BLOCKCHAIN Opportunities for Private Enterprises in Emerging Markets Second and Expanded Edition, January 2019 This report contains nine chapters that had been recently published as the following EM Compass Notes: Chapter 1, Blockchain in Development—A New Mechanism of ‘Trust’? has been published previously as Marina Niforos, Blockchain in Development—Part I: A New Mechanism of ‘Trust’? EM Compass Note 40, IFC, July 2017. Chapter 2, Blockchain in Development—How It Can Impact Emerging Markets has been published previously as Marina Niforos, Blockchain in Development—Part II: How It Can Impact Emerging Markets, EM Compass Note 41, IFC, July 2017. Chapter 3, Can Blockchain Technology Address De-Risking in Emerging Markets? has been published previously as Vijaya Ramachandran - Thomas Rehermann, Can Blockchain Technology Address De-Risking in Emerging Markets? EM Compass Note 38, IFC, May 2017. Chapter 4, Blockchain in Financial Services in Emerging Markets—Current Trends has been published previously as Marina Niforos, Blockchain in Financial Services in Emerging Markets—Part I: Current Trends, EM Compass Note 43, IFC, August 2017. Chapter 5, Blockchain in Financial Services in Emerging Markets—Selected Regional Developments has been published previously as Marina Niforos, Blockchain in Financial Services in Emerging Markets Part II: Selected Regional Developments, EM Compass Note 44, IFC, August 2017. Chapter 6, Beyond Fintech: Leveraging Blockchain for More Sustainable and Inclusive Supply Chains has been published previously as Marina Niforos, Beyond Fintech: Leveraging Blockchain for More Sustainable and Inclusive Supply Chains, EM Compass Note 45, IFC, September 2017. Chapter 7, Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging Markets has been published previously as Marina Niforos, Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging Markets, EM Compass Note 57, IFC, September 2018. Chapter 8, Using Blockchain to Enable Cleaner, Modern Energy Systems in Emerging Markets has been published previously as Douglas Miller – Peter Mockel, Using Blockchain to Enable Cleaner, Modern Energy Systems in Emerging Markets, EM Compass Note 61, IFC, November 2018. Chapter 9, Blockchain and Associated Legal Issues for Emerging Markets has been published previously as John Salmon - Gordon Myers, Blockchain and Associated Legal Issues for Emerging Markets, EM Compass Note 63, IFC, January 2019. IFC 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 U.S.A. ifc.org/thoughtleadership IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. All rights reserved First printing, October 2017. Second printing of expanded edition, January 2019. The findings, interpretations, views, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent. Rights and Permissions The material in this publication is copyrighted. IFC encourages use and distribution of its publications. Content from this document may be used freely and copied into other formats without prior permission provided that clear attribution is given to the original source and that content is not used for commercial purposes. BLOCKCHAIN Opportunities for Private Enterprises in Emerging Markets Second and Expanded Edition, January 2019 ABOUT THE AUTHORS DOUGLAS MILLER, Origin Market Development & Regulatory Affairs Manager, Energy Web Foundation ([email protected]) (Chapter 8) PETER MOCKEL, Principal Industry Specialist, Climate Strategy and Business Development, Climate Business, IFC ([email protected]) (Chapter 8) GORDON MYERS, Chief Counsel, Legal Department, Technology and Private Equity, IFC; and Co-Chair, Legal and Policy Community, ITS Innovation Lab, World Bank Group ([email protected]) (Chapter 9) MARINA NIFOROS is the founder and Principal of Logos Global Advisors, a strategic advisory firm to high-growth startups and large multinationals, helping them form partnerships and leverage opportunities for growth. She is also Visiting Faculty of Leadership at HEC Hautes études commerciales de Paris, a French business school. ([email protected]) (Chapters 1, 2, 4, 5, 6, 7) VIJAYA RAMACHANDRAN, Senior Fellow, Center for Global Development. ([email protected]) (Chapter 3) THOMAS REHERMANN, Senior Economist, Thought Leadership, Economics and Private Sector Development, IFC. ([email protected]) (Chapter 3) JOHN SALMON, Partner, Hogan Lovells International LLP, London ([email protected]) (Chapter 9) CONTRIBUTORS Matthew Saal, Martin Holtmann, Steven Buck, Marcos de