Blockchain Relevance for UN Sustainable Development Goals
Blockchains first used to store and track transactions like in Bitcoin. However, other uses and implementations can be used for SDGs. Some of those blockchain applications are: establishment of identities for refugees, tracking information linked to the identities (health, social benefits, education, etc), distribution of resources, tracing of goods and their content/original source, etc. These examples were selected to show the possibilities that exist for using blockchain to support the SDGs.
SDG 1: No Poverty — End poverty in all its forms everywhere
Access to financial services for the unbanked population around the world is essential. Globally, 59% of adults without an account cite a lack of enough money as a key reason, which implies that financial services aren’t yet affordable or designed to fit low income users. Other barriers to account-opening include distance from a financial service provider, lack of necessary documentation papers, lack of trust in financial service providers, and religion.According to the Global Findex database 2017, around 2 billion people still have no access to financial services so, therefore, targeting financial inclusion is a necessary first step in order to raise people’s living standards. It enables greater saving possibilities, access to buying property and to starting a business.
SDG target 1.4 specifically mentions the need to ensure that all men and women, the poor and the vulnerable, have equal access to appropriate new technology and financial services, including microfinance.
Target 1.A refers to the need to ensure mobilization of resources in order to provide adequate means for developing countries to implement programmes to end poverty.
The UFA2020 (Universal Financial Access 2020) envisions that adults worldwide — women and men alike — will be able to have access to a transaction account or an electronic instrument to store money, send payments and receive deposits as a basic building block to manage their financial lives.
India and China have the largest share of unbanked people and together they account for some 32% of them. The rest of the focus countries include: Bangladesh, Brazil, Colombia, Cote d’Ivoire, DRC, Egypt, Ethiopia, Indonesia, Kenya, Mexico, Morocco, Mozambique, Myanmar, Nigeria, Pakistan, Peru, Philippines, Rwanda, South Africa, Vietnam, Tanzania, Turkey, and Zambia.
Approach on Financial Inclusion centers on:
- creating a regulatory environment to enable access to transaction accounts,
- expanding access points,
- improving financial literacy, and
driving scale and viability through high-volume government programs, such as social transfers, into those transaction accounts.
- key building blocks: public and private sector commitment, enabling legal and regulatory framework, and bolstering financial and ICT infrastructure
While great portion of the world population may not have bank accounts, mobile phone use has increased dramatically, even in countries with a high degree of financial exclusion, and these can be useful devices in the fight against poverty. Blockchain applications can be developed for use with mobile devices. Mobile Money with Blockchain is a game-changer for rural poor who have generally had scarce access to financial institutions, and for whom the trip to the nearest bank has too high a cost in terms of travel or lost time at work.
The exclusion of billions of people from growing and accumulating their capital has lead to social, political and economic instability, while leaving huge chunks of the world’s potential for value creation missing.
Informal Networks and Existing Solutions
Long before international financial institutions, communities have been providing their own financial services. For example, Esusu is an ancient financial practice in the Yoruba tribe of Nigeria where people contribute/borrow from close ties. Networks such as hawalas are used to transfer money between people or to buy commodities such as gold as stores of wealth.
These ad hoc networks, although cheaper and more accessible in underserved regions, are fragile and have difficulty growing as they operate on personal reputation.
On the other hand, banks require guaranteed assets, liquidity, and formal identity to determine creditworthiness. Most banks also require account minimums and fees to ensure profitability. In places like Africa and South Asia, this means banking is available only for the wealthy, and only in metropolitan areas. Because banks don’t see profitability in the rural areas, people who live there must travel hours to transfer money.
As seen in East Africa, Mobile Money solutions have done amazing work in reaching people where banks have failed, but most operate on centralized databases prone to hacks. The centralization creates a barrier to interoperability, as each Mobile Money Operator must integrate across banks and merchants, meaning they can’t expand outside their core geographic region or country.
Many other Blockchain projects are amazing theoretically. But on the ground barriers, like lack of electricity, Internet access, accessible roads from rural to urban areas, and a fear of new technology, keep them from wide adoption.
