendor to vendor of investment grade corporate borrower) or multiple links in the chain?
Chained Finance’s ecosystem provides a better link between supply chain operators and their vast network of suppliers. Additionally, new loan assets generated by Chained Finance will be available to Dianrong’s 3.7 million investors, expanding the company’s portfolio of diversified investment options.
How is the credit priced? Is it based on the buyer’s credit rating (as in traditional Supply Chain Finance)? Or is it based on the seller’s credit rating as in Factoring, Receivables Financing and other SME lending?
The Chained Finance pricing model is proprietary.
What stage is Chained Finance? Have transactions already been completed. Can you share what sort of APR % the SME companies are getting and how this compares with other SME lending?
Chained Finance successfully completed a successful six-month pilot with FnConn, which originated US$6.5 million (RMB45 million) in high-quality loans for supply chain operators, many of whom were unable to secure needed financing in the past.
The pilot was only recently completed, so it is premature to disclose representative APR data.
Please tell us why you use blockchain technology as opposed to some other distributed database technology and a bit about the technology?
Blockchain technology allows both lenders and borrowers to gain unprecedented control and transparency of their records.
Lenders gain greater transparency of the financial history of borrowers, enabling them to make better lending decisions. This capability enables financial institutions to lower the risk of potential bad debts and problematic financial sources.
For borrowers, the technology provides a comprehensive track record of their financial history, which increases their creditability when applying for a loan. Borrowers also have greater control over who has access to their records, because borrower data can only be obtained with their approval. That efficiently avoids borrowers’ personal information being abused by third parties, e.g. lead generation companies.
The primary benefit of blockchain is the transparency, and thus security, of the data transacted within the system. At Dianrong, compliance and transparency are part of our DNA. This is why we are integrating blockchain technology across our entire platform.
Is this a permissioned or permissionless system?
Permissioned.
What blockchain technology do you use (e.g. Ethereum, Hyperledger). Please tell us why you chose this technology
Chained Finance was designed to be technologically (and geographically) agnostic. That said, Dianrong is an active participant in the Hyperledger project.
Soul, please give us your vision of where Chained Finance could go in the future.
By harnessing the power of blockchain, the Chained Finance platform is geographically agnostic. So, while Dianrong’s initial focus is on China, where 85% of SMEs have no effective access to funding, the potential for the platform goes far beyond China’s borders.
Blockchain for supply chain finance extends to any large company that has a complex supply chain and, as such, is enormous. The electronics, garment and auto industries are a natural fit.
Chained Finance offers large multinational manufacturers unprecedented transparency and risk control capabilities for their supply chain finance ecosystems.
Thank you, Soul
What questions should we have asked Soul? (please tell us in comments).
Editor’s Note: Last week, Aunkumar Krishnakumar (Arun for short) wrote a great post about the effects of Demonetization on Microfinance in India. We liked it so much that we asked for more and this week Arun has found two amazing stories from Africa. Both are practical uses of leading edge technology to change the lives of millions (for example to enable crop insurance for farmers). The technology used forces one to think again about some conventional wisdom. One uses a mix of Internet Of Things (IOT) and Distributed Ledger Technology (DLT), without using any Blockchain. Another uses Blockchain but with M-Pesa (not with Bitcoin or any Altcoin). Following our theme of “first the Rest then the West” we would not be surprised to see innovation like this coming to the West soon.
From next week, Arun will join our other Authors as a regular. Please see our announcement later today.
In the last few years, every time I visited India, I have got excited looking at the number of frictions and inefficiencies in day to day transactions. There were problems that could be solved to create huge impact to large communities of people. Of course, when executed with a good business model, those could be great stories creating social and monetary value. When I was talking about this to my friend from Nigeria a few days back, he mentioned that he had the similar thoughts about Africa, the continent with 54 countries, truly a land of infinite possibilities. Over the last few years, financial services driven by mobile penetration have created a few “leap frog” initiatives in Africa.
M-Pesa completed its 10th anniversary this month. It is the firm that revolutionised financial services by providing a simple way of transferring money, and has crossed 30 Million users across 10 African nations (only 10). But the impact it has created has already highlighted it as a model to be used for the emerging world. In 2016, according to Vodafone, M-Pesa was used in six billion transactions. Research by Digital Frontiers found a 22% drop in female-headed households living in poverty in areas with access to M-Pesa. The same study noted that the source of income for almost 200,000 women in rural areas shifted from the low-income, labour intensive agricultural sector to more prosperous small business creation. However, there is a lot more to be done through financial inclusion and I believe Blockchain will be a key catalyst in unlocking the potential of this great continent.
