If you have been following the financial news, you may have seen that the value of one bitcoin skyrocketed from around $11,000 in October 2020 to over $62,000 in April 2021, before plummeting to under $32,000 two months later.

If you feel lost trying to understand these price movements, you are not alone. Most people – including government officials – struggle to understand the technology behind bitcoin (blockchain) and its potential impact on our lives.

How should governments deal with this technology? And how could they harness its potential to advance national development priorities and achieve the Sustainable Development Goals (SDGs)?

Blockchain was invented to create bitcoin but can now store computer code and “smart contracts”. The technology offers the possibility to innovate in virtually any area, but the top uses are currently for cryptocurrencies and decentralized finance (DeFi) applications, which use blockchain-based smart contracts to implement financial instruments.

According to Coinmarketcap.com, as of June 2021 there were over 5,000 cryptocurrencies totalling over $1.4 trillion of market capitalization. The top 10 DeFi tokens were worth $51 billion in market capitalization.

The UN Commission on Science and Technology for Development (CSTD) paid keen attention to the significance of blockchain in the real economy at its annual meeting in May 2021, looking at the areas of trade, logistics and supply chains. Following discussions at the CSTD, UNCTAD recently published a report on how to harness blockchain for sustainable development.

Like any technology, blockchain can contribute to the SDGs in various ways – from providing food vouchers in refugee camps to enhancing property and land registries to improving access to national identification. So far, however, blockchain innovation has mostly focused on speculative gains in crypto-financial assets instead of creating real value through new products and services.

This is a recipe for financial bubbles and bursts.

Blockchain is potentially a key technology in a new technological paradigm of increasing automation and the integration of physical and virtual worlds. Its impact goes beyond the economy, as it can transform social interaction, public institutions and our relationship with the environment, and affect countries’ options for pursuing sustainable development.

Based on the assumption of a new technological paradigm, blockchain is in the installation period of a technological revolution – dominated by radical innovations (led by suppliers), experimentation, new technological solutions, many standards and competing technical specifications.

During the installation period, the financial sector, which provides the required finance for entrepreneurs to innovate, is also learning about the new technology and its opportunities for financial gains. The fast pace of innovation and insufficient knowledge about the new technology’s real potential create a frenzy of investment.

As a result, there is a tendency for speculation, and “money creating money” schemes emerge with the gradual decoupling of the real economy and the financial sector.

The end of the installation period is prone to financial bubbles. It is too early to say if we are witnessing bubble-bust-like prices movements in bitcoin and other crypto assets, but the way blockchain innovation is self-financed could expedite this process and create a series of periods of installation, crisis, and deployment particular to blockchain innovation.

Source: UNCTAD