A New Narrative For Emerging Markets & Blockchain Enabled Finance

There is a distinct narrative shift happening in how the cryptocurrency and blockchain space looks at emerging markets. Up until recently, emerging markets have been lumped into the category of beneficiaries of outside technology and pointed to as a prospective user base, in the process being used to justify speculation or, in some cases, argue for regulatory approval.

The reality is that emerging markets represent more than pseudo-charitable beneficiaries of external technology. Emerging markets represent some of the world’s most exciting financial opportunities, which, thanks to tokenization, are poised to be more accessible than ever before.

What’s more, emerging market participants are not monolithic. Many of them are likewise looking for access to the world’s best financial opportunities, to which they have previously been denied access in large part due to the antiquated structures of the financial world.

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In short, the narrative is shifting to recognize this group as part of a new class of global investor, not just a beneficiary for remittances or an unbanked waiting to be banked.

Photo by Matthew Henry on Unsplash

The Previous Narrative Of Emerging Markets And Blockchains

Over the last several years, the notion of emerging markets as they relate to cryptocurrencies and blockchains have fallen into several narrative tropes.

The first of these tropes is the idea of “blockchains, not cryptocurrencies.” In this view, what makes the movement interesting is not cryptocurrencies, per se, but the world of applications for the distributed ledger technology that underpins it.

This perspective has been common established institutions of economic development like the IMF and World Bank. The “blockchain not crypto” perspective has also been the standard refrain from enterprise working groups like IBM who were happy to spin up new divisions to explore blockchain business opportunities — both in the emerging markets and beyond.

While those who have been in the bitcoin or cryptocurrency space can often be cynical about the “blockchain not crypto” narrative, the interest in the potential applications of DLT in emerging markets makes sense.

Developing economies are often hamstrung by logistical process, under-developed legal and economic infrastructure, and opaque processes entirely controlled by centralized administrators.

Blockchains promise something quite the opposite, painting a vision of a new economic infrastructure that replaces centralized control with decentralized, peer-to-peer models and opacity with structural transparency.

What’s more, there was an easy narrative analogy for the potential to build something totally beyond the old financial establishment. If the telecommunications infrastructure around the world could leapfrog the landline era, why couldn’t the new banking infrastructure do the same? In fact, given how robust the existing mobile payments and mobile money infrastructure was in many places, wouldn’t these users be quicker to adopt new technologies than even some who were already plugged in to the credit and debit card infrastructure of the developed world?

Yet if the leapfrog analogy was there, many of the applications these institutions looked into were not money-focused but on other aspects of society. Some of these focused on simple core infrastructure of civil society, such as cost reduction in government bureaucracy.

In a 2017 piece for the Harvard Business Review entitled “How Blockchain Could Help Emerging Markets Leap Ahead,” Vinay Gupta and Rob Knight wrote about Dubai’s plan to move more than 100 million documents annually to a blockchain in order to spur innovation and experience major cost savings.

Other initiatives focused on tamping down on corruption in areas that has historically seen significant problems — such as property rights and land registry. A Knowledge@Wharton piece profiled both an Indian national think tank project to implement blockchain projects including land titling, supply chain records and health care with the Andhra Pradesh state, while also telling of a ConsenSys pilot project managing land rights information in Chandigarh city.

Yet still, the money-centric applications of blockchains never really left the emerging market conversation. During the heady ICO days of tokenize the world, another narrative around emerging markets and crypto emerged which had to do with cross-border transactions like remittances.

It doesn’t take one being a blockchain advocate to come to the conclusion that the current system of remittances is in desperate need of an overhaul. According to the World Bank, 2018 saw the highest ever transmission of remittances to low and middle income countries, coming in at $529 billion, up nearly 10% from the year before.

The fees for this sort of economic transfer can often be exorbitant and hit the world’s most vulnerable. Authorities use the figure of the cost to send $200 as a benchmark. The average combination of fees eats up $14 — or 7% of that.

That’s why numerous crypto projects set out to change that, using a tokenized approach that promised to dramatically lower fees for moving money across borders.

The challenge of those types of tokenized approaches is that they require a network effect large enough for tokens to have the liquidity such a use case demands. What’s more, even if one were to use tokens with significant liquidity, the inherent volatility of the crypto markets creates major opportunities for slippage and lost value between when the value is transferred and received. Perhaps it makes sense then that it would be a particular stablecoin that took this narrative to the next level.

When David Marcus sat down to testify before Congress in June about Libra, the new global digital currency project he was leading for Facebook, it was clear that he had one major narrative to push: banking the un- and under-banked.

The world’s financial system, Marcus repeated over and over, was simply failing to serve a huge portion of the world. This group either didn’t have access to key financial services at all, or dramatically overpaid if they did. A digital currency like Libra could make a fundamental difference.

Unlike small crypto projects, Libra — with its consortium of members and billions of out-of-the-gate potential users — would have the liquidity to make the network work. And unlike volatile cryptos like bitcoin, Libra would be pegged to a basket of cryptocurrencies and held stable, making it a much better tool for use cases like remittances.

Libra’s emergence onto the scene did a few things for the emerging markets narrative within the blockchain and crypto context.

First, the narrative of banking the unbanked reinforced the idea that emerging markets were primarily a use case for and the beneficiaries of blockchain technology being built elsewhere, rather than another financial stakeholder. Particularly in the hands of Facebook, the narrative wasn’t dissimilar from the type of thing you’d hear from a global economic development organization or charity.

