By Joel John
Contributions from Lawrence Lundy-Bryan, Head of Research at Outlier Ventures; Nish Kotecha, Founder Finboot & Founder geosansar; and Darrell O’Donnell, Technology Advisor Continuum Loop
Pillars for a new era of banking for the poor through identity, governance, data protection and open-data.
Many early proponents of the Bitcoin network believed Bitcoin would disrupt the financial system in emerging economies. Censorship resistance, low entry barriers, minuscule fees and round the clock access meant a new world of opportunities.
[ctt template=”3″ link=”tqvYp” via=”no” ]Be it the Greek debt crisis of 2015 or India’s demonetisation in 2016, Bitcoin has time and again proven that it can be an alternative store of value in regions where the government enforces capital controls.[/ctt]
However, its ability to impact the bottom of the pyramid (BoP) has yet to be fully tapped into as discussed in my earlier post. We are still at the earliest stages of exploring how blockchain-based networks can make an impact in the lives of the world’s poorest. Much like the Internet, it is likely to take a decade and advances in multiple convergent technologies before we realise real financial inclusion at scale.
Caption : Financial inclusion is not only about the penetration of technology in developing markets. . Source : Findex Database
The reasons for this are multifold as shown in the chart above. First, blockchains alone are unlikely to raise disposable income for the BoP. Even if local products existed, they are likely to be unaffordable. Although over 51% of the globe now has internet access through cheaper mobile phones, the user experience and product’s contextualisation has not improved to a point where it’s easy to use for retail consumers. This is a concern in regions where users coming online may have never used English as a language to interact with systems. Between private keys and token volatility, it may be awhile before the BoP adapts to the new paradigm. This is not to discredit the incredible work startups such as Bitpesa.co have done over the years. As per some reports, they scaled from $50,000 in volume of transactions to $13 million a month over two years. All this in regions in which regulatory clarity and user adoption have been relatively low. However, if we consider the broader financial landscape, the arrival of mobile devices, automated Know Your Customer (KYC) systems and digital banking has led legacy financial players to explore opportunities in the bottom of the pyramid. For instance, in India, Adhaar , the national identity system, enabled the creation of over 200 million bank accounts in the past three years. However, only 52% of those bank accounts remain active to date. This suggests that while banking accounts have surged at the bottom of the pyramid, actual usage and interaction with financial products has not.
The number of bank accounts have increased but share of inactive accounts remains high. This leaves the question —
[ctt template=”3″ link=”OpHLT” via=”no” ]Is financial inclusion the only thing blockchains could offer the bottom of the pyramid? [/ctt]
Maybe some products must be emphasised before we can bank the unbanked. In the absence of a way to generate income, a society’s ability to “bank” cannot be utilised. With this in context, it becomes easy to map out key aspects of the emerging world economies that could be addressed earlier with the help of a blockchain. We believe identity, and individual data ownership to be the pillars upon which a new more equitable digital economy can be built. Blockchains will have to be integrated into each of these components individually before they can make a significant economic impact in the developing world. We will be using each part of this four-part series to look deeply into each. Since identity is the foundation of most human interactions, we’ll begin with identity, then proceed to governance and eventually more open data infrastructure.
Over 161 countries around the world have a tech-driven identity verification system in some form or the other.
[ctt template=”3″ link=”URd1n” via=”no” ]According to the World Bank, over 1.5 billion individuals, 80% of them spread between Asia and Africa have no access to a formal identity.[/ctt]
This is especially crucial in the context of inclusion with 40% of people in low-income backgrounds having no means to verify their identity cutting them off from available subsidies. India’s Aadhaar system, for example, was devised to ensure the poorest in India have access to subsidised food (locally known as rations). The lack of access to a provable identity could result in individuals being denied their fundamental rights such as voting or in this case, food for sustenance. The United Nations acknowledges this in their goal 16.9 of the Sustainable Development Goals . It reminds member nations of the need to provide a legal identity for all, including free birth registrations by 2030.
The presence of a national identity system will reduce the need for paperwork and manual inspection in regions where bureaucracy and red tape have seeped deep into the culture and limit economic growth. India’s telecom giant — Jio, was able to acquire over 100 million subscribers in six months with the help of Aadhaar-enabled e-KYC. Similarly, Nigeria’s Integrated Personnel and Payroll Information System was able to save the Government $74 million and eliminate 43,000 “ghost workers” from the system. Additionally, a lack of a formal identity leaves the world’s most vulnerable outside official banking ecosystems. This means they rely on informal sources of credit that often leads to a spiral of debt and lifelong economic insecurity. For context on how much this matters — India loses a farmer to suicide every 30 minutes due to lack of access to a formal banking system. As the World Bank rightfully puts it in their report — fixing identity would result in increasing shared prosperity and reducing global poverty. An official identity oriented technological stack would be the first on-ramp the world’s poorest could use to climb up the socioeconomic ladder. Identity access is the single biggest impediment towards the adoption of financial services and therefore the aim to ‘bank the unbanked’.
A single issuer of identity poses systematic security, corruption and censorship risk. Now with blockchain technology, consortiums offer a way to deliver shared market infrastructure. This would mean, an identity system that utilises blockchains could bring in the efficiencies and advantages of multiple enterprises into a single system. This would also drastically reduce dependence on a centralised system functioning properly, all the time. Drawing example from Aadhaar due to its size, some reports suggest that 1 in 5 Aadhaar authentications tend to be faulty. Similarly, a hack on Equifax lead to the breach of personal data of over 145.5 million US customers. In other words, centralised systems fail to bring neither security nor efficiency in scale to identity-based systems. This can be especially scary when identity systems are needed to work in situations of emergency (eg, disaster relief)
When it comes to blockchains, two key themes of identity management has emerged
- Self Sovereign Identity — These dictate that the individual has complete control on their identity and should not rely upon a state authority for issuance of it. Self Sovereign Identity systems such as Sovrin (a portfolio company) and uPort rely upon validators such as schools, workplace and Municipal offices to verify attributes about an individual’s identity and store it on a blockchain. These are often private and permissioned to ensure limited access to third parties.
