There may be several reasons:

First, in the eastern part of the region, the market-based financial sector is relatively new and not yet fully mature. Insurance and capital markets are underdeveloped. Land registration and real estate cadastre can still be improved. Blockchain technology may help fill these gaps.

Second, the banking industry’s exposure to fragility after the transition in 1991, the global financial crisis in 2008, and the collapse of oil prices in 2014 have weakened people’s trust in financial institutions. The degree of dollarization in the eastern financial sector in the region is relatively high, reflecting the public’s lack of trust in the legal currency. This has led to very low local bank deposits and consumers are looking for other ways to invest their savings.

Third, banks dominate the financial sector throughout the region. There is very little risk capital that does not require collateral. New forms of financing can help technology start-ups that have the potential to grow rapidly in a highly competitive global market.

Small countries in the region have a favourable business environment and therefore are conducive to the introduction of new financial instruments based on blockchain technology. The tokenization allows small startups to raise funds in the global market, and these start-ups lack easy access to financing. Emerging countries in the Baltic States and several other small countries, including Georgia, have already issued love in Western Europe. These examples are instructive to other economies in the region. These economies have long been dominated by state-owned enterprises, mainly through the non-tradable sectors to achieve economic growth.

For many of these economies, the challenge is how to unlock new growth potential in areas of global competition. The new P2P technology provides access to these markets. More specifically, activities on the blockchain network automatically place participants in international competition.

Fourth, there is strong demand for new cross-border transfers. The amount of remittances in the region is large; the transaction costs associated with it are high. There is also a large part of the region’s illicit financial flows related to money laundering, tax evasion and circumvention of capital controls or sanctions.

Fifth, the governments of the region provide a wide range of services. They supervise and improve the social security system, and most of them play a comprehensive role in medical care, pensions, and education. People are constantly asking for more efficiency and transparency in these services. Many governments are working to achieve these goals.

The European Commission has funded a blockchain observatory to encourage the development of blockchain technology and help formulate policy recommendations, particularly on smart contracts and policy recommendations for improving government services.

Lithuania has opened a blockchain center to incubate start-ups and collaborate with similar centers in Melbourne and Shanghai. In addition, the Central Bank of Lithuania has provided a one-year sandbox environment for the development of new digital financial technology startups. Estonia is exploring opportunities to use blockchain technology for medicine, and Georgia is studying the possibility of supporting smart contract applications. Serbia and Tajikistan are working with the United Nations Development Programme (UNDP 2018) to test remittances on the blockchain. Azerbaijan is experimenting with applying digital IDs to blockchains in banking. The Riksbank (Sweden’s central bank) is considering launching its own digital currency.

Sixth, governments in the region are looking for ways to reduce the power of large technology companies and increase privacy. Compared with the governments of other regions, the governments of the region are limiting the natural monopoly of technology giants. When technology companies get some data, people in the area have strong privacy concerns. The open source performance of the blockchain structure breaks this monopoly of data. Several governments and the European Commission are studying whether it is possible to use new technologies to reduce the power of large digital network companies.

It is still unclear which experiments will have lasting effects. The impact of disruption may come from applications that are very different from the initial design of the blockchain. Testing of blockchain technology has promoted innovation and competition among private companies and governments. For this reason alone, the trial of blockchain technology is worth supporting.

Author: Marko Vidrih