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Smart contracts and trust in Africa’s e-commerce revolution

Africa Connected: Issue 6

By Rodwyn Peterson

The coming into effect and promulgation of the African Continental Free Trade Area (AfCFTA) has ushered in a new and exciting era for the continent. AfCFTA aims to enhance intra-African trade by providing a complete and mutually beneficial trade agreement among Member States. It covers goods and services, investment, intellectual property rights and competition policy.1 On December 5, 2020, the African Union Assembly approved the start of trading under AfCFTA as of January 1, 2021.2

AfCFTA works to bring together all 55 Member States of the African Union, covering a market of 1.2 billion people with a combined gross domestic product (GDP) of USD3.4 trillion.3 AfCFTA will see to a reduction of tariffs among member countries and cover policy areas such as trade facilitation and services, as well as regulatory measures such as sanitary standards and technical barriers to trade. The complete application of AfCFTA would restructure markets and economies across the continent and boost output in the services, manufacturing and natural resources sectors.4

In 2019 participants at UNCTAD’s e-commerce week 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 lift intra-African trade from the current rate of 18% and boost Africa’s share of global trade.”5

Other think tanks share this optimism, and in September 2019 the World Economic Forum and the International Trade Centre published an Africa E-Commerce Agenda Roadmap for Action where they say that online market places have the potential to drive inclusive growth across the continent, predicting that e-commerce is likely to create as many as 3 million jobs6.

E-commerce has big potential in Africa, and was valued at USD16.5 billion in 2017,7 with a McKinsey report predicting that this value could rise to USD75 billion by 2025.8 The entry into force of the AfCFTA, which seeks to create an integrated market of 1.27 billion consumers, will undoubtedly stimulate the African Union’s aim to build a digital single market in Africa by 2030.

African e-commerce businesses will need to ensure they find ways of transacting that are safe, secure and not liable to manipulation. They will need to find a method of transacting that will provide their customers with a guarantee that will ensure that, for instance, once the customer fulfils certain obligations, the e-commerce business will equally fulfil its obligations to the customer through the delivery of goods and / or services.

However, at various stages of the buying process, there are numerous obstacles that slow the adoption and progression of e-commerce in Africa. The four main obstacles are identified by the UNCTAD are access to the internet, trust towards online businesses, logistics and infrastructure challenges, and payment systems.

The focus of this article is trust, and the question of whether smart contracts offer a unique opportunity for the issue to be addressed in African e-commerce.

The problem of trust

There is little trust towards online businesses in Africa tracing back to various scams (email phishing or advance-fee scam) and the uncertainty of ever seeing whatever is ordered online. This lack of trust still permeates the e-commerce landscape as Mrs. Amani Abou-Zeid identified at the 2019 UNCTAD’s e-commerce week.9

Trust in the context of e-commerce has generally been treated as more significant than in other settings because of the lack of personal contact and social cues.10 The trust and distrust relationship is conducted by two parties, the trustor and the trustee. In e-commerce, those two parties do not participate in a human-to-human relationship, but rather a human to computer-interface relationship.

In an e-commerce transaction, a trustor cannot see or touch a trustee’s products or services or ask questions face-to-face. The trustor must deal with an unfamiliar intermediary and must overcome perceptions of risk and insecurity, such as by submitting personal information, wiring money, and providing credit card information.

Trust can be divided into three parts: intrapersonal-level (dispositional) trust, system-level trust, and interpersonal-level trust. In e-commerce, a trustor who is the buyer (intrapersonal-level) faces two trustees that are the intermediaries (system-level / intermediary) and the seller (interpersonal-level / vendors).

Intrapersonal-level trust refers to the tendency to believe (or not to believe) in others. System-level trust plays a role of assurance that convinces a trustor to submit personal and financial information and to buy products or services from an unfamiliar seller. Interpersonal-level trust is associated with the seller’s trust in the counterpart of a transaction that delivers products or services. Structural assurance, a part of system trust, is an institutional trust in which a buyer perceives robust structures that ensure a successful e-commerce transaction will take place under safe and 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 mail-order distance selling and have concerns about paying online, the quality of the goods, delivery, return of damaged or unaccepted goods, lack of consumer protection regulations, hidden costs (eg taxes and customs duties) and general suspicions of buying goods without the ability to touch and feel them.

In e-commerce, perceived risk may act as a barrier to entry. Contrary to a retail shop, in e-commerce, the potential buyer must make a decision armed only with information provided by a website. Trust and distrust affect the willingness to purchase, intention to use, and willingness to share information.

Are smart contracts the answer?

For African e-commerce businesses, the answer to the issue of the lack of trust may be in the use of smart contracts. Smart contracts are a relatively new concept, with their origins being traced to 1994 when a computer scientist by the name of Nick Szabo discussed how contracts could be embedded in computer codes.12 Blockchain technology has made this an even more feasible prospect.13

A smart contract is essentially a contract that is set out in electronic form and is rooted in computer codes. They have been referred to as self-executing contracts due to the fact that they are able to perform a given transaction upon receipt of a given trigger or input. Blockchain smart contracts are digital protocols similar to traditional contracts by their functions. They are created to enable transactions between parties, contain terms of agreement and are executed automatically. Smart contracts eliminate third parties from the transaction-making process, making it private, fast and more secure. Additionally, digital contracts are only executed if rules and conditions are respected by both parties, which reduces the risk for all involved.

Smart contracts work by being programmed onto a decentralized blockchain network which defines the terms of a particular transaction. One way to think of a smart contract is as a computer executing on “if / then” or conditional, programming.14

The example of the vending machine is often chosen to explain the functionality of smart contracts. The buyer chooses the desired product, puts the amount of the indicated purchase price into the machine and, as a final step, the vending machine releases the desired product. Smart contracts work in a similar manner.

One of the attractive features of a smart contract is that they are a highly secure way of transacting as they cannot be altered or manipulated. It is said there is no way to covertly manipulate smart contracts without drawing the attention of the network.15 Smart contracts work in such a way that they permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. In so doing, they reduce any administrative overhead costs involved.16

Smart contracts are therefore a great way of transacting, as once certain conditions are met – for example goods arrive in a port, two parties agree to an exchange – they can automate the transfer of bitcoin, alt coins, fiat money, or the receipt of a shipment of goods that allows them to continue the transaction; and underneath it all: a blockchain ledger that stores the smart contract.17

The analysis of whether the contractual conditions have been satisfied is completed by the software. This is particularly advantageous when the parties do not know each other personally, as is often the case in an e-commerce transaction. With the use of smart contacts, trust is no longer an issue among the parties involved.

Building a trust system based on blockchain technology is conducive to improving social and economic efficiency, ensuring financial security, and enhancing the core competency of the system. Blockchain can improve the accuracy of credit evaluation, clarify data ownership, broaden the coverage of credit assessment, and ensure data