Micro-Insurance for Farmers:
In my previous post, I discussed the challenges Microfinance had in improving farmers’ lifes in India. While researching for that, I came across instances where farmers who had insured their crops and lost them to drought had serious challenges in claiming money from their insurance providers. This was primarily due to lack of understanding of complexities around what triggered their insurance claims and also due to the bureaucracy and corruption that existed in the system. Crop insurance is one of the most underserved industries in the developing world.
Typically Blockchain firms have two different exploratory routes to address pain points in the Insurance value chain. The first set of firms which are the more common one try to add efficiencies around instant reconciliation using distributed ledgers. The second set of Blockchain firms, re-imagine the whole structure of the business from scratch, and in some cases intend to create a new structure altogether. A Blockchain company Etherisc is working on crop insurance in Africa and across the developing world. They are trying to solve the problem using a methodology called “Parametric Insurance”. In this model, the insurance pay-out is triggered by pre-agreed set of simple triggers, which do not involve any middle men. The data that triggers the pay-out would be sourced automatically by the system which will disburse payments according to pre-programmed rules. The other advantage is that this model offers crop insurance for one or two dollars a month, which is typically not economically viable for a traditional insurance provider.
For instance, a farmer can insure his crops against lack of rainfall for a particular year. Etherisc would have a rule that if the rainfall for that region in Africa doesn’t cross a particular threshold, the pay-out to the farmer would happen automatically. From that point, Etherisc would source rainfall information automatically from the weather data base, and if the threshold is breached, the pay-out happens. There is no need for human intervention to assess claims or damages, there by keeping the process simple, transparent and efficient. More importantly, the farmer receives timely help, without having to go through the trauma of dealing with corrupt bureaucrats to get the payment. Etherisc are also working at integrating their product with M-Pesa to plug into the existing payments infrastructure in Africa.
Micropayments Ecosystem:
In most developing nations penetration of mobile phones and internet has been better than penetration of traditional financial services and the underlying infrastructure. The main reason that there is so little private or public effort to extend financial services infrastructure into these remote and often impoverished areas is that the cost and benefits don’t add up positively. This leads to hundreds of millions of people scattered across Africa with almost no infrastructure and thus little opportunity of changing their circumstances. The solution is to take a decentralised approach that the traditional financial services infrastructure hasn’t managed to achieve.
IOTA is a lightweight crypto-token that is designed to facilitate micropayments. IOTA is derived from the acronym IoT which means Internet-of-Things. IOTA could be connected to millions of devices and could facilitate micro transactions between the devices by paying miniscule amounts to each other in a frictionless manner. IOTA is a completely new distributed ledger innovated from scratch. Unlike the Blockchain, it contains no blocks. They instead have developed something called a Tangle, which is a form of directed acyclic graph. Here a user sending a transaction verifies previous transactions through a small amount of proof-of-Work. This means that the verification of the network is not decoupled from the network’s users, as is the case in blockchains. Hence there are no external parties to be compensated, which means that IOTA got absolutely zero fees on transactions. I have painfully resisted the temptation to get too technical about IOTA’s tangle, but for those who like a good technical read, their whitepaper is here.
Due to this architecture, IOTA can be used for most business models that require a scalable ledger with no-fees. And this is especially interesting for micro payments that flow through an ecosystem of connected devices. The IOTA-Tangle infrastructure doesn’t need internet and can operate on Bluetooth as well.
A simple example highlighted by IOTA: Business A set up a solar electricity instalment and sell it per watt in real time to business B, which is a company that saw the potential in selling sensor data to be used to optimize agriculture, so now business B is selling soil and weather data to business C which is an analytics company that turn the data into useful information that it sells to business D which is a farming company that use the info to optimize their crops. Of course, all of these companies buy their bandwidth from business E which saw the need for connectivity between these other businesses. A completely self-sustaining and scaling business ecosystem that might previously have been impossible because the profit margin was non-existent due to fees. A micro insurance model could work like a dream on such an ecosystem, a friction-free economy of things.
Unfortunately, expansion of such business models in Africa, is not going to be as friction free. Between 2010 and 2017 internet penetration in Africa grew from 10% to a mind boggling 27%. And in model countries like Kenya, this has reflected in the GDP growing as a result. However, there are challenges around how security of these Blockchain infrastructures are going to hold and how regulations would evolve around these disruptive initiatives. The other key challenge is awareness, where most people still struggle to understand what the value of a Blockchain based financial eco system is. However all is not doom and gloom, as there are quite a few initiatives across the continent educating people about bitcoin and Blockchain, and the demand for such programmes has never been higher. Onwards and Upwards!!
