Shane Ninai is the Co-Founder and Managing Partner of Day One Investments, a Blockchain venture capitalist fund. He is from East Sepik, Papua New Guinea.
Blockchain allows consumers and suppliers to connect directly, removing the need for a middleman to make a transaction, and essentially makes trust possible in digital platforms. It is a platform most commonly used for Bitcoin, but Shane makes the case for its use for economic development in emerging markets, such as Papua New Guinea.
In this article, taken from his opening keynote address at the 2017 London Blockchain Week, Shane discussed his model for use based on his experiences in Papua New Guinea, and shows why PNG is worth watching in this space.

Subsistence gardening in PNG (Photo: Flickr/DFAT)

Good morning everyone. It is a pleasure to be here in London, the Fintech capital of the world with all of you to talk about the Blockchain.

It’s interesting to think about the progression of Bitcoin and Blockchain over the past 8 or so years. The ups and downs and where it’s all going; it’s very exciting to be a part of it all.

But at the end of the day the whole ecosystem and every single one of us in this room wants to know the answer to one question – How can we make the Blockchain real? How can we take this out of the labs and into the real world?

So for my talk I am going to tackle this popular narrative that the Blockchain will be made real in emerging markets; and how I see this happening.

Emerging markets by definition have weaker trusted third party infrastructure and governance systems. The Blockchain solves this as it allows us to digitise trust in code and distribute this trust function across a network of participants in a distributed ledger effectively allowing developing countries to crowdsource trust. The narrative goes a little like this and we’ve all heard it before: Using the Blockchain you can go in to an emerging market and take the power out of the hands of the corrupt few and return it to the people. Technology as saviour. Blockchain as saviour. Emerging market plus Blockchain equals problem solved. And this is correct, to a certain degree; and while I am a big fan of the optimism around this I think it is very important that we acknowledge that most of the talk around this is because we are entrenched in the “inflated expectations” stage of the hype cycle. Most of the world we have to remember are still in this stage- 2016 was a big year for the Blockchain and represents the innovation trigger or phase one of the hype cycle: the “everything that glitters is gold – let’s just use a Blockchain for that” phase

This hype cycle model has been touted by many international development firms, venture capitalists and big banks. Positioning bitcoin and the Blockchain as this life-raft currency or technology that people in emerging markets need. My opinion is that we are framing this wrong- from an applied point of view we have to rethink the starting point:

Emerging markets and developing countries do not need the Blockchain. Instead, the Blockchain and us the Blockchain industry as a whole, need emerging markets and developing countries.

Two very different things. I’m going to repeat that.

Emerging markets do not need the Blockchain. The Blockchain needs emerging markets. It’s from this reversal that my line of thought starts.

The application of the Blockchain in emerging markets is never going to work, it will never become real as long as it continues to be pushed by those that are disconnected from the gritty social realities of life in developing countries and the complex informal cultural governance and power structures that dominate these markets.

So these are my thoughts based on our work in emerging markets.

Day One Investments is a venture capital and economic development consultancy firm. We do two things.

  1. We invest in Blockchain solutions.
  2. We work with central banks, regulators and international development firms in emerging markets on how to apply these solutions to make the Blockchain real.

I am going to share three of my key learnings with you today from our work in Papua New Guinea around financial inclusion.

  1. The need to Redefine financial inclusion to allow the Blockchain to capture the alternative customary economy
  2. The regulator is key in these developing nations as the innovation ecosystem as we would define it, is either immature or non-existent
  3. Applied knowledge in developing markets will prove more valuable than returns. The race is to emerge as the educator in this area

So, the Blockchain in Papua New Guinea. The first question I get asked is Why Papua New Guinea? The answer is always quite simple and comes in 2 parts.

First and foremost, I am a Papua New Guinean. My entire family is Papua New Guinean, we still live there, I grew up there my whole life, that is home. I know it inside out and back to front. I know the problems.

