Exploring blockchain applications to agricultural finance
This brief (PDF) by CGAP set out to understand how the emerging technology of distributed ledger technologies (DLT), also known as blockchain, could enable broader and more inclusive markets for agricultural finance. DLT is build around he concept of a ledger and provides a mechanisms for creating a shared record of transactions among several institutions or individuals in the absence of a trusted arbiter. There are a number of barriers to using DLT: the technology is still nascent, there is a lack of trust in and of itself and of the data written to the ledger. Further, poor connectivity , lack of computing power, low penetration of devices that can interact with DLT among smallholders are obstacles. However, several features of the technology emerge particularly relevant. The transparency and shared control are benefits of DLT. Disintermediation can help overcome barriers to agricultural finance and the use of DLT to verify the identity of smallholders is fundamental. Cases where DLT could be used in agricultural finance are: 1) The collateralization of assets could enable smallholders to access financing; 2) Supply chain management by data on smallholder agricultural production; 3) Recording smallholders’ borrowing and repayment histories and; 4) Posting contractual agreements. So agricultural finance offers several potential applications. However, several obstacles need to be overcome before DLT can be deployed at scale to unlock financing along agricultural finance chains. Trusted actors is paramount, even in a system designed to operate without third-party intermediation. Governments would need to put in place appropriate legal and regulatory frameworks that recognize the use of digital ID. Any DLT solution to agricultural finance should be as simple and straightforward as possible and should not pretend to have eliminated the need for some degree of shared trust among participants.