The rapid development and spread of new technologies has been significantly transforming the financial sector.
The World Bank Group published the first fintech note that looks at Distributed Ledger Technology and Blockchain, and analyzes its potential relevance for international development.
Fintech — a relatively newly-coined term which combines ‘finance’ and ‘technology’ — describes companies or innovations that use new technologies to improve or innovate financial services.
What is a blockchain and a distributed ledger?
Distributed ledgers (DL) use independent computers — referred to as nodes — to record, share and synchronize transactions in their respective electronic ledgers, instead of keeping data centralized as in a traditional ledger.
Blockchain is one type of a distributed ledger.
Blockchain and distributed ledgers are the building block of “internet of value” that enable economic interactions and transfer “value” peer-to-peer, without a need for a centrally coordinating entity. “Value” refers to any record of ownership of asset – money, securities, land titles, etc.
Why is this technology important?
Distributed ledger technology (DLT) could fundamentally change the financial sector, making it more efficient, resilient and reliable.
This could address persistent challenges and change roles of financial sector stakeholders. It could also potentially transform various sectors such as manufacturing, government financial management systems and clean energy.
How will this technology affect international development efforts?
Since this technology is still nascent, the World Bank Group doesn’t have general recommendations about its use for international development.
However, the World Bank Group is in dialogue with standard-setting bodies, governments, central banks and other stakeholders to monitor, research and pilot applications based on blockchain and DLT.
Would it be better to wait for the technology to mature?
Waiting for “perfect” DLT solutions could mean missing an opportunity to help shape it. To understand how DLT can address challenges in the financial sector, we need both research and real-life applications and pilots.
What else needs to be addressed in light of this disruptive technology?
Just as with the advent of any new technology that disrupts an industry, countries will need to review and resolve various related legal, regulatory and technological issues, including consumer protection, financial integrity concerns, speed of transactions, and environmental footprint.
Where do you see first distribute ledger applications to take off?
DLT applications will likely be incremental, and will likely first replace processes and activities that are still manual and inefficient. These include reference data maintenance in payment and settlement systems, trade finance, syndicated loans, and tracking provenance of agricultural products and commodities, their subsequent sale or use as financing collateral.
Eventually, DLT could increase efficiency and lower remittance costs, and potentially improve access to finance for unbanked populations, who are currently outside the traditional financial system.