Blockchain’s Effects on Economic Deprivation

Can blockchain solve the problem of economic deprivation?  We’ll admit the world we live in is becoming increasingly divided when it comes to the standards of living enjoyed by its citizens. Can blockchain close this gap?

We’ve seen how blockchain technology is already impacting the financial industry in the developed world.  Besides its use in cryptocurrency, there are also many other potential applications of this technology which we have discussed in previous articles.  

The internet has connected the world in ways not possible before. Similarly, the effects of blockchain technology may also be far-reaching and disruptive.  In particular, blockchain may be able to play an important role in helping those in less developed areas of the world. The ones who suffer from economic deprivation.

Economic Deprivation Defined

To start this discussion, we will first have to define economic deprivation. In Layman’s terms, economic deprivation is the lack of material benefits that are considered basic needs in society.  This lack may be the result of unequal production, distribution, and consumption of goods and services. The result is social deprivation. This is when the current process of distribution results in some having less than others. In some cases, individuals have so little that they are unable to meet their basic needs and necessities. 

According to the World Bank’s most recent estimates, as of 2015, about 10% of the world’s population or 734 million people live in extreme poverty.  Extreme poverty refers to living on less than $1.90 per day.  General causes of poverty include lack of education, environmental problems, lack of access to banking facilities, lack of legal ownership of property, lack of rule of law, overpopulation, epidemic disease, or changing trends in a country’s economy.

In the past decades, we have seen significant inroads to reduce poverty.  The global poverty rate is lower now than it has ever been in recorded history.  However, the decline in poverty rates has slowed in recent years.  This has raised concerns about whether the first of the UN’s Sustainable Development Goals of ending poverty by 2030 will be achieved.

Image of a child facing social deprivation as he looks through the grabage.

How Blockchain Can Solve Economic Deprivation

The potential exists for developing nations to use blockchain technology for leapfrogging.  Leapfrogging occurs when there is an opportunity to take advantage of a lack of infrastructure to adopt the most advanced methods. It is an effective strategy for developing nations to move forward rapidly without going through all the intermediary steps.   

We’ll admit blockchain is not able to solve all the causes of poverty. However, it does hold great potential in tackling some of them, specifically a lack of access to banking facilities, a lack of legal ownership of property, and proof of identity.  

Lack of Access to Banking Facilities

Remittances make up one of the most important financial flows to developing countries.  Remittances are private funds sent by migrant workers to families in their home countries. For many in poorer countries, it is a critical lifeline. This is because these funds go towards paying for basic necessities, access to healthcare, education, and housing.  Remittances have the potential to raise entire communities above the poverty threshold and in some cases, boost a country’s GDP.

According to one source, nearly one billion people send or receive money every year.  Total transfers reached over 500 billion dollars in 2019.  It amounted to roughly three times the amount of development aid. This makes it an important source of funds for developing countries.  Currently, about 40% of all transfers go to rural areas. 

Remittances Help to Reduce Social Deprivation

Though remittances play an important role in reducing poverty, transferring money overseas is expensive and particularly disadvantageous for the migrant communities receiving it. Average transaction fees are 7.45%, and even higher for certain corridors, for example, Europe to Africa, and within Africa itself.  

The high costs are due to the lack of competition among Money Transfer Operators (MTOs), the need for many intermediaries, each charging their own fees, inefficiencies in the system, and the lengthy clearing time for transactions.  This is particularly true if the recipient lives in an underserved or under-banked community.

The process is further streamlined with blockchain. This means a cheaper, safer, and faster remittance system can be created.   Whereas traditional services often include an expensive middleman like a bank to verify each transaction, blockchain technology eliminates this need.  It allows for direct peer-to-peer transactions in real-time across borders.  

Image of ATM's in a financially inclusive environment with no economic deprivation.

Creating a Financially Inclusive Environment

The availability of the internet and low-cost smartphones opens up the possibility for millions of people to have access to financial services. That is without the need for a financial institution. By eliminating the middleman, costs can be reduced.  And anyone, no matter where they live, will be able to interact and make economic trades with each other. It can reduce discrimination based on gender, ethnicity, income bracket, or occupation.

The end result is a more financially inclusive environment. Therefore, we can expect that individuals and businesses will have access to useful and affordable financial products and services. Ones that meet their needs.  This includes transactions, payments, savings, credit, and insurance.

Remittances Using Cryptocurrencies

Blockchain technology makes it possible to send remittances using cryptocurrencies. Yes, this includes bitcoin. Although still very much in its infancy stage, the potential is great as it has the ability to reach the migrant population masses.  With the increased availability of the internet and low-cost smartphones, transactions can be made without the use of any financial intermediaries. Cryptocurrencies offer the advantage of being anonymous and secure.  And where there may be concern about hyperinflation with the national currency, they can act as a store of value.

Property Rights and Land Titles

It is estimated that about 70% of the people in the world who own land have only a tenuous title to it.  This means that their claims of ownership to their properties are weak at best, and can easily be taken away from them.  For the poor, however, land and housing are their most important assets.  According to the World Bank,  “improving tenure security for both women and men can have a greater impact on household income, food security and equity”.

