Reinventing Nepali trade and governance through blockchain

Over the last decade, Bitcoin has captured the imagination of investors, tech geeks and the average Joe alike. It made international headlines when it made a remarkable ascent from USD 976 to USD 20,089, a 2000% increase in the span of 9 months in 2017. This astonishing market traction it received made governments and economists take notice of the bitcoin, and talks began of developing digital currencies to compete with it. The outbreak of the COVID-19 and the subsequent economic disruption provided further impetus to Bitcoin adaptation. Since the beginning of the worldwide lockdowns, governments and central banks have increased money printing, which has in turn amplified concerns amongst investors over inflation and a potential weakening of the government currencies. This led to many institutional investors jumping the bandwagon to purchase Bitcoins as an alternative since they considered it as a store of value owing to its limited supply – capped at only 21 million. In January 2020, the price of Bitcoin peaked at USD 49,951.[1] During the same time period, the total cryptocurrency market also hit an all-time high, exceeding a market capitalization of over USD 1 trillion![2]

As revolutionary as Bitcoin has been to the fundamentals of the finance industry, Blockchain – the underlying technology which governs Bitcoins has an even larger use case, ranging from tracking tangible assets(house, car, land, cash) to intangible assets(intellectual property, patents, copyrights, branding). Virtually anything of value can be traded and tracked in a Blockchain network. So how is Blockchain different? Say, you make an electronic payment online, via card, or through a mobile phone. At present, the most common mode for all financial transactions is through a trusted bank or institution to process the transaction. This is usually a very long process that includes verifying identities, establishing creditworthiness, and reconciling sums of money between accounts. Blockchain removes this need for a third party such as a bank, allowing customers and vendors to connect directly. The fundamental to understanding the working of a Blockchain is the notion of a “distributed ledger”. Using cryptography to keep the transactions secure, Blockchain provides a decentralized database or ledger of transactions that everyone in the network can see. This network is a chain of computers that must all approve of exchange before it can be verified and recorded. This concept of a distributed ledger can be used in a myriad of different applications ranging from anti-money laundering tracing systems, supply chain & logistic monitoring, and secure sharing of medical data. Blockchain’s potency, however, is best described through its impending revolution in trade and governance.

Blockchain in Trade

Current international trade transactions are very cumbersome, involving a lot of documents and paperwork like sale contracts, commercial invoices, letters of credit, border procedure documents, sanitary and phytosanitary certificates, and certificates of standard conformity documents at the very least. As a result of this complex web of approvals and paperwork, international trade has been plagued by issues of high administration costs and fraud, debilitating coordination in the complex web of international trade. The use of a blockchain system allows for all these documents to be verified and stored in a distributed ledger, reducing overhead costs on trade clearances and possible cases of the seller or buyer fraud.

Another aspect of trade that Blockchain has the capacity to revolutionize is trade finance. Currently, 80 to 90 percent of global trade is reliant on trade finance.[3] The use of trade finance tools is usually a risk involved for both importers and exporters owing to the challenges of trust, party authentication, and fraud. Blockchain effectively streamlines this since it facilitates a process to share information between importers, exporters, their respective banks and government agencies involved in import, export, and transit in a permissioned distributed ledger. Blockchain offers an effective solution to improve the security of traditional trade finance and to further automate the process, which also streamlines and digitalizes the process of international trade. Furthermore, the concept of a highly transparent decentralized ledger with an audit trail allows for a significant reduction in overhead costs in the payroll of employees required to verify documents related to letters of credit for the financial institutions involved. [4]

Blockchain in Governance

Governments can leverage the Blockchain in areas of financial transaction & asset management, government contract management, and regulatory compliance. Blockchain has in particular been found to have the capacity to bring about significant impact in the area of regulatory compliance. A Blockchain establishes an immutable and transparent audit trail with assured timelines that allow for a significant reduction in the cost of managing the contracts and enforcing regulations. This not only increases transparency in government activities for the general public, but it also helps the government to automate the check on illegal activities, tax evasion and to ensure improved public service delivery. Since a Blockchain allows for fraudulent activities to be detected very quickly, it can also dissuade fraud to a large extent. The concept of an immutable and transparent audit trail in a Blockchain equips the government with a highly transparent system which will also allow for effective implementation of rigid anti-money laundry and counterfeit rules and policies.

Blockchain can also enable complexity reduction in areas of identity management. Undocumented people mean a section of a population that is cut off from full participation in the country’s economy. It disables people from opening a bank account, owning a property, or getting access to government services and programs. Blockchain services can securely compile, cross-reference, and verify multiple data sources, events, and transactions that can effectively validate an individual’s identity when traditional proofs of identity are missing. This plays a significant role in increasing financial access to the unrepresented population in the country.

Furthermore, since all participants in any transaction have access to the same records in a Blockchain, the provision of government services to the general public does not require intermediaries to validate transactions and verify identities/ownership including services for businesses licenses, property titles, vehicle registration, streamlining the process of effective public service delivery. The government can also streamline the process of contract management. The distributed nature of multiple sources of data means that the failure of any party or contractor to meet a deadline or complete a task can be immediately visible to all concerned stakeholders, which increases transparency from the government’s perspective for public services such as garbage collection and infrastructure projects development.

Blockchain in Real Estate

Blockchain introduces the concept of a smart contract – a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. A Blockchain allows for a distributed ledger with real estate information on the authentic owner, tax information, land title documents, and government approvals, which does not require an interested buyer to frequent government agencies to buy the piece of real estate. Furthermore, it also ensures that any transactions regarding the land property are recorded transparently in the distributed ledger. This takes out the need for brokers, lawyers, and land registry bureaucrats. The concept of smart contracts through Blockchain will also serve to replace the slow bureaucratic process through a decentralized ledger that subtracts the additional overhead on extra inspection costs, registration fees, loan fees, and property taxes, which can all be digitalized. The greater transparency in the process also allows for greater clarity in tax collection for the government. The Blockchain system also allows for any property to be liquefied and exchanged like stocks which will allow people with the weaker financial potential to be inclusive in the country’s financial system.

Blockchain and Nepal

Blockchain possesses an unharnessed potential to revolutionize the governance and trade policies in Nepal, areas which require significant upgradation in the country.

However, while Blockchain does have the ability to bring about a huge disruption in governance and public service delivery, it requires significant investments and clear policies around its implementation. Furthermore, only will scaling the Blockchain infrastructure to all 3 levels of the federal system ensures a cohesive system that is transparent and which effectively streamlines the process of information collection and utilization. Nepal needs to reinvent its IT infrastructure on the foundations of the Blockchain.

References:
[1] https://www.cnbc.com/2021/02/15/bitcoin-btc-price-hits-a-record-high-of-nearly-50000.html#:~:text=Bitcoin’s%20price%20reached%20a%20new,showed%20support%20for%20digital%20currencies.

[2] https://www.coindesk.com/cryptocurrency-market-value-record-1-trillion

[3] https://www.wto.org/english/thewto_e/coher_e/tr_finance_e.html

[4] https://www.wto.org/english/res_e/booksp_e/blockchainrev18_e.pdf