Africa, Unchained: Blockchain and the Myth of Leapfrogging

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“Slave to a label but I own my masters.” – Pharaoh Monch

Growing up in Nigeria in the 80s and early 90s, the simple task of making a phone call was an adventure. This was the era of analog telecommunications and rotary phones, and the capacity of the telecommunications network was quite limited. Phone calls rarely went through and, to the extent they did, only worked between urban areas. To make an international call, you had to troop down to the local telephone office, wait in an interminable queue, and pay an exorbitant fee. Invariably, the phone call would disconnect after a few minutes. Then you would go to the back of the line and start the process all over again. Of course, the telephone company was a government-owned monopoly.

Today, the situation is remarkably different. Mobile phones have become ubiquitous in Nigeria. The number of telephone lines exploded after licenses were auctioned to private operators – from 450,000 in 1999 to 216 million as of 2016, according to this Medium post. Nigeria “leapfrogged” to digital telephony, bypassing any further investment in outdated analog telephony. The telecom industry has been a boon to Nigeria’s economy: In FY 2017, Nigeria’s mobile ecosystem contributed $21 billion to the country’s GDP, nearly 500,000 jobs, and $1.8 billion in tax revenue. This, even though most mobile phones in Nigeria are not (yet) of the smartphone variety. Still, Nigerians are tweeting, Instagramming, and WhatsApping with the best of them.

Developments such as these have spawned a cottage industry of experts touting leapfrogging as the panacea for all that ails sub-Saharan Africa. The term has become accepted shorthand – if not dogma – among the cognoscenti: You can scarcely read an article about African development that does not reference the word. And I confess – when I first became aware of blockchain’s potential, I, too, blithely assumed that African countries could leapfrog directly into this brave new world.

I no longer subscribe to that view.  To borrow the title of a popular book on leadership, what got us here won’t get us there. And that is because blockchain explicitly assumes that the data already is in the digital realm. Blockchain is a very powerful tool, as I’ll discuss in more detail below; but in essence all blockchain does is decentralize data and make them immutable and tamper-proof. A prerequisite is that the data must exist in digital form or be easily convertible thereto. This condition is generally met in the Western world. But it is not met in sub-Saharan Africa. In the West, we talk about the “last mile” problem in the context of delivering broadband to the residence. But in the context of Africa and technology, we have the exact opposite problem: A “first mile” problem. Without collection of the data and conversion thereof to digital form, the blockchain revolution will continue to reside in the world of fantasy, like the unwritten books in Lucien’s Library of Dreams. (Shout out to Neil Gaiman.)

Here is why this is important. Even after discounting for hype, blockchain really is a transformative technology. If you don’t believe me, believe President Xi Jinping. Many people sat up straight when President Xi, in widely-reported remarks, called for greater research and investment into blockchain. He noted that many countries are in the process of developing blockchain technology, and stressed the need for blockchain investment to help China gain a competitive edge. When the Chinese say that something is important to gain a competitive advantage, it behooves the rest of the world to listen.

But some of you may still be skeptical. You may be asking, what are blockchain’s real-world applications for Africa? I’ll focus on one every Nigerian intuitively understands: land and property sales. Drive around any major city in Nigeria and you will pass house after house with this inscription: “This property is not for sale!” As Porter Erisman notes in his book Six Billion Shoppers: The Companies Winning the Global E-Commerce Boom, “Nigeria has a long tradition of people selling real estate that is not actually on the market.” According to experts, only 3% of Nigeria’s land is surveyed and documented. The cost to Nigeria’s economy is staggering: PwC estimates that “Nigeria holds at least $300 billion or as much as $900 billion worth of dead capital in residential real estate and agricultural land alone.” To unlock this dead capital, PwC recommends the creation of a blockchain-based land registry to bring the 97% of land not currently documented into the system. The paper cites to a similar project undertaken to positive effect by the Republic of Georgia, but cautions:

“The existence of high-quality data, as a result of [government] reforms, helped ensure the credibility of the project. This is evidence that for Blockchain based solutions for governments, while the technology can ensure the security and immutability of information, it cannot be a substitute for the institutional infrastructure that is essential for ensuring the quality of data.”

This is precisely the point. Blockchain is a tailor-made solution for unlocking Nigeria’s dead capital and disintermediating a lengthy, broken, and opaque land transfer process. With blockchain, smart contracts, and dapps, we can easily verify property ownership, assess a potential purchaser’s creditworthiness, arrange financing, and transact sales with the immediate transfer of funds in fiat currency or cryptocurrency. This is the future, and it is fast approaching. But we cannot simply leapfrog into this future; first, we need quality data.

