How Blockchain Technologies Can Solve Real Financial Problems

It has now been over 5 years since I moved back to India after 5 years in London where I worked in the bylanes of commodity trading and interest rate swapping.

In the years that I’ve been here, I have had the fortune of interacting with people from all walks of life — something I did not do much of when I was living the city boy life in London. And by walks of life, I mean people from practically every socio-economic bracket one can envision.

I have interacted with the poorest of the poor, who have nothing to their name. Hell, in some cases, these people did not have a single piece of ID which pointed to their name, date of birth or even where they were born. At the other end of the spectrum are the richest of the rich — often educated abroad, these folks can afford practically anything, and they are not shy of splashing out on items which I consider ‘wasteful expenditure’ — lamborghinis, ferragamo belts and colognes that induce a coughing fit if you get too close the person wearing them.

Old Spice does it for me, thank you very much.

(and for the ladies apparently)

Of course, one learns a lot and develops an immense amount of compassion when you take the effort to delve deeper into people’s lives. Not at a surface level — I don’t mean likes, dislikes and so on.

I mean getting to know them well enough so you can understand the motivation behind their behaviour — the ‘why’ that seems to be driving every decision and move that they make.

Consider the following scenarios:

Scenario 1:

Amit has moved to Bangalore from his home state of Bihar in north east India, as there are very few opportunities there to earn a livelihood. He has left a family of three — a wife and two sons, and also has a mother back home who is dependent on him for her basic needs. He gets a job in Bangalore as a driver, and makes it a point to send money back home every month. Of his salary of Rs. 15,000 per month, his monthly budgeting is as follows:

Payment of loan taken for sister’s wedding — Rs 3,000 ($45) per month

Living expenses — Rs 4,000 ($62) per month

Money to be sent home — Rs 8,000 ($124) per month (the balance)

Amit has not been able to open a bank account in Bangalore, despite being resident there for over 3 years. When his employer asks him why he does not yet have a bank account, he comes up with many reasons; chiefly, that he doesn’t have the right documents. Every time Amit approaches a bank branch to open an account, he is turned away for not being able to present some official document or the other. Basically, the real reason that Amit has not been able to open a bank account is that banks don’t see him as being a profitable customer, and therefore can’t be bothered with wasting time on him.

As a result, for the money that he needs to send home, Amit asks his employer to draw a cheque in the name of his wife, which is then transferred directly to his wife’s account a few days after he presents the cheque to the bank. The remaining salary is paid to Amit in cash — which he uses for daily expenses and the repayment of the loan.

Amit has very little knowledge of the financial system, especially about how banks operate. He is able to read and write only in Hindi, while most documents in Bangalore are either in English or in Kannada. Amit had not heard of the concept of compound interest until his employer explained it to him. Of course, he was stupefied that money could ‘grow’ like that.

Remember the loan I mentioned earlier? Amit pays an amount of Rs 3,000 ($45) every month on a loan of Rs 60,000. So he pays 5% of the amount loaned to him every month as repayment. The only catch here is that this amount is the interest portion on the loan. Do you want to work out how much this works out to in terms of an annual interest rate? He thinks this exorbitant rate of interest is ‘normal’ — after all, every person in his village is paying the same rate. Only when he pays an amount greater than Rs 3,000 does the moneylender start deducting this from the principal.

Amit has only ever heard of stocks and fixed deposits. He never has any amount left over to ‘invest’ though. After all, it takes Rs 5,000 ($78) to start an account, and if that is going to be an amount he can’t ever touch (it is the minimum balance which has to be maintained at all times), then what is the point?

He is happy the way he is.

How do I know all this? Amit works as a driver at the school where I also work.

Scenario 2:

Raju is a Pakistani living in Dubai. He works sixteen hours a day, seven days a week. He has 3 jobs. Well, not quite. He has one job, and numerous side hustles.

The first job is one that starts at 4 am and finishes by 11 am. He is a sweeper and is employed by the Sharjah Municipality. Although the nature of his job has changed since more mechanized methods have been introduced, he gets paid a salary which most people in the developed world would not get out of bed for.

