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We live in a world that is increasingly borderless, with the unprecedented growth of technology across a number of sectors. However, geographical and economic borders remain firmly entrenched in the global financial landscape, preventing those in emerging markets from accessing the playing field of capital growth.
None of the three countries with the highest GDP growth between 2008 and 2017 — Nauru, Ethiopia and Turkmenistan — have stock exchanges, depriving emerging investors and business owners of much-needed access to global capital. When investors do enter the traditional market, they face extremely high intermediary fees. Despite growth in tech hubs across emerging markets, economic exclusion and inequality remain huge barriers to those looking for a profitable investment opportunity. Blockchain technology, as a borderless force, might hold the very solution to this problem. By reshaping international investing to create a more decentralised, secure and accessible means of doing business, blockchain-based exchanges could help eradicate economic inequality and foster a new era of financial inclusion for developing countries.
Emerging markets have limited access to stock exchanges.
In comparing the South African Johannesburg Stock Exchange (JSE), the largest exchange in Africa, with its North American counterpart, the New York Stock Exchange, it becomes evident that economic exclusion is a prevalent issue in emerging markets. The JSE has around 375 listings and a market capitalization of about $988 billion. In comparison, the New York Stock Exchange lists more than 3000 companies worth more than $28 trillion as of June 2018. This means that even those privileged enough to gain access to the South African JSE are still not being exposed to the same level of opportunity as those operating on larger foreign stock markets.
There is also a huge gap in the availability and accessibility of financial institutions. Two billion people are financially excluded from formal institutions such as banks. This means that a huge percentage of our global population is prevented from interacting on international investing platforms, despite a clear demand for capital growth in developing countries such as Nauru, Ethiopia and Turkmenistan.
The demand for investment and business expansion from entrepreneurs in emerging markets is increasing year after year. The 2017 Global Findex reported that 71 percent of adults in high-income economies saved in 2017, while the same was true of only 43 percent of those in developing countries. However, both economies reported the same percentage of people saving to start, operate, or expand a business. In Sub-Saharan African economies, this figure was twice the global average, with one-in-three adults reportedly saving for business expansion. The biggest hindrance to business growth within the region has been a lack of supportive financial services, such as stock exchanges, that encourage investment opportunities.
It is an unfortunate truth that current financial models are favorable and exclusive to high-income economies. Those in emerging markets have no choice but to invest in non-formal ways, such as through a savings club or in the form of livestock, jewelry or real estate. This excludes communities from global markets and, therefore, wider pools of investment opportunities. Equal access to global networks could turn these informal savings into real capital growth. Empowering emerging markets, and particularly small and medium enterprises in developing nations, should be at the core of all financial initiatives.
Expensive intermediaries are barriers to growth.
Expensive intermediaries in stock exchanges area a major deterrent to business owners operating in developing countries. Currently, no stock exchange in the world allows customers to invest directly on their platform. Prospective investors are forced to place trades through intermediaries, such as banks or brokers, which is both an expensive and exhaustive process.
A report entitled ‘Blockchain in Capital Markets’, estimates that IT and operations expenditure are close to $100-150 billion per year among banks, with post-trade and securities servicing fees estimated at $100 billion. The high costs for both traders and banks, intermediary services are a major barrier to growth for early-stage businesses. For emerging markets, this makes trading across borders an improbable and often impossible option, having neither the money nor the time to invest in intermediary networks. Thus, the current stock exchange market is a double whammy of inaccessibility to foreign and smaller players.
Borderless blockchain can solve economic exclusion.
Change is needed to combat issues of financial exclusion and these barriers to growth. A decentralized blockchain-based exchange offers a possible solution to this very issue. A borderless exchange removes the middleman. By ruling out traditional bank and broker monopoly, borderless exchanges enable previously excluded companies to connect with global investor networks, while simultaneously raising capital. This immediacy — when contrasted with the costly and exhaustive process of intermediary involvement — empowers business owners in unprecedented ways to expand their business, which in turn will promote growth in their local communities and economies.
Although there are an estimated two billion unbanked adults, almost two thirds of that population have access to a mobile phone. Blockchain technology, through initiatives such as app-based exchanges, could harness this easily accessible method of communication to overcome the barriers of high costs and inaccessible institutions. The borderless nature of digital technologies is an incentive for foreign investors to engage with emerging markets, redistributing wealth and investment into economies where growth is most needed.
Perhaps the most exciting element of blockchain technology is its potential to disrupt and decentralise the traditional financial market, especially in regards to redefining the stock exchange market. Decentralized exchanges can harness the core values of borderless, decentralised, accessible platforms to offer developing countries unprecedented power to acquire wealth.
Technology has become an integral part of our everyday lives and job functions. Blockchain has the capacity to promote change and capital growth in emerging markets and beyond.
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December 11, 2018 at 08:49AM