Smart Contracts and Trust in Africa’s Ecommerce Revolution
The entry into force and promulgation of the African Continental Free Trade Area (AfCFTA) heralded a new and exciting era for the continent. AfCFTA aims to improve intra-African trade by creating a full and mutually beneficial trade agreement between member states. It covers goods and services, investments, intellectual property rights, and competition policy.1 On December 5, 2020, the Assembly of the African Union approved the start of trading under AfCFTA on January 1, 2021.2
AfCFTA is working to bring all 55 member states of the African Union together and cover a market of 1.2 billion people with a combined gross domestic product (GDP) of 3.4 trillion US dollars.3 AfCFTA will ensure a lowering of tariffs between the member states and cover policy areas such as trade facilitation and services as well as regulatory measures such as hygiene standards and technical barriers to trade. Full application of AfCFTA would restructure markets and economies across the continent, increasing output in the services, manufacturing and natural resources sectors.4th
In 2019, UNCTAD e-commerce week attendees were told that e-commerce can significantly boost free trade across Africa, and Ajay Kumar Bramdeo, the African Union’s Ambassador to the United Nations, said: “E- Commerce has the potential to reduce intra-African trade from currently 18% and increase Africa’s share of world trade. “5
Other think tanks share this optimism, and in September 2019 the World Economic Forum and International Trade Center released an Africa E-Commerce Agenda Action Plan saying online marketplaces have the potential to drive inclusive growth across the continent , and predict this e-commerce is expected to create up to 3 million jobs6th.
E-commerce has great potential in Africa and was valued at $ 16.5 billion in 2017.7th with a McKinsey report predicting that number could climb to $ 75 billion by 2025.8th The entry into force of the AfCFTA, which aims to create an integrated market with 1.27 billion consumers, will undoubtedly spur the African Union’s goal of building a digital single market in Africa by 2030.
African e-commerce companies need to ensure that they find secure and tamper-proof transaction channels. They need to find a transaction method that offers their customers a guarantee that ensures, for example, that once the customer fulfills certain obligations, the e-commerce company also fulfills its obligations to the customer by delivering goods and / or services.
However, at different stages of the buying process, there are numerous obstacles that are slowing the adoption and advancement of e-commerce in Africa. The four main obstacles identified by UNCTAD are access to the Internet, trust in online businesses, logistics and infrastructure challenges, and payment systems.
This article focuses on trust and the question of whether smart contracts offer a unique opportunity to address the topic in African e-commerce.
The trust problem
There is little trust in online businesses in Africa due to various scams (email phishing or prepayment scams) and the uncertainty of ever seeing what is being ordered online. This lack of trust still pervades the e-commerce landscape, as Ms. Amani Abou-Zeid noted at UNCTAD’s 2019 E-Commerce Week.9
Trust is generally rated more important in the context of e-commerce than in other contexts due to the lack of personal contact and social cues.10 The relationship of trust and mistrust is led by two parties, the trustor and the trustee. In e-commerce, these two parties do not participate in a person-to-person relationship, but rather in a person-to-computer interface relationship.
In an e-commerce transaction, a trustor cannot see or touch a trustee’s products or services, or ask face-to-face questions. The trustor has to deal with an unknown intermediary and has to overcome the perception of risk and uncertainty, for example by submitting personal information, transferring money and providing credit card information.
Trust can be divided into three parts: trust on the intrapersonal level (dispositional), trust on the system level and trust on the interpersonal level. In e-commerce, a trustor who is the buyer (intrapersonal level) faces two trustees who are the intermediaries (system level / intermediary) and the seller (interpersonal level / seller).
Intrapersonal level trust refers to the tendency to believe (or not to believe) in others. System-level trust plays a role in the security of convincing a trustor to submit personal and financial information and to purchase products or services from an unknown seller. Interpersonal trust is related to the seller’s trust in the counterpart of a transaction that delivers products or services. Structural Assurance, part of the System Trust, is an institutional trust where a buyer perceives robust structures that ensure that a successful e-commerce transaction takes place in secure circumstances.