So how do we do that? I’ll proffer a few quick thoughts, some substantive and others more process-oriented.

Expand the mandate of the FinTech Roadmap Committee. The Fintech Roadmap Committee recently delivered its report on adopting and establishing a regulatory framework for fintech in Nigeria. This is a laudable yet overdue development – estimates are that Nigeria has the third-largest holding of cryptocurrency as a percentage of GDP.  Unfortunately, the report mentions “blockchain” a scant five times. That is peering through the wrong end of the looking glass. Yes, we should move with all deliberate speed towards a clear framework for crypto. But even more focus should be on the underlying blockchain technology. Nigeria should either expand the committee’s mandate to look at all things blockchain-related or set up another committee to do so.

Start Small, Scale Fast. A few states in Nigeria already are gathering data on land holdings. Lagos has a computerized and searchable system, although it appears one has to physically go to the Lagos Land Registry to look through the records. It is also unclear how far back the records go, or what percentage of the land holdings the database contains. Nevertheless, for those records that do exist, Lagos and similarly-situated states should take the logical next step and put the records on a blockchain. The resulting tax revenues from transactions will more than offset the cost of the transition to a blockchain system.

Accelerate Nascent Digitization Initiatives: In 2016, Nigeria established the Presidential Enabling Business Environment Council (PEBEC), which has as its explicit mandate to improve the country’s Doing Business score from the World Bank. At the time, Nigeria ranked 169th out of 190 countries in the World Bank’s Ease of Doing Business score. For 2020, Nigeria is ranked 131st, and was named one of the 20 most improved countries. Among the reasons cited for the improved score, the World Bank mentioned the Lagos land registry initiative and the implementation of an electronic tracking and e-payment system for import-export transactions. The improved scores are a proof of concept: There is plenty of low-hanging fruit in the digitization realm. PEBEC should launch an ambitious project to digitize land, healthcare, business, and judicial records.

Apply IP Techniques to Incent Digitization. One of blockchain’s most touted benefits is that it wrests control of data from companies such as Facebook and Google and returns it to the individual. That may be true, but for developing countries such as Nigeria, who would be willing to underwrite the cost of the massive data collection required to bridge the “first mile”? It’s a classic public good problem. Perhaps one way to solve it is to extend the same intellectual property protections as for patents and copyrights. Nigeria should invite data mapping companies in to collect the data – the digital equivalents of Google’s Street View mapping cars – and give them exclusivity for some period (to be determined). Governments and private parties can then lease the data from such providers and put them on the blockchain. The costs of obtaining access to this data will, again, be more than outweighed by the dead capital freed up. Further, over time the need for such services will abate as transactions are captured from inception in a database if not directly on the blockchain.

These proposals are practical, implementable, and don’t rely on the magical thinking of leapfrogging. Having said that, the leapfrogging analogy is not entirely bereft of analytical force. For instance, I think it applies very strongly in the regulatory context. The advantage Africa has here is similar to the one it enjoyed in the transition to digital telecommunications. Countries like the United States and the United Kingdom have a long, intricate history of securities, financial, and consumer protection regulations. Every innovation in finance is viewed through the prism of what went before. The regulatory environment is needlessly complex as a result, and worse – it is plagued by skirmishes for primacy among regulatory agencies, as we see with the recent NY District Court opinion (incorrectly decided, in my view) denying the Office of the Comptroller of the Currency the ability to grant federal bank charters to fintech companies that don’t accept deposits. We see the same dynamic at play with the California Consumer Privacy Act and so-far futile attempts to enact a pre-emptive federal privacy law.

Ideally, it would be better to start with a clean sheet of paper and pass a set of laws adequately flexible and responsive to the opportunities and challenges of blockchain technology. For reasons just stated, I think the likelihood of that happening here in the United States is remote. In contrast, the very paucity of securities and consumer regulation in Nigeria makes it possible to leapfrog directly into a nimble, future-oriented, set of laws and regulations that unleash Nigerians’ creativity and entrepreneurial energy. Indeed, given Nigeria’s recent ratification of the African Continental Free Trade Agreement (AfCTA), the ambition should be even grander still – to coordinate among the 54 signatory countries so the entire continent becomes a magnet for innovation in blockchain and other technologies such as Big Data and AI. (The IMF projects that the AfCTA will create a market of 1.2 billion people with $2.5 trillion dollars in GDP.) Accordingly, I urge Nigeria and other African countries to proceed apace with digitization efforts. Not as an end, although digitization alone will unlock significant economic value. But because digitization is the necessary predicate to widespread blockchain implementation. That’s the real game changer.

Here’s to Africa, unchained.

(View Article Originally Posted on LinkedIn)