BLOCKCHAIN TECHNOLOGY AND THE PERFORMANCE OF THE NIGERIAN CAPITAL MARKET – PART II

To catch up

Application of Blockchain Technology

According to (Tapscott & Tapscott, 2016), “This new digital ledger of economic transactions can be programmed to record virtually everything of value and importance to humankind: birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims, votes, provenance of food, and anything else that can be expressed in code”. That is, Blockchain can virtually do anything that interface with human interaction if it can be programmed to do so effectively, bringing about a reconciliation of digital records in real time for all transactions carried out

Blockchain enables top notch record keeping, “they can be used to create a clear timeline of who did what and when” (Laurence, 2019). Industries and regulatory bodies spend countless hours and billions in trying to carry out forensic audit to know who did what and when. But this can be eliminated with the use of Blockchain technology. Deloitte, in a report sponsored by them identified an application area for Blockchain and stated that, “…financial executives expect that blockchain will rapidly be adopted for use in other scenarios involving payments, like capital markets and contracts” (FINANCIAL EXECUTIVES INTERNATIONAL, 2018).


https://how2code.net/what-is-blockchain/

Concept of Smart Contracts and Decentralized/Distributed Ledgers

Decentralized/Distributed Ledgers: “A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions or geographies. It allows transactions to have public “witnesses,” thereby making a cyberattack more difficult.”(MAJASKI, 2019). According to a World Bank report,” Distributed ledgers 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).”(The World Bank, 2018). Distributed ledgers, in a nutshell are transactions that are easily accessible by users thus promoting transparency and real time value, but are not easily modified without the knowledge or input of all the users. Basically it gives power to the users across different locations to make their input into a transaction or process without the imbroglio or burden of having to route it through a central server and be dependent on one person to upload and update. Distributed ledgers afford for trust to be divested from one person or system to several connected node systems that is “failproof”, reliable and real time in operation

Benefits:

  1. It gives control of all its information and transactions to the users and promotes transparency. Thus, transaction time is minimized to minutes and are processed 24/7 saving businesses billions.
  2. This technology also facilitates increased back-office efficiency and automation. It cuts down on operational inefficiencies which ultimately is cost saving to any organisation.
  3. It provides greater security due to the decentralized nature and transparency and the fact that the ledgers are immutable. This is a far cry from centralized ledgers that are prone to cyber-attacks and system downtime.

Christina Majaski aptly sums it up broadly as, “Distributed ledger technology has great potential to revolutionize the way governments, institutions, and corporate work. It can help governments in tax collection, issuance of passports, record land registries, licenses and outlay of social security benefits as well as voting procedures.” (MAJASKI, 2019)

Smart Contracts:

According to Tiana Lawrence, “A smart contract is computer code that is written inside a blockchain protocol. Smart contracts are created to facilitate, verify, or enforce the pre-negotiated terms between two or more parties” (Laurence, 2019). It can further be defined as,” … systems which automatically move digital assets according to arbitrary pre-specified rules” (Buterin, Accessed 28th Dec 2019). Smart Contracts enable two or more individuals to work together without the question of trust coming up or a need for a higher authority to authorize or arbitrate on a transaction. It offers a systemized process of conveying information and carrying out transactions from one point to another with the assurance that information herein contained is secured and accessible by all stakeholders without a third-party interference. Apart from a smart contract defining the rules of engagement in an agreement, it also defines the penalties to be executed like the way traditional contracts operates. It automatically enforces obligations in a contractual agreement. Smart Contracts can be used in different sectors and industries, from legal process, healthcare, insurance, financial derivatives etc. They operate using the blockchain principle and technology as well. It simplifies and automates routine repetitive process which enhances productivity and effectiveness. “Blockchain-based smart contracts are helping make business and other transactions more secure, efficient and cost-effective.”(Rouse, Sales, & Cole, April 2018).In a report sponsored by Deloitte, it states that, “…blockchain-based smart contracts will allow companies to pull data from their financial statements in order to fulfill their contractual obligations…With a smart contract, any transaction is publicly available and can be seen.” (FINANCIAL EXECUTIVES INTERNATIONAL, 2018)

Benefits of smart contracts but not limited to these are:

  • Cost saving and operational effectiveness.
  • Increases processing speed and turnaround time in any transaction or business activities.
  • Creates an autonomy that is devoid of third-party participation except the concerned stakeholders.
  • Offers an immutable reliability. That is, data entered in cannot be altered nor changed and stakeholders are protected at each block node of information created and as well can see the details of the transaction being carried out.

With these benefits there are demerits to the use of smart contracts. Key among the disadvantages is lack of international regulations focusing on blockchain technology thus making it difficult to monitor the operations in a global economy. They are also difficult to amend and implement. While this can also be seen as a major plus for Smart Contracts, it’s also a demerit in the sense that, “…the parties cannot make any changes to the smart contract agreement or incorporate new details without developing a new contract.” (Rouse, Sales, & Cole, April 2018)

To be Continued.

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