His second and third jobs are at the homes of Asian expats. Where he cooks or cleans. He works at an average of 7 houses at any one time. This is of course illegal according to the laws of the country — if you are there on a work visa, you can only work at the job that the visa entitles you for. But Raju is a hustler, and is fully aware that he can get deported if he gets ‘caught’. Yes, there are countries on this planet where working hard is a crime!

Raju has been in the UAE for over twenty years, and has gone back to Pakistan just six times in that period. Two of those trips were to get his daughters married. His life is tough, but he feels proud that his children are the first generation in his family to all have a college education. All because he worked hundred hour weeks for over twenty years in a country where people of his background have never been treated well.

Raju, like Amit, sends money back home every month. He uses one of Pakistan’s most famous banks for this — and according to him, it is the best way for him to transfer money back home. The only catch here is that Raju has absolutely no clue that his bank is ripping him off. They give him an exchange rate which is so unfair, most financial professionals would laugh at it. Added to this, they demand that Raju keeps a minimum balance in his account at all times, and that his wife keep a minimum balance back in Karachi. Inadvertently, Raju is losing out every month in the following ways:

• He gets a very bad exchange rate to convert Dirhams into Rupees
• He has to keep a certain minimum balance in his bank all the time, and he can’t use this money
• His wife has to do the same — keep some money in the bank but she can’t use it as it is a minimum balance

How do I know about Raju’s circumstances? He used to come in twice a week to clean our home in Dubai. Not that it is relevant to this post, but Raju made the best biryani I have ever had.

So, where does blockchain come in?

Well, consider Scenario 1. While Amit struggles to send money home (literally and metaphorically), and simply can’t ‘afford’ to open a bank account, my worries revolve mainly around whether I should take some of my money out of bitcoin and buy some other coins.

Quite different problems, and yet we work for the same organisation.

I want to address how applications built on the blockchain can help people like Amit.

Amit is not part of some minority, — he is one of 233 million people in India who don’t have a bank account.

Using the blockchain, all people need to transfer money to each other is what is called a ‘wallet’. No bank accounts, no documentation and definitely no minimum balance. Documentation and minimum balance requirements keep many million Indians out of the banking system, and at the mercy of ruthless money lenders.

If you want to send money to me, all you need to know is my wallet address and we have a mechanism for payments to go through. No bank needed. No payments app needed (which requires a bank account in the first place).

If Amit gets himself a wallet, and gets his wife a wallet, they can transfer money to each other whenever they want, and in any amounts desired. Although transaction fees on some cryptocurrency transfers can be very high, in most scenarios, transferring amounts from one wallet to another costs less than 1% (in some cases, well below 1%). Compare this to the 3% that Paytmcharges when you transfer money from your wallet to your bank account.

Now let’s talk about Raju. Most remittance companies, banks included, charge exorbitant fees for their services. Western Union often charges 5% of amount sent as commission, and that does not include the foreign exchange charges. This 5% is charged at both ends of the transaction. So if Raju were to send money using Western Union, he would pay 5% in Sharjah, and then his wife would pay 5% in Karachi when she goes to the local kiosk to receive the money. This process normally takes days from the time the money leaves Sharjah to the point it is delivered in Karachi. You’d think they are shipping actual notes, but they’re not! When you think of someone having to do this every month for many years, you get an idea of how the financial system exploits people!

A company called Abra attempts to solve Raju’s problems in a way that conventional companies and banks cannot (or choose not to). Abra uses the bitcoin blockchain to transfer money, and charges no fees for transfers between wallets, irrespective of the country. The only fees users pay is the fee for using the bitcoin network for transactions. In an ideal world, such fees would be very low, but lately, transaction fees have been very high for bitcoin transactions. I am keeping a close eye on Abra as I am keen to see how they solve this problem. The easiest way would be to integrate other cryptocurrencies into their network, which I believe they have done since I wrote the first version of this article. *

So how would Raju use Abra?

