In a recent research report, we wrote at length about blockchain technology, which will introduce elements such as enhanced security and transparency to the third version of the internet, Web 3.0. Blockchain has a much broader scope of impact beyond cryptocurrency and is poised to disrupt a range of sectors via its technology.
Here we summarise some of our findings to show the impact on financial products and services, sustainable consumerism and insurance in emerging markets.
Financial inclusion
Fintech solutions: one of the primary applications of blockchain lies in increasing financial inclusion through fintech solutions. Emerging markets (EMs) such as Argentina, Philippines, Mexico and Indonesia have less than 50% of banking coverage1, which warrants a need for financial services solutions. With rising smartphone penetration and financial services like payments offered via mobile phones, there is significant scope for increasing financial inclusion in EMs via fintech.
Bitcoin: there is evidence of cryptocurrency adoption in countries such as Nigeria and Brazil, through the use of bitcoin for payments and transactions. P2P transaction data depicts large volumes, with Brazil recording USD25.3 million and Nigeria with USD357 million as of 20202. In some countries, such as Cuba, cryptocurrency has been used as a replacement when traditional networks (e.g. Western Union) halted services.
P2P lending: fintech P2P lending has experienced significant growth recently, with fintechs capitalising on the drawbacks of traditional lending processes which entail slow loan approval processes and other administrative hurdles. Lending platforms built on blockchain technology reduce the costs associated with loan approval and increase efficiency and security. Loan evaluation procedures, for instance, could be automated using smart contracts which would improve approval processes.
High remittances: crypto usage and ownership are prevalent in economies with high remittances. We find that cross-border payments systems infrastructure are largely inefficient owing to regulatory hurdles, administrative requirements in processing transactions and high transaction fees. Blockchain-based services are cheaper with potentially faster transaction speeds, thus will facilitate financial services in the absence of traditional networks.
Low Earth Orbit satellites: LEOs combined with blockchain technology could significantly impact financial inclusion, by improving access to connectivity. In addition to a significant unbanked population, 55% of the Asia Pacific region’s population remain offline with an excess of 3 billion people living more than 10km from fibre optic cables3. Overall, LEOs provide higher quality connectivity than GEO satellites, which effectively implies fast transaction speeds, useful in processing financial transactions.
Exhibit 1: Crypto ownership tends to be higher in countries with high remittances
Source: Statista Global Consumer Survey 2020 and World Bank 2020
Will crypto gain mainstream adoption?
While it is clear that there is a degree of utility for cryptocurrency in EMs, the following issues mean the jury is out with regards to widespread adoption:
- Volatility and extreme price fluctuation
- Regulatory scrutiny
- Slow transaction processing times
Furthermore, there are concerns by the IMF that crypto adoption in EMs could undermine traditional financial systems and upset stability. As it stands, there is a general degree of legislative hostility towards cryptocurrencies in EMs, with outright bans in some countries, such as China.
On the other hand, cryptocurrencies backed by an asset e.g. stablecoins remove the aspect of volatility and could better address financial inclusion without the risk of extreme volatility. Many Latin Americans have resorted to using stablecoins as an inflationary hedge owing to the price instability of local currencies. We believe that this reflects the potential for their use as a mainstream cryptocurrency in the future.
As it stands however, stablecoins are private and are unregulated – this has brought Central Bank Digital Currencies (CBDCs) into the spotlight. CBDCs are effectively digital fiat currencies issued by a central bank. They have the potential to improve financial inclusion as well as existing payments infrastructure in terms of efficiency and safety4 and also reduce the cost of printing. In addition to this, CBDCs would allow central banks to retain their monetary authority.
China is testing its own CBDC in several regions, with India expected to debut its own digital currency by 20235. We believe that widespread adoption of a CBDC would require a fully-fledged early adopter like China to demonstrate viability before we see digital currencies proliferate into the EM mainstream.
Sustainable consumerism
On the production side of supply chains, blockchain technology would positively impact manufacturing, with applications in supply chain transparency, supplier management and container logistics management6. This is relevant for emerging economies where manufacturing is a significant proportion of GDP.
On the consumer side, it’s clear that ethically-conscious consumerism has gained traction in EMs with consumers placing emphasis on ESG factors, such as ethical sourcing and low carbon footprints, when purchasing products. Increasingly consumers are holding brands to higher ethical standards and depict a willingness to pay a premium for sustainable fashion brands.
We find that this has effectively pushed brands to adopt more sustainable business practices and consumer brands in luxury goods, fashion and e-commerce are compelled to stay competitive and cater to prevalent consumer trends.
As an example, a leading Chinese cosmetics brand, OuShiMan, recently adopted blockchain technology into its business operations to improve supply chain transparency and traceability. According to news sources, this would be the world’s first instance of a blockchain-based beauty products series7.
Exhibit 2: High and low income consumers are willing to pay more for sustainable fashion brands
Source: Credit Suisse Emerging Consumer Survey, 2021
Insurance
The insurance industry in emerging economies currently has a “protection gap” with significant scope for growth in the space. Insurtech firms are competing to leverage technology to deliver customer-friendly services to the masses in a cost-efficient way. Blockchain could add significant value in this context as underwriting and claims settlements could be automated using smart contracts which would improve speed and cut costs. Customer data stored on an immutable ledger would also enhance insurers’ abilities to derive insights and develop products that could maximise reach.
Exhibit 3: Benefits of using blockchain in insurance
Source: IBM.com
Conclusion
While we believe that blockchain technology has potential implications on a range of sectors, its impact will be mostly keenly felt in financial services, where it would be a significant risk to financial services incumbents which rely on traditional financial networks, such as SWIFT, for asset transfer.
Blockchain technology’s disintermediation implies significant potential for disruption in the sector, especially in segments such as payments and lending, while introducing advantages such as enhanced speed, cost efficiency and security in conducting P2P transactions. These are significant competitive attributes that fast-growing fintech platforms could garner via its adoption.
Given our top-down overlay, we seek to understand the broader implications of changing trends and how these are likely to affect sectors and companies. As new technologies develop and disrupt the market, our thematic research helps identify areas of structural growth, while enabling us to avoid areas that aren’t likely to stand the test of time in a changing world.