Distributed Ledger Technology: The Key to Reducing Global Inequality?

By Marvin Amberg, Nuri John Atay, Steve Isaacs & Christine Onyung

 

“Indeed, the distribution of wealth is too important an issue to be left to economists, sociologists, historians, and philosophers.”

– Thomas Piketty, ‘Capital in the Twenty-First Century‘

 

Sustainable Development Goals

In 2015, the United Nations settled on 17 ‘Global Goals’ to supersede the Millennium Development Goals and define the international development agenda over the next 15 years. These goals were determined deliberatively by a worldwide consultation process in which development priorities were crowdsourced from populations across all 193 UN member countries.

One of the authors of this post was integral to the US process, collating opinion in the Greater Chicago area through the MyWorld Survey. Of central importance to the Chicago community, spurred on by the recent release of Thomas Piketty’s ‘Capital in the Twenty-First Century’, was the idea of reducing income inequality. This aspiration ultimately made its way into the final 17 Sustainable Development Goals (SDGs) as Goal 10: “Reduce inequality within and among countries”¹.

Yet contained within this broader aspiration was a more specific target: to “reduce to less than 3 percent the transaction costs of migrant remittances”.

Remittances are money transfers sent by migrant workers to their country of origin and represent a huge proportion of international financial flows. They overwhelming are sent from developed countries to developing countries and therefore play a crucial role in redistributing wealth from the world’s richest countries to the world’s poorest.

However, many economic migrants are forced to pay exorbitant rates to send money to their own friends and family. Internationally, the average cost is around 7.5% of the money sent. Sub-Saharan Africa, with an average cost of 9.5 percent, remains the highest-cost region². In order to lower this cost to 3% by 2030, in line with the SDGs, transformative innovation is required.

 

Distributed Ledger Technology

Recent developments in distributed ledger technology, of which blockchain is a prominent example, have the potential to disrupt the international remittances industry in this way. A distributed ledger is a record of information, or database, which is replicated and synchronized across a network. Unlike a central ledger in which there is one official ‘ledger of record’, and typically one central authority responsible for maintaining the integrity and security of the information, a distributed ledger stores information in multiple locations and shares the responsibility for official updates across multiple members through a consensus approach. Any participant can request a copy of the ledger and changes are generally synchronized across all copies in a matter of seconds. While centralized ledgers are often vulnerable to cyber attack, a distributed ledger is inherently more secure, necessitating a synchronized attack across multiple members of the network simultaneously.

Applying DLT to the challenge of international remittances, there is the potential to improve security while dramatically reducing the cost and settlement time of transactions. The process works by placing DLT at the center of the transaction as a replacement for the standard international settlement processes such as SWIFT. International transactions can be conducted securely and quickly across borders without the need for financial intermediaries and long confirmatory settlement periods.

A world in which migrant workers could send money instantly to their friends and family and pay 3% or less on each transaction would mean an extra $20 billion towards reducing inequality and driving economic development in emerging markets.

We would like to mention three companies that are working at the forefront of DLT, in international remittances and adjacent applications, and that we suggest keeping a close eye on:  Ripple, MultiChain, and Hyperledger. We would like to draw particular attention to Ripple:

Ripple offers a modern global payment infrastructure and potential long-term solution to the remittances issue at hand. With the use of distributed ledger technology, it allows banks to efficiently transact with other banks and payment providers in real time. As described above, Ripple accelerates transaction processes and, most importantly, ensures certainty of settlement. As a result the company claims  it can significantly decrease transaction costs while creating new revenue channels for banks, particularly for “faster, low-cost, on-demand global payment services for any ticket size.”

This integration of traditional commercial banks with new technology providers and a focus on the high volume, low ticket size segment of the market, we hope, will directly impact transaction costs for migrants around the world.

The Ripple protocol may be third in terms of market capitalization behind Bitcoin and Ethereum, but the focus on international transfers makes the company our biggest hope. What’s more, the company keeps adding banks to the network. Just this past February, National Bank of Abu Dhabi (NBAD) was added as the first Middle Eastern bank³.

Furthermore, Ripple is creating an entire ecosystem for payment solutions, just as Bitcoin and Ethereum have attempted to do. For instance, Saldo.mx is an app built on the Ripple protocol that will allow Mexican immigrants to the United States to pay utility bills for family members in Mexico, without the need of a bank account in Mexico. Transaction costs effectively get eliminated completely.

 

^{1 | https://sustainabledevelopment.un.org/sdg10}

^{2 | https://remittanceprices.worldbank.org/sites/default/files/rpw_report_march_2017.pdf}

^{3 | https://www.finextra.com/newsarticle/30069/ripple-lands-first-middle-eastern-bank}