Secondly, I was lucky enough to receive education in Sydney, Australia and then go on to work in Silicon Valley in venture and bitcoin until I co-founded Day One and began deep diving into bringing bitcoin and Blockchain to emerging markets.

Having my feet firmly planted in both sides of the spectrum, my investment thesis and theory of change is shaped by a passionate, first hand understanding of the gritty social realities of life and culture in a developing country along with a knowledge of this new and exciting technology and its potential.

Based on that, this is a general theory I have been exploring with members of the Central Bank of Papua New Guinea who are in attendance today- Assistant Governor Elizabeth Genia, Head of IT Naime Kilamanu, Head of Research Boniface Aipi and IT Consultant Callum Holmes.

It goes something like this; in developing countries we all know that financial inclusion is a major problem. In some developing nations, upwards of 80% of the population are unbanked. Central Banks, Banks and Governments are tirelessly attempting to solve this problem.

Now the general consensus is that the Blockchain provides us with the greatest potential technology and opportunity to solve this problem.

But before we do anything, we have to define the problem.

Financial inclusion broadly suggests that economic inequality is due to external factors that hinder the efficient workings of markets, thereby creating market failures. For example, market-based approaches may identify poorly defined property titles as a cause of market exclusion, and therefore of poverty. But this leaves out a villager who owns his land, works it and lives comfortably in the village- is it fair to say that he lives in poverty?

The financial inclusion practitioner operating within this framework may seek to rectify that, in order to extend market systems into areas where they do not currently operate well. The theory is that this will give individuals within that situation a better chance of competing within the “normal market.”

This is where I fork, I don’t think the Blockchain and financial inclusion should be applied to bringing these individuals into the “normal market” when their informal “traditional economy” is still alive and well. If 85% of the population are not in the normal market, and the Blockchain allows us to now capture this 85%, maybe it is more practical to explore an alternative economy model as research in a sandbox.

From my experience I believe that in order to make the Blockchain real, we have to start from the assumption that, while formal market systems may be a source of economic growth and individual enhancement, they are simultaneously the source of financial exclusion as we are competing with millennia of ingrained cultural tradition and competing norms of economic engagement.

Instead of trying to fit the 85% of the unbanked into a narrow financial system; the real wonder of the Blockchain is that it allows us to create and capture these alternative economic systems that bypass normal markets.

In Papua New Guinea for instance we have an overarching term called the wantok system, this is a term used to cover all the unspoken social cues and obligations in our traditional cultural form of economic engagement. For instance, I don’t pay life insurance because When I pass away, my family and extended relatives will all chip in and contribute money and gifts to help my family deal with my passing and my relatives will make sure to continue to support my family as much as possible. We are a very traditional and culturally diverse society made up of 800 different languages, countless tribes and clans. We are a country dependent on close human relationships where $5000 dollars in cash may not mean as much to me as 3 pigs and a shell necklace. Informal and alternative economies and governance systems mirroring what we in this room would call the consensus algorithm are deeply ingrained in our culture and are still alive and well; and the Blockchain allows us for the first time to capture this activity. There is no need to swim upstream here or reinvent the wheel.

In many developing nations like Papua New Guinea, the basis of economic life is mutual cooperation and solidarity, rather than individual competition for narrow success. These are systems of consensus and distributed trust that are consistent with the mechanics, vision and value of the Blockchain; and are often at odds with the “normal market” we define financial inclusion by.

For us to tackle financial inclusion in developing nations with the Blockchain there must be a regulator led inquiry into the correlation between traditional informal economies and a study to see how the Blockchain can be applied to capture this.

This leads me to the most important part of all this- in emerging markets the innovation ecosystem is either immature or non-existent and cannot be relied upon to lead the push like it can in jurisdictions like the UK or the US. In developing nations, the Regulator and the Central Banks are arguably the most influential body- they will have to be the ones to lead this drive. That is why I expect to see an increased collaboration between developing nations and regulators in regions like Europe as there is a growing appreciation for these solutions to move into the real world, the developing nations provide the most logical value proposition and in turn can provide valuable applied information and learnings to their counterparts.

