JP Morgan & Tomatoes In Africa: A Blockchain Love Story
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It is not uncommon to walk into a restaurant in Kenya only to find that many of the items on a given menu are not available. This is especially the case in non-touristy locations in major Kenyan cities, such as Nairobi. One major cause of this phenomenon is supply chain unreliability. Basically, restaurants suffer price instability from wholesalers of locally-sourced food because of hyper-intermediation, market opacity, cyclical weather conditions, infrastructure-driven transportation logistical nightmares, vendor solvency risks, cartel price-rigging and more.
For example, many Kenyan farmers forgo (or do not have access to) the latest irrigation technologies. Although battle-tested over centuries, many traditional farming techniques in the region disproportionately increase the risk-profile of weather and result in higher susceptibility of farmers (and prices) to droughts. The lack of urgency to address this issue and others can be reduced to one of many things: a lack of incentives. It is here where capital markets (especially the latest digital marketplaces) can and do help.
Recently, a Kenyan company leveraged blockchain technology to tackle these problems and has seen massive adoption among farmers and retailers: Twiga Foods.
Twiga provides financing and logistical support to hundreds of vendors across multiple supply chains to offer local farmers and restaurants increased reliability. They have been taking on the risk and have achieved significant upside, with many competitors now entering the fray. However, they are only tackling the vendor solvency and logistical aspects. Price unpredictability and supply chain disfunction still run rampant across the nation. One of the most widely-produced and price sensitive commodities in the region is tomatoes, which can increase or decrease in price by 200% in short periods of time.
This is in a country where you can buy nearly anything with a text message (using Safaricom’s world-renowned, easy-to-use, telecom-powered Kenyan branchless-payment system: M-Pesa). One might wonder how you could have such efficiencies in one sector of financial markets with such a lack in others. It takes a few seconds longer to process an M-Pesa payment than your typical wallet-to-receipt process, but setting up and funding your M-Pesa account on-the-go is MUCH easier than setting up a bank account and debit/credit card for the average Kenyan. In many other countries around the world, people could only dream of such widely-accepted convenience for their mobile devices: Street vendors even accept M-Pesa.
However, many of these other countries have significantly greater price predictability and product availability. One reason for the lack of price predictability and excessive market risk in Kenya is a lack of agricultural futures and options markets to allow vendors to hedge against price fluctuations and other systemic risks.
Kenya boasts a highly deregulated financial services environment, making it a hotbed for fintech innovation. You are seeing this innovation with the likes of not just Twiga Foods, but Tala, Tulaa, Alternative Circle, BitPesa, L-Pesa, DPO Group, and many more in the microfinance, payments and securitization spaces.
Enter the Quorum blockchain by J.P. Morgan. Unlike most blockchains, there are fee-free transactions. Likewise, while you can have public ledgers of all transactions like traditional blockchains, there are optional private, encrypted transactions on these distributed ledgers (see PrivateFor).
With the ability to process thousands of transactions per second, it is essentially an obvious choice to record ownership and chain-of-custody of financial instruments, especially securities. By linking M-Pesa’s open API for payment settlement with Quorum’s blockchain for asset custody validation, Kenyan producers and vendors could use systems they are already familiar with in order to purchase and verify price protection. Speculative traders could deploy exchanges built on top of Proof Suite’s open-source Quorum/Ethereum-compatible decentralized exchange platform, AMP, to trade these instruments securely as well.
This kind of marketplace is required for essential liquidity to power a futures market for professional traders while hedgers can manage their risk via simpler interfaces over text-message or via easy-to-use mobile apps.
The result is transparency, efficiency, risk reduction, and perhaps fewer items not available when you grab a bite in Nairobi. This is not to mention increased margin for local farmers and price reductions for local consumers: a typical recipe for economic growth.
