University of Johannesburg: Blockchain and South Africa’s foreign policy

Transformations in production and connectivity are defining the ongoing fourth industrial revolution (4IR). But it is also defined by emerging trends in the decentralisation of financial transactions. The former are products of advances in artificial intelligence (AI) and machine learning (ML), 3D printing (additive manufacturing), 5G networks, and the Internet of Things (IoT). The latter is due to blockchain technology, which has come into mainstream attention in the past decade. Blockchain technology – perhaps known best in its cryptocurrency incarnation – is a system of recording information that allows for its storage and unchangeability. This system, also known as the decentralised ledger, is therefore useful in peer-to-peer payment, hence its application in cryptocurrencies such as Bitcoin, Ethereum, and hundreds of others that have come into the fore in the past several years. It has also gained traction as a method of ensuring the integrity of ballots in elections.

Four features define blockchain. First, it has a distributed database. In other words, the data is not controlled by a single individual due to the immense computational power required, as well as the increasing complexity which takes place the more centralised the process seems to become. Second, it has peer-to-peer transmission through which every party may verify the transactions taking place without the need of an intermediary or “middle man”, which are usually in the form of banks. Third, the system is defined by transparency and pseudo-anonymity, which means that every node or user on the blockchain has a unique alphanumeric address which is at least 30 characters. Finally, the records are irreversible, which is what ensures that there can be no double-spending. This is crucial because any individual or group who would seek to corrupt the blockchain system would have to change every block in the chain. This impossibility to corrupt is continually being further complicated by the growing number of blocks in the chain due to the sheer number of transactions which are recorded with an unchangeable signature called a hash. The ledger is greatly secured as a result.

In its 2016 report on determining when a society can be said to be in the 4IR, the World Economic Forum (WEF) set the threshold of 10% of revenue being in cryptocurrency. In other words, a country may be said to be in the 4IR at the point when the equivalent of 10% of its GDP is in cryptocurrency. So far, no country has met this threshold. Such a lack of evidence may be due to the difficulty policymakers have had in regulating cryptocurrency, mainly because they are not certain about classifying it since it exhibits characteristics of being both an asset and a currency (medium of exchange). Such ambiguity has allowed day traders to make use of virtual currencies as vehicles for speculation, in the hopes of buying a cryptocurrency and selling it at a higher price at a future date. This has been a significant setback for regulators

The method has many applications, some of which are already known but many of which may be yet to be discovered far beyond the management of payments. This is why the technique is known as a general-purpose technology (GPT). As a GPT, blockchain has the potential to provide a foundation for new future technologies and other applications when combined with the other 4IR technologies.

Given its numerous applications, blockchain has ample implications for the global economy. This is a consideration for the World Trade Organization (WTO) in particular. In the 2018 report, Can Blockchain Revolutionize International Trade? authored by Emmanuelle Ganne, the Economic Research and Statistics Division (ERSD) of the WTO studied “the potential of Blockchain for reducing trade costs and enhancing supply chain transparency, as well as the opportunities it provides for small-scale producers and companies.” The WTO publication observes that global supply chains are engaged in evaluations of how to best leverage blockchain systems in order to enhance their efficiency and profitability due to the direct payments. At the same time, however, blockchain has been used to facilitate transnational money-laundering. This poses a serious threat to national economic sustainability as it leads to shrinking revenues.

South Africa and the African Union (AU) as a whole, therefore, have a substantial stake in ensuring that blockchain is optimally regulated. For South African and African policymakers, we suggest that there are at least five ways blockchain impacts national and continental priorities as set out in Agenda 2063. These include the flow of remittances within the continent and from other regions among the unbanked, the enabling of innovation and money laundering, improper election funding, terrorism-sponsoring, and other illicit financial flows. Internationally, three broad camps have emerged: some advance the elimination of blockchain, some advocate maintaining it but with greater scope for regulation, while others are more or less in favour of the status quo.

According to a comprehensive study by the Law Library of Congress in the United States, as of 2019, there were 25 states with implicit and explicit bans on cryptocurrency including China, Saudi Arabia and the United Arab Emirates. On the continent, these are Algeria, Egypt, Lesotho and Morocco. The North African countries have absolute bans, while the Kingdom of Lesotho has an implicit ban. The South African Reserve Bank (SARB), according to its 2014 position paper on virtual currencies, expressed warning against individuals from trading or holding virtual currencies. The same white paper, however, noted no “systematic threat” being posed by cryptocurrencies for the time being and the SARB reserved “the right to change its position should the landscape warrant regulatory intervention.” Given the level of interdependency between South Africa and a number of these economies, the regulatory gap may cause legal ambiguity in the future. This policy considers blockchain only in terms of its cryptocurrency version, while it leaves many of its other applications open. Moreover, there are potential uses to which blockchain can be implemented for the benefit of government and citizens. Among others, these benefits include combatting corruption, electoral fraud, and bureaucratic inefficiency in record keeping. This raises the urgency of advancing a uniform global policy on blockchain.

Such a policy will require cognisance of the national and transnational benefits as well as a mitigation of the downsides, while leaving room for agility as new factors emerge. This is a balancing act, and a set of strong voices for the global South’s interests are a necessary ingredient in the formulation of such a regulatory framework.

Professor Tshilidzi Marwala, is Vice-Chancellor and Principal of the University of Johannesburg (UJ) and Deputy Chairperson of the South African Commission on the Fourth Industrial Revolution.

Dr Bhaso Ndzendze is HOD and Senior Lecturer, Department of Politics and International Relations, UJ.

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