How Self Sovereign Identity Functions In Sovrin
- Decentralised Trusted Identity – These are systems of identity verification that utilise existing forms of identity such as passports to authenticate users. They rely upon a network of trusted entities such as banks to verify the authenticity of a document. Notable examples such as Civic also use phone number and e-mail accounts to the identity of an individual on a blockchain. This could often have long-term implications concerning GDPR and may be short-sighted.
Example Of A DTI system’s architecture
Blockchains distribute both data and validation and thereby drastically reduce the singular points of failure that could occur. In addition, an authentication system that puts the user in power (through private key validation) would enable the individual to know when and where their identity-related documentation has been accessed. Given the rising frequency of fraud stemming from the unauthorised utility of identity-related documents, the use of blockchains can drastically reduce occurrences of fraud and thereby protect financial assets. Also, they make the interoperability of identities sharply higher. Dubai’s has been planning the world’s first gate-less border using biometrics and blockchains. The permissioned layers of access a blockchain can provide state actors, enterprises and individuals with varying levels of authenticating an individual’s identity and reduce transactional friction. The use of a distributed identity system is best explained in an excerpt Caribou Digital post from 2016:
“Open, decentralized systems enable individuals to fully own and manage their own identities, leading to the idea of “self-sovereign” identity systems. These systems use combinations of distributed ledger and encryption technology to create immutable identity records. The individual creates an identity “container” that allows them to accept attributes or credentials from any number of organizations, including the state, in a networked ecosystem that is open to any organization to participate (e.g., to issue credentials”
Where Are We?
We are at the earliest stages of blockchain-enabled identity. Concerning traction, the most exciting application of the technology currently has been for humanitarian aid. The United Nations uses a private fork of the Ethereum blockchain to disperse resources for refugees in Jordan. The system, built in collaboration with World Food Programme relies upon biometric scans to verify the identity of individuals and creates a permanent record of transactions. This is then used to help refugees integrate faster with normal societies in regions they eventually settle in. The United Nations has also partnered with Microsoft and Hyperledger through ID2020 to scale the solution globally. At the regional level, Zug (Switzerland) has been registering Citizens through uPort, a self-sovereign identity solution built on Ethereum. Enterprises are increasingly aware of the need to decentralise identity verification systems and collaborate with startups in making it happen quicker. Microsoft has a team dedicated to exploring blockchains in the context of identity and may permit tokenised logins to Outlook related services by as early as 2020. In addition to the same, Cisco and IBM have collaborated with our portfolio company — Sovrin as stewards on their network.
[ctt template=”3″ link=”0Q3US” via=”no” ]Enterprises and governments are clearly exploring blockchains for identity. However, creating on-ramps that are easy enough to use while secure enough to store an individual’s data is where the challenge lies.[/ctt]
While networks like Sovrin could build the base layer upon which identity is stored, there will be a need for regional players with an in-depth understanding of local culture, linguistics and user-behaviour to build applications upon which the 1.1 billion without an identity can be given one.
Banking Inclusion Trends In India. Source : State of Aadhaar Report – Omidyar Networks
At the start of the decade, Banking the unbanked was at the crux of the Reserve Bank of India’s focus. Seven years on, India has close to half of its population “banked” and an ever-increasing number of individuals accessing sophisticated financial products. Tech-driven inclusion attains hockey stick growth rates over a period of time and relies heavily on improvements in technology (Moore’s law) and improvements in user experience. We are at the earliest stages of witnessing the deployment of blockchain based identity networks. As both on-ramps and the base layer infrastructure (ie — blockchains and verifiers) becomes increasingly reliable, we will see nation-states adopt them due to competitive advantages.
Adoption of a blockchain based identity will be driven out of a need to reduce leakages, attain operational efficiency (time taken for verifications) and consumer interest in faster services. As with innumerous trends in the past, the end consumer may not even realise how blockchains are being utilised in the background. Their rise will further empower individuals to claim ownership and trade personal data with entities they trust. That shift — from state holding complete control on an individual’s identity that is leaky and vulnerable to ones that are self-sovereign, decentralised and relatively reliable will lead to a new generation of financial products that would have been impossible until then due to difficulties in tracking consumers.
- A lot of this article (and charts in it) was inspired by Omidyar Network’s State of Aadhar Report. It is highly recommended if you’d like in-depth insights on the challenges and opportunities in working on identity in developing economies. Thanks to Govind Shivkumar for an invite to Omidyar’s event focused on challenges in developing economies. This series is inspired by learnings from there.
- Credits to our portfolio company Sovrin for inspiring curiosity on why identity needs fixing. Their whitepaper is a must-read if you’d like to understand blockchains in the context of identity.
- Contact me via email (email@example.com) or Telegram (@ joel_john) if you are working on something interesting in the field. I adore #Buidlers
Byers, K. P. C. “2018 Internet Trends Report” http://www.kpcb.com/internet-trends.
Leaving no one behind: the imperative of inclusive development: report on the world social situation 2016 (2016). United Nations, Department of Economic and Social Affairs.
Merriott, D. (2016) “Factors associated with the farmer suicide crisis in India,” Journal of Epidemiology and Global Health, 6(4), pp. 217–227. doi: 10.1016/j.jegh.2016.03.003.
Questioning the Role of Bitcoin for Financial Inclusion (no date) Center For Global Development. https://www.cgdev.org/blog/questioning-role-bitcoin-financial-inclusion.