Remembering that despite all the hype, all the Blockchain system actually does is enable digital tokens to be moved between participants. Whether such digital tokens are perceived to have value or not is a separate, and more complex issue. In emerging markets especially, a regulator led model is the only way to ensure that these systems have value and are transacted with at scale; the regulators appreciation of this innovation and a willingness to experiment is key.

What the FCA is doing here with the regulatory sandbox is a world first model, and one that I have spent quite some time researching and learning about as we increasingly see other regulators and central banks around the world continue to follow this model.

The real opportunity though is for a developing country to embrace this. Public and private partnerships are key for this to work. An informed regulator is more important than ever as the problem is in the irony that while developing nations are the ones that stand to benefit the most, they are also more often than not, not prepared to do so. And therein lies the challenge.

Now a lot of what I am saying comes back to my theory of change and one of the key points that we foresee. Over the next 3-5 years I believe that being an inch wide and a mile deep in applied knowledge will be more valuable in the long term than any investment. Having a deep knowledge and appreciation of the nuances here will be pivotal, as being the educator is key. We believe that the success of the Blockchain is 20% technology and 80% strategy. We have every faith that the engineers and entrepreneurs will solve the technology issues and build great and wonderful things. I believe now we will see a lot of action in the 80% strategy- space with collaboration between regulators- and this is why I expect to see a lot more international engagement between central banks as this space consolidates.

So to sum up:

  1. An understanding of the traditional informal economy and culture in emerging markets- and extending a new definition of financial inclusion to allow for this to be captured
  2. A strong partnership with a regulator in an emerging market who is willing to look at cross border collaborations with regulators in developed markets like the FCA sandbox model- and then to additionally and most importantly contextualise it: Here it is important that the regulator explores these alternative economies with the Blockchain promoting an alternative business model that incentivises solidarity and mutual aid over- the “normal market”
  3. Those that are able to execute on this; and extract the most lessons will be the leaders in this Blockchain race.

I’d like to end with a story.

In our work in Papua New Guinea we have identified an exciting pilot province; aptly named East New Britain. The second largest financial hub in the country; we have been exploring the alternative economy and the way people there use shell money. Shell money gets its value because it is so hard to make (proof of work). To this day microfinance institutions and savings and loans societies are willing to provide loans against this shell money because they recognise it as currency. In these communities before any major decision is made the families, the clans all meet and have a say and vote (consensus algorithms). The first day that we walked into the office of East New Britain Savings and Loans in Kokopo, we began to explain the Blockchain to the staff. And something interesting happened, we would say something, they would ask questions and before we could answer, the other staff members would be answering the questions. They knew the problems so well, they grasped what the technology could do and they knew it was needed. We hardly did any talking. This was the overwhelming reaction from these smaller microfinance businesses who are tasked with serving the bottom of the pyramid.

The only other time that we were greeted with such enthusiasm from people who immediately saw the value was when we went to meet with the Central Bank of Papua New Guinea.

I would like to thank our guests the Bank of Papua New Guinea; Assistant Governor Elizabeth Genia and Head of Research Boniface Aipi, Head of IT Naime Kilamanu and IT consultant Callum Holmes for being exemplary of a regulator in a developing nation; and I expect that the Blockchain scene should expect to see a lot of exciting firsts and lessons learned coming out of Papua New Guinea and other emerging markets in the not so distant future as we continue to try to make the Blockchain real for financial inclusion.

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Shane Ninai - Technology investor - Lowy Institute

Shane Ninai

Technology investor

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Shane Ninai is the Co-Founder and Managing Partner of Day One Investments, a Blockchain venture capitalist fund. He is from East Sepik, Papua New Guinea.