Brujis, Rachel Alexandra Halsema, Susan Carevic, Andrew Yew CONTENT ADVISORS Economics and Private Sector Development | Neil Gregory, Thomas Rehermann Financial Institutions Group | Matthew Saal, Susan Starnes, William Haworth Global Infrastructure & Natural Resources | Tonci Bakovic Legal | Gordon Myers PROJECT AND CONTENT TEAM Project Manager | Thomas Rehermann Editors | Matt Benjamin, Ann Bishop, Ofeoritse Daibo Research Assistants | Jung Ryun Byun, Ariane Tamara Volk, Robert Mwanamanga, Kevin Matthees Composition and Design | Rikki Campbell Ogden, Daniel Kohan CONTENTS 4 | INTRODUCTION 6 | EXECUTIVE SUMMARY 9 | CHAPTER 1: Blockchain in Development—A New Mechanism of ‘Trust’? 16 | CHAPTER 2: Blockchain in Development—How It Can Impact Emerging Markets 23 | CHAPTER 3: Can Blockchain Technology Address De-Risking in Emerging Markets? 29 | CHAPTER 4: Blockchain in Financial Services in Emerging Markets—Current Trends 38 | CHAPTER 5: Blockchain in Financial Services in Emerging Markets—Selected Regional Developments 44 | CHAPTER 6: Beyond Fintech: Leveraging Blockchain for More Sustainable and Inclusive Supply Chains 51 | CHAPTER 7: Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging Markets 59 | CHAPTER 8: Using Blockchain to Enable Cleaner, Modern Energy Systems in Emerging Markets 66 | CHAPTER 9: Blockchain and Associated Legal Issues for Emerging Markets 77 | REFERENCES INTRODUCTION The World Bank Group has set a goal of Universal Financial Access by 2020, and IFC has a long- standing commitment to financial sector development. The continued digital transformation of financial services is critical to both objectives. Only the reach and efficiency of digital finance can sustainably bank the next billion people. Both existing and newly emerging technologies will be part of this transformation. Mobile networks, cloud-based services, and big-data analytics are already helping to reach thousands of previously unbanked customers with transaction accounts, savings products, and credit. Many emerging markets lack connectivity infrastructure and trusted institutions and counterparties. Distributed ledgers may provide some of the infrastructure these markets need. This collection attempts to focus attention on the underbanked in various emerging markets, including in potential of blockchain, and of distributed ledger Latin America, Asia, and Sub-Saharan Africa (Chapter technology (DLT) more generally, to address some of 5). Chapter 6 looks “beyond fintech” to explore how the economic and financial challenges that emerging developments in applied blockchain technology can markets face today. These challenges are many, and impact agribusiness, drug safety, and more generally include Know-Your-Customer gaps, the de-risking by provide enforcement tools to promote the reach of global financial institutions that prevents emerging sustainable and inclusive business. Chapter 7 discusses markets from accessing the global financial system, and the proper regulatory environment needed to stimulate the costs and inefficiencies of processing remittances competition and investment in blockchain technologies through the interlinked ledger system that is today’s in emerging markets and beyond. Chapter 8 examines correspondent banking network infrastructure. Various the potential of blockchain to accelerate the transition approaches using distributed ledger technology could to low-carbon energy solutions in these countries. provide solutions, as well as a new infrastructure for Chapter 9 offers a review of legal issues associated with financial services in emerging markets. the use of blockchain and how these can be addressed. Of the nine chapters that follow, the first six were These chapters are a continuation of the initial written in 2017, while the last three are more recent exploration of this topic. Sound use cases for and bring the perspective of more than a year of blockchain beyond cryptocurrencies are yet to development in this nascent technology. They also be validated at scale. Many of the proposed revisit several issues from different perspectives. implementations remove key attributes of distributed Chapter 1 provides an overview of blockchain ledgers (for example, distributed write capability technology, followed by a look at its unfolding or absence of intermediaries) in order to integrate applications in emerging markets in Chapter 2. blockchains into existing institutional structures and Chapter 3 examines whether