Second, Libra functioned a bit like a starting gun for governments around the world in both developed and emerging markets to think about building their own digital currencies.

China’s response in particular has been aggressive, with the country accelerating both their R&D and their PR efforts around a forthcoming digital yuan. Other countries have responded as well. In Europe, countries like France and Europe have started exploring their own digital currencies. Looking around the world, the last few years have seen a huge array of development and even more is now anticipated in the wake of Libra and China’s digital yuan.

In some ways, this has validated the notion of the potential impact of cryptocurrencies in emerging markets (and on national economies in general).

At the same time, we believe that the true potential of emerging markets is yet to be unlocked, and that it may not in fact be obvious (if important) solutions for issues like remittances, but a fundamentally new conception of emerging markets that tokenization enables.

What tokenization can really do in emerging markets

As is clear from the above, most of the blockchain and cryptocurrency space has thus far looked at the technology’s implications for solving economic and social development problems. We believe the narrative is shifting now in two ways that treat emerging markets not as beneficiaries of global do-goodism but as full market participants — both in terms of how existing global investors participate in emerging market opportunities and how a new class of global investors are invited to participate in the world’s best financial products.

Smarter Exposure To Emerging Market Opportunities

Today’s developed market investors face a set of challenges. Since the 2008 crisis, interest rates have been artificially low, with one impact being an inability to capture yield in the savings or bond markets. The result of this is that capital has flooded away from public markets with limited yields towards private markets looking for ever more exotic opportunities for yield. By definition, private markets have higher barriers to entry and are more complicated to navigate. To read more about this dynamic, see our recent essay “The Democratization Of Finance.” The net result of all of this is that many investors are beginning to look to alternative spaces, including emerging markets.

Gone are the days when sophisticated investors look to emerging markets as too small to be interesting. Indeed, as the global economy continues to interlink, many of the world’s most interesting financial opportunities are to be found in developing economies that have the potential to leapfrog entire infrastructure and technology paradigms.

Take, for example, the opportunity around solar energy. Solar is one of the fastest growing energy sectors, predicted to overtake all other forms aside from gas by 2040. Emerging markets are expected to account for 90% of all energy demand growth by 2035, and importantly, already represent 63% of new investments in wind and solar (more, for example, than the United States).

To provide international investors exposure to this market, Invictus has recently launched the Emerging Market Solar (EMS) fund. The fund builds on infrastructure provided by Sun Exchange, a peer-to-peer market enabling individuals to buy and lease solar panels to schools and small businesses in Africa, using the bitcoin blockchain as payment distribution infrastructure. The EMS fund intends to optimize returns by adding an additional layer of vetting while leveraging scale investment incentives.

We reference this fund not to pump ourselves up, but because we believe that it reflects shifts that we believe will not only make today’s investors more comfortable with new categories of alternative investments like solar, but shifts that investors will simply come to expect across the investment products they use.

Simply put, investors want to be more nimble and able to gain exposure to new categories without the same restrictive minimums; with ongoing liquidity rather than burdensome lockup periods; with transparency around fund holdings; with easy on boarding. This is precisely what blockchain-based fund management enables.

New Opportunities for a New Category of Global Investor

The developed market investor isn’t the only type of investor facing challenges as they look for new opportunities. Many people in emerging markets represent a new category of global investor. Historically, however, this group has also faced a number of profiles that ultimately come down to an accident of their geography.

The first of these problems has to do with inflation. In many parts of the world, inflation is a defining force that robs people of their wealth in ways nearly unimaginable in developed nations.

Inflation in itself is not the only problem, as government responses to inflation often create even more challenges for investors looking to diversify their holdings and get their wealth out of the country. Throughout this year, Argentina has continued to ratchet up capital controls, for example, trying desperately to keep holdings in the peso while Argentine’s simply trying to make for a better life are attempting to diversify.

Even those who have enough wealth after inflation and mechanisms to get around capital controls don’t necessarily have good places to put their money. One need look no farther than the percentage of people in key emerging markets with crypto holdings to understand that there is a demand for global investment opportunities.

According to a 2019 Statista Global Consumer Survey, the 5 countries with the highest percentage of cryptocurrencies are Turkey, Brazil, Columbia, Argentina, and South Africa. In a Globalwebindex survey from 2018, 13 of the 16 countries that had more than the worldwide average of cryptocurrency users came from emerging markets.

To us, these numbers reflect not only an interest in cryptocurrencies, but an interest in gaining access to investment opportunities that extend beyond the physically proximate.

In the same way that tokenized funds simplify emerging markets access for existing global investors, we believe that the benefits of tokenized, blockchain-based fund management — including the elimination of investment minimums and 24/7 liquidity — can give this category of investor access to the world’s best financial products which previously they would have been fundamentally blocked out from.

One example of this is Invictus’ Margin Lending Fund or IML. The IML fund is a dollar-based fund that 1) protects wealth (since it is US dollar based) and 2) encourages savings by providing investors predictable returns of 8%+. This product is available to a global investor audience and helps investors earn great returns in a stable, well recognised global currency.

We have only just begun to see what blockchain-based financial technologies can do for emerging markets. We believe that while the idea of cryptocurrencies as ways to solve issues like remittances and blockchain applications for government and civil society may still have legs, there is a narrative shift happening as we begin to understand both the financial opportunity inherent in emerging markets as well as the dignity and sovereignty of investors from those markets.

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A New Narrative For Emerging Markets & Blockchain Enabled Finance was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.