Well, he would download the Abra app and ask his wife to do the same. Then, he would buy bitcoin through the app using his Dirhams and send it to his wife on the app. His wife would receive bitcoin almost instantaneously (usually within an hour). Now it is unlikely his wife’s local grocer in Karachi accepts bitcoin. So Abra has built a network of tellers all over the world — people who buy bitcoin and sell the local currency for a fee. These fees are usually in the region of 1.5%, although some ‘tellers’ on the Abra network do it for less. Raju’s wife would go to the local teller in Karachi and get her local currency in exchange for bitcoin.

How does this compare to the Western Union model? I think I know which one I would choose!

Back to Amit’s problem of never having invested in a stock or fixed deposit, because he doesn’t have a bank account. It seems like Amit will never truly participate in the financial system simply because he does not have a bank account, and it doesn’t look like he will get over the hurdles of getting one.

Enter a company called Chain. Chain has developed a solution which allows anybody to buy any kind of digital financial instrument, without going through the hoops that entail becoming a ‘qualified investor’. Chain is enabling the digitization of any kind of asset, and uses blockchain technology to do so. What I personally find exciting is that as this technology develops, anyone anywhere will be able to buy a fraction of any financial asset in the world.

So a person in Bangladesh could buy a bond issued by a company in Australia, just using his wallet. Of course, the regulation that comes with such technology is still in its infancy, but the opportunities that it opens up are undeniable. Additionally, this will enable people to buy a fraction of any asset — something which was not possible previously. Just imagine — you want to invest in a house in London but can’t afford it (duh!). Another company called LAToken allows anyone to create ‘tokens’ against an asset and to sell them on the blockchain. So as a prospective investor in London’s real estate market, you can still buy these ‘tokens’ and participate in the gains of London’s real estate market. This can be done for all sorts of assets — pieces of art, houses and antiques. What is amazing about this is that you are not required to be a UK resident to now buy a token on a house in London (as is the case with most crowd funding platforms); you could be sitting in Bangalore, like I am, and still buy a token which gives me the same financial payoff as owning part of a house in London!

In effect what this means is that the ‘market’ for investments is truly becoming a global one — where anybody can participate in the growth of assets and economies all over the world. As these technologies develop further, you will be able to pay for something even if you don’t hold a particular currency. For example, let’s say you hold a token on a piece of art, and want to pay for something else in bitcoin, or even dollars. Because these blockchains will be linked to one another (interoperability is the technical word), users will be able to use their art tokens to make payments in multiple currencies, at exchange rates which are very favourable and involving very low fees. Imagine that — even if you hold only USD, but need to pay someone in Bitcoin, you can use a single application which does the conversion and the transfer with a couple of taps, all in a few seconds.

OK, so a whole lot of promise, and there clearly are some very real problems that people face in the developing world. Cryptocurrencies are not the only answer, but they do offer some compelling advantages over the options that people have today.

However, let us now look at some of the problems with these new forms of payment. Cryptocurrencies are highly volatile. And by volatile I mean that if you sent $50 worth of Bitcoin to someone in the morning, it could be worth $40 or $60 by the time they receive it. Not good. There are ways to ‘hedge’ this risk in the cryptocurrency markets, but these are not well developed, nor are they easy to use for a person who has never done financial transactions.For all the hype and promise around blockchains and cryptocurrencies, they are currently not much more than a speculative investment for the well educated and the already rich, especially in the Western world.

The people who can truly benefit from the adoption of these technologies are yet to get their foot in the door. Amit and Raju first need to be educated about what these technologies can do for them. This is a big, big task, and you won’t find a blockchain company conducting such education any time soon. After all, would you put your money into an ICO which promises to bring crypto education to the masses in India and Africa? :DThe people who are ‘invested’ in the space are hoping that cryptocurrencies become the defacto method of transferring value. The only way this can happen is if adoption becomes truly universal; if markets remain small, they will still be subject to ‘pump and dump’ schemes, all of which will only serve to benefit the promoters of these schemes, while eroding the trust that others have placed in such technologies.If you have not figured it out yet, most ICOs are scams.

Things that don’t benefit at all from blockchains are being tokenized and promoted as the answer to all of the world’s problems. Companies that have not yet built a product yet now have hundreds of millions in their bank accounts, with the final product being promised two years down the line. Telegram just raised $850 million in an ICO — which company requires that much money for development? Unless they are building a competitor to Space X.