In developing lands keeping accurate, up-to-date records is a challenge.  Land registries are often vulnerable to tampering, inconsistencies, damage, and loss.  The lack of governance in this area contributes to issues with unclear ownership and tenure.  This lack of secure land and property rights, however, is one of the most important barriers to economic mobility, which is the ability of an individual to improve their economic status.  Without a secure and valid land title, it is difficult to borrow money, invest in improvements, or to plan for the future. 

Economic Benefits of Secure Land Titles

Secure, up-to-date land records have many economic benefits.  Having accurate records enables value-based property taxes, contributing significantly to local government revenues.  It allows for the effective management of public properties.  Additionally, accurate records have a direct impact on financing and public infrastructure investments.  

Other benefits include:

  1. A reduction in social tension. After a conflict or natural disaster peace, we can ensure peace with speedy reconstruction.
  2. Management of sustainable urban growth.
  3. A pilar for agriculture and food security.
  4. Reduction in inequality and protects the rights of vulnerable groups including minors, women, and indigenous people.

How Blockchain Can Secure Land Titles

With all these benefits, we can see why addressing this issue can have a great impact on economic deprivation.  Blockchain technology has the potential to address many of the problems surrounding the maintenance of accurate and secure records.  Three of the features that blockchain can offer are:

  1. Cryptography allows for the maintenance of a secure ledger.  Blockchain technology protects and stores information on it. This is through encryption with a unique identifier.
  2. Validation and immutability.  Because blockchains operate on a consensus, a new record of a property transaction cannot be added unless its authenticity is verified against other nodes within the network.  Once added, it cannot be changed. This protects the data from corruption by illegitimate sources.  
  3. Distributed ledgers.  Records are stored and distributed among the permissioned parties in a network.  Additionally, you can view or add these records intermediaries or centralized authority, such as a national land registry.  

With blockchain then, it will be possible to create a registry that is accurate, secure, and immutable.  It would streamline the process of property transactions and facilitate trust between parties, as all transactions will be transparent and immutable.  

Hurdles to Overcome For Blockchain To Reduce Economic Deprivation

However, blockchain technology can’t be implemented on a large scale basis in developing countries just yet. There are still a few hurdles that technology must overcome.  One potential hurdle is that the inputs themselves need to be accurate and digitized. Once something is recorded, it cannot be changed. Prior to its implementation on the blockchain, there is the challenge of ensuring that the registry is free of error, fraud, and corruption.  

Secondly, the data needs to be digitized to allow for hashing. Many countries will have the challenge of updating incomplete paper-based records to digitalized ones that accurately reflect property and ownership characteristics.  Furthermore, to tackle the challenge of implementing blockchain technology will require a significant investment in a public and professional capacity. This will ensure this technology is managed properly.

Image of a person with their face covered to illustrate the difficulty of proving your identity in socially deprived areas.

Proving Your Identity

What would you do if you had no way of proving who you are, or even that you exist?  According to the World Bank, about 1 billion people around the world face challenges when it comes to proving their identity. Of these, about 81% live in sub-Saharan Africa and South Asia.  

The problem particularly affects the poor. In these countries, high fees are charged to obtain an ID. Therefore, the cost of obtaining the required supporting documents are a barrier for the poor.  Without proper ID, these ones struggle to access basic services like access to finance, health care, and education. It also becomes difficult to access opportunities for employment or ownership of a registered business. 

Another obstacle to providing proof of identity is the lack of proper infrastructure in poorer countries. The registry tracks important life events like birth. For governments, proper identification of its citizens is critical. This is to provide services efficiently, raise revenues, and foster growth in the private sector.  

Here again, blockchain technology can be applied to provide a solution for digital identities that are both traceable and immutable,. These identities are not under the control of a single company or organization.  With blockchain technology, documents that confirm one’s identity and qualifications can be safely stored. The technology also protects them from being altered, forged, or deleted. 

For millions of refugees who have been forcibly displaced as a result of conflict or persecution, digital IDs can be used by governments and aid agencies to provide access to banking, documentation, and education.  

Blockchain technology also holds promise as a way to counteract the global issues of identity theft and certification fraud.  

Will Blockchain be The Answer to Economic Deprivation?

We all long for a world where everyone can enjoy life and have access to, at the very least, their basic needs.  But getting there will not be an easy process.  Let’s face it.  Though blockchain technology holds promise in addressing some of the issues of economic deprivation, the wide-scale implementation of this technology is still years away.  Blockchain architecture is still relatively new, and there are still questions surrounding the scalability of its infrastructure.  This means that it is in no way a perfect solution just yet. 

And while blockchain technology may help with economic deprivation issues, technology on its own cannot fix all problems.  It cannot overcome a bad government that is too poor, too unorganized, or too corrupt to provide for the needs of its people.  

Nor can it overcome a lack of basic infrastructures such as roads, schools, or reliable power.  In the words of Bill Gates, “No one can suggest that great technology is in any way a substitute for good governance. I certainly don’t think giving everyone computers helps their malaria or solves the problem of the teacher not being there or not having a schoolroom.”  

Learn more about blockchain for good in our article: Blockchain in Education – 2020 Update.