A report by Alastair Tempest of the South African Institute of International Affairs11 says that businesses and consumers in Africa are not used to distance selling by mail order and have concerns about online payment, quality of goods, delivery, return of damaged or unaccepted goods, lack of consumer protection regulations, hidden costs (e.g. taxes and customs duties) and the general suspicion of buying goods without being able to touch and feel them.
In e-commerce, the perceived risk can act as a barrier to entry. Unlike a retail store, in e-commerce the potential buyer only has to make a decision based on information provided by a website. Trust and mistrust influence the willingness to buy, the intention to use and the willingness to share information.
Are Smart Contracts the Answer?
For African e-commerce companies, the answer to the lack of trust problem may lie in the use of smart contracts. Smart contracts are a relatively new concept, with origins traced back to 1994 when a computer scientist named Nick Szabo was discussing how contracts could be embedded in computer code.12th Blockchain technology has made this an even more feasible prospect.13
A smart contract is essentially a contract that is written in electronic form and anchored in computer code. They have been called self-executing contracts because of their ability to execute a specific transaction upon receipt of a specific trigger or input. Blockchain smart contracts are digital protocols that are functionally similar to traditional contracts. They are created to enable transactions between the parties, contain contractual conditions and are executed automatically. Smart contracts exclude third parties from the transaction process and make it private, faster and more secure. In addition, digital contracts are only executed when rules and conditions are followed by both parties, which reduces the risk for everyone involved.
Smart contracts work by being programmed onto a decentralized blockchain network that defines the terms of a particular transaction. One way to think of a smart contract is as a computer doing “if / then” or conditional programming.14th
The example of the machine is often chosen to explain how smart contracts work. The buyer selects the desired product, enters the amount of the displayed purchase price in the machine and in the last step the machine releases the desired product. Smart contracts work in a similar way.
One of the attractive features of a smart contract is that it is a very secure type of transaction as it cannot be changed or tampered with. It is said that there is no way to stealthily tamper with smart contracts without attracting the network’s attention.fifteen Smart contracts work by enabling trustworthy transactions and agreements between disparate, anonymous parties without the need for a central authority, legal system or external enforcement mechanism. This reduces the associated administrative effort.16
Smart contracts are therefore a great transaction option because once certain conditions are met – for example goods arrive at a port, two parties agree to an exchange – they can automate the transfer of Bitcoin, Alt-Coins, Fiat money or the receipt of Bitcoins a shipment of goods that allows them to continue the transaction; and below: a blockchain ledger that stores the smart contract.17th
The analysis of whether the contractual conditions are met is completed by the software. This is particularly advantageous if the parties do not know each other personally, as is often the case with an e-commerce transaction. Thanks to the use of smart contacts, trust between those involved is no longer an issue.
The establishment of a trust system based on blockchain technology helps to improve social and economic efficiency, ensure financial security and strengthen the system’s core competency. Blockchain can improve the accuracy of credit scoring, clearing ownership of data, widening the scope of credit scoring, and ensuring data security and privacy. Blockchain-based trust systems guarantee that data cannot be manipulated and take the question of trust completely out of the equation.18th
Given the secure way in which smart contracts work, they could certainly be the answer for e-commerce companies in Africa to break the hurdle of fraud and enable companies to conduct secure transactions with their customers and thus continue their growth path by taking among other things, to take advantage of the opportunities that AfCFTA is currently offering them.
Despite the benefits that AfCFTA can bring to e-commerce companies, it should be noted that the agreement does not currently contain a framework for e-commerce companies themselves. In this context, e-commerce was only recently included in AfCFTA by a resolution of the heads of state and government of the African Union in February 2020 and will be integrated in a third negotiation phase.19th The decision will certainly be another factor in the further growth of the African e-commerce market.
AfCFTA’s lack of a comprehensive framework for the African e-commerce market suggests that the positive impact AfCFTA is likely to have on the growth of the African e-commerce market will be more indirect. Therefore, a framework is required that deals directly with the e-commerce market.
Karishma Banga, Mohamed Gharib, Max Mendez-Parra, and Jamie Macleod, in a report for the Overseas Development Institute, recommend that AfCFTA-specific e-commerce negotiations should consider taxing digital businesses, among other things, by attempting to provide a framework for the harmonization of indirect taxes on digitally traded goods in order to promote digital industrialization, ensure a level playing field between local and foreign providers and boost revenues.20th