Hot on the heels of the successful Africa Forum at the Hogan Lovells London office earlier this year, Hogan Lovells South Africa recently hosted its first Africa Forum in Johannesburg. The...18 October 2016
Blockchain in Africa
What is blockchain?
You may have heard this term and wondered what it is (as have most of us). We take a look what it is and consider its potential in Africa.
A blockchain is, in essence, a distributed digital database that maintains a list of records.
Members (with access to the database) validate the data in a specific block by means of a consensus of members using algorithmic calculations that utilize cryptography (methods vary depending on the technology and database involved) – I know, sounds very techie, because it is! Validated blocks are then linked in sequence to the preceding blocks by using time stamps and other unique information, creating a chain of blocks of information (hence the term blockchain).
Sequentially added blocks are almost impossible to change once validated and stored on the relevant blockchain. Blockchains can either be public (or permissionless) or private (or permissioned), depending on their purpose. A public blockchain means that anyone running the relevant blockchain protocol can read or write information to the blockchain; a private blockchain means that only designated users can read or write to the blockchain. Blockchain technology is revolutionary in the sense that it allows parties to transact directly with each other without the need for third party intermediaries as central trusted counter-parties, as this comfort is provided by way of the mutual consensus of members.
What is blockchain's potential in Africa?
For a continent that has a reputation for corruption and patronage, smart contacts written on a blockchain platform could prove an effective mechanism for making business dealings more transparent and less vulnerable to untoward influence and outcomes. Here's how.
Smart contracts are programmes that facilitate, verify or enforce the negotiation or performance of a conventional contract. The computer code for a smart contract may itself be stored on a blockchain ledger, and this code will be intended to validate and execute whatever terms have been agreed by the parties to the smart contract. Likewise, for smart contracts residing on a blockchain ledger, the outputs of the code (that is, the actions required by the contract, such as making a payment or exercising an option) will also be stored in the ledger where network participants validate both the contract and the outputs produced by the code.
They also have the potential to make agreements and their management more efficient by removing the need for third parties to implement and execute the subject matter of an agreement between parties. This independent consensus is achieved by limiting the smart contract ascertainable data points, which are always objectively verifiable. This independent assessment and implementation of agreed terms would provide international investors, intent on complying with ABC laws and policies, additional comfort and certainty.
Could this be the solution international investors have been waiting for in Africa?
Traditional financial institutions and entrepreneurs in Africa have dedicated more and more resources to developing and implementing applications for blockchain and related technologies throughout 2016. Much of the focus has been on developing applications to make traditional financial service offerings, such as settlement, clearing of trade and remittances of funds, more accessible and efficient. In Africa this technology is particularly appealing as it will make financial services available to a greater number of Africans (approximately 80% of which are currently unbanked according to the World Bank: the Global Findex Database 2014: Measuring Financial Inclusion around the World) and allows for the reduction of counterparty risk.
Various African fintech start-ups pitched new products at the SWIFT African Regional Conference in Mauritius on 18 May 2016. At the conference a range of potential use cases were highlighted, including products that:
|—||Focus on remittances of money, as despite Africa receiving remittances from friends and family around the world estimated at US$60bn, Africans still pay the highest transaction fees in the world.|
|—||All individuals and business to make payments to and from certain Africa nations with developed ICT infrastructure, accept bitcoins around the world and exchange bitcoins for local currency.|
|—||Aim to turn digital currency into funding renewable energy programmes that could provide international revenue to investors and generate returns of approximately 10% per annum. The product would achieve this by crowd funding renewable projects for potential investors to choose and allowing the investor to participate via traditional bank account or bitcoin.|
The evolution of such companies makes it is clear that Africa has embraced the disruption that fintech and blockchain are creating in the way banking and financial services are traditionally rendered.
What could inhibit the use of blockchain in Africa?
What could inhibit the use of blockchain in Africa?
For blockchain based applications to run, users need access to the internet. And with many African homes struggling to have consistent running water or a reliable source of electricity, internet access is low down on their list of priorities. It will take a number of years before internet access becomes more widely available across the continent (up from 10% in 2010 to 20% in 2014 in according to Ernst and Young - Africa 2030: Realizing the possibilities, which once achieved will increase the rate at which new technologies, such as blockchain based cryptocurrencies are adopted and accepted.
African regulators can be unpredictable at the best of times regarding their application of the law, in particular in relation to disruptive technologies. Think of Uber, which developed too fast and legislation and regulation needed to regulate it to keep up. As a result any companies operating in the fintech space on a pan-African basis must comply with complex regulations, which are different between both countries and regions, not to mention a government's appetite to embrace it (or not!).
Security and confidentiality
Transaction confidentiality is of huge importance for a number of multi-nationals, states and parastatals. The validation by mutual consent of the blockchain, one of blockchain's biggest benefits, may also be its Achilles heel, as it would potentially allow competitors to view certain details of each other's transactions if the records are not appropriately anonymised or databases permissioned. This is why there is a concerted effort to keep certain information confidential while still allowing for distributed ledger consensus.
The various hacking scandals surrounding bitcoin and other cryptocurrencies, most recently the US$60m lost by Bitfinex and the hack on the DAO, also leads to hesitancy in adopting what appears to be a currency vulnerable to hackers and thieves.
Digital currency exchanges will have to think long and hard about how they intend to optimally secure their respective exchanges, comply with securities regulation (at home and abroad), and maintain the ability of users to validate assets and transactions by mutual consensus, without leading to system vulnerability.
Notwithstanding these challenges, the prospects for blockchain look bright for companies and states willing to take explore new technologies. In financial services in particular, blockchain promises a future where some of the complexity associated with traditional market infrastructure can be replaced with much more streamlined and processes and systems.
New use cases are being rapidly researched, developed and engineered including smart assets (think digitization of the components in a supply chain and the almost instantaneous recording on a shared ledger), clearing and settlement solutions that minimize associated costs such as CSDs and collateral management facilities and blockchain voting, which would entail voters' individual ballots being recorded and uploaded onto unpermissioned databases (without disclosing their identities) and released for public inspection and validation, as opposed to the current system of vendor confirmation (of the electronic voting software utilized) or manual ballot counting commonly used in Africa.
So the future looks bright, the future is blockchain.
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