Access to credit is another field in which blockchain can contribute to the targets under SDG 1. An ethical investment platform, where investors have access to ‘highly-profitable positive impact projects’ and connect with unbanked producers. This can be done through an international crowd lending platform which connects unbanked, underserved populations, which often engage in paying high interests to lenders (mostly small farmers) with socially responsible investors using blockchain. Another example, involving universal access to credit, which is blockchain based decentralized applications that can be build and these applications looking to connect investors and borrowers at lower rates and higher returns than could be obtained through banks or other, existing, credit institutions.
Transaction accounts can open up access to those currently left out of the banking system, providing a basic entry point, or pathway, to broader financial inclusion.
Using transaction accounts to move away from cash to digital payments has made it easier to be part of the formal financial system, even when brick-and-mortar banks are too far away or prefer not to serve poor people.
A transaction account used to only mean an account at a bank. Nowadays, a transaction account could be a bank account, a mobile wallet, payment card, or a similar electronic instrument.
Having a transaction account opens the door to other formal financial services, such as savings, payments, credit and insurance. Access and use of appropriate financial services can help people better manage risks, step out of poverty and build a better life.
- People could save more securely and conveniently.
- Poor people could more easily and safely receive benefits.
- Entrepreneurs could get access to the financial services they need to build small businesses, and exposure to new markets.
- Inexperienced customers can be more empowered to use formal financial services.
SDG 2: Zero Hunger — End hunger, achieve food security and improve nutrition and promote sustainable agriculture
Blockchain technology used as a pilot in Jordan as a way of making cash-based transfers fast, secure and less costly. World Food Programme (WFP) is working extensively to provide refugees an effective way to pay for their food in the refugee camps. Refugees pay for their food through a blockchain-based system. This system uses biometric registration data for authentication. The data is provided by UNHCR and it enables refugees to buy at local supermarkets using eye-scanning technology instead of cash or card payments. This is an example of lowering the possibility of fraud and the costly intervention of third-parties, it also allows to better beneficiary data and better control of financial risks and a more rapid response in the wake of emergencies.
These efforts are expected to contribute to the achievement of SDG 2 in the near future, and particularly target 2.1 aiming at ensuring access by all people, in particular the poor and vulnerable to safe, nutritious and sufficient food.
SDG 10.C By 2030, reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate remittance corridors with costs higher than 5 per cent
SDG 10.C.1 Remittance costs as a proportion of the amount remitted
There is room to improve the infrastructure for payments made by individuals and businesses that cross borders, according to a new report by the Committee on Payments and Market Infrastructures (CPMI), the global standard setter for payment, clearing and settlement services.
Retail payments sent from one jurisdiction to another are typically seen as slower, costlier and more opaque than payments within the same jurisdiction. Cross-border payments do involve more risks, complexities and rules than domestic payments, but the difference can often feel disproportionate.
Although competition and innovations such as mobile or e-banking have made these payments more convenient, the bulk of clearing and settlement for cross-border payments still goes through traditional correspondent banks, which struggle to handle the higher-volume, lower-value retail payments.
However, alternative clearing and settlement arrangements are emerging, which could improve the efficiency of the cross-border retail payment market. These new arrangements include links between national payment infrastructures and companies that require both payers and receivers to hold accounts.
“Safe and efficient cross-border payments are vital for growth and financial inclusion. The emergence and use of cryptocurrencies across borders signals to central bankers that our current payment systems are too expensive and slow. Action is needed to put better arrangements in place,” CPMI Chairman Benoît Cœuré
“Distributed Ledger technology could become a game changer for payment, clearing and settlement activities if fintech companies and financial institutions can leverage the technology to meet demanding legal, operational and risk management requirements,” CPMI Committee chair Benoît Cœuré
Though the use of technology will also limit processing fees, commissions and gains on foreign exchange transactions, which will pressure revenue, it added.
Distributed Ledger System (DLT), widely known as blockchain, is a digital record of transactions maintained and validated by a network of computers via a cryptographic audit trail. A distributed ledger means that no single authority, like a clearinghouse, needs to verify or execute transactions.
Since blockchain does not discriminate between the transaction sizes, the low cost of transactions will allow a whole new demographic to participate in the cross-border payments space.
Instead, the participants themselves have computers that serve as ‘nodes’ within the network, which add time-stamped blocks of transactions to form an immutable chain (thus, blockchain).
There are various factors that make up the transaction costs, which can be eliminated through the application of blockchains. The slow-moving nature of these remittances forces the banks to hedge against volatile movements and foreign-exchange risks. It also forces the banks to address liquidity needs due to massive amounts being transmitted. These costs also include compliance to regulations and requirements such as Basel III and capital ratios. The numerous intermediaries in the whole process adds to the costs through the various commissions.
Blockchain helps in addressing these issue through its decentralised ledger, consensus protocol, and use of digital assets and ‘smart contracts’.
Distributed Digital Ledger: Traditionally, asset and transaction information was stored within physical books to independently reference previous actions internally and externally. As technologies advanced, physical books were translated into digital ledgers. Blockchain removes the need for a central entity to store and process these ledgers. Instead, the ledger is replicated among many different nodes in a peer-to-peer network, securing each transaction with a uniquely signed cryptographic private key. This eliminates the need for inter-party reconciliation in cross-border payments. Since all the transactions are permanently recorded, it leaves no room for manipulation while establishing an audit trail.
Consensus Mechanism: A method of authenticating and validating a transaction without the need to rely on a single authority. These transactions are verified and executed based on an agreed-upon arrangement, while invalid transactions are immediately discarded. It allows the connected organisations to work together as a group, which can survive even if some of the members fail. The ability to sustain individual failure is a big advantage and helps in increasing the integrity and efficiency of the system, while also leaving room for other validators such as various stakeholder companies, internet service providers and other such institutions. The validation of transactions — currently done through a manual entry system — is automated, thus allowing real-time tracking of transactions. The process allows for a risk-based approach to the transactions instead of screening every single one.
Digital Assets: The use of digital assets solves the issue of multiple currencies and improves the liquidity and capital compliance costs, while also allowing the possibility of micropayments. Instead of hedging against the various currencies, the banks only need to take care of the digital token, thus cutting the operational costs of maintaining multiple debit/credit accounts in varying currencies. The rapid nature of the transactions eliminates any kind of liquidity risk that banks might have to hedge against and enables almost-real-time settlement between banks.
Smart Contract: Smart Contracts are self-executing contracts, based on the fulfilment of the terms of agreement between multiple parties. The terms and conditions, written into lines of code, exist across the distributed ledger network. Thus, financial agreements can be executed automatically as long as the mutually agreed conditions and the regulatory requirements are met. It transforms compliance from post-transaction to immediate and on-demand. An example to blockchain-based payment solution, farmer in Samoa can be able to draw a contract with a buyer in Indonesia and use the blockchain to record everything from the farmer’s collateral to letters of credit to payment.
As with any new technology, there are some difficulties to adopting the blockchain. Even with all its benefits, the technology brings with it the notorious reputation of cryptocurrencies (the common name for digital currencies). Since its inception, Bitcoin (the biggest cryptocurrency) has been associated with illegal activities such as drug trafficking and extortion, due to its ownership anonymity. Although, recently, exchanges have been forced to implement KYC (Know Your Customer) and AML (Anti-Money Laundering) norms, the anonymity aspect remains.
DLT has the potential to provide new ways to transfer and record the
ownership of digital assets; immutably and securely store information; provide for identity management; and other evolving operations through peer-to-peer networking, access to a distributed but common ledger among participants, and cryptography. Potential use cases in payments, clearing,
and settlement include cross-border payments and the post-trade clearing and settlement of securities. These use cases could address operational and financial frictions around existing services. Nonetheless, the industry’s understanding and application of this technology is still in its infancy, and stakeholders are taking a variety of approaches toward its development. Given the technology’s early stage, a number of challenges to development and adoption remain, including in issues around business cases,
technological scalability and stability hurdles, legal considerations, and risk management considerations are addressed.
Having more diversity of back-end clearing and settlement arrangements could result in cross-border retail payments that are quicker, cheaper and more transparent. Such diversity could include an improved traditional correspondent banking system, greater interoperability between domestic payment infrastructures and greater interoperability between closedloop proprietary systems.
Access to financial services and financial inclusion are necessary to reduce world's poverty and increase prosperity…www.worldbank.org
Report on Cross-border retail payments published by the Committee on Payments and Market Infrastructures (CPMI)…www.bis.org
Distributed ledger technology in payment, clearing and settlement - an analytical framework published by the Committee…www.bis.org
Distributed ledger technology in payments, clearing, and settlement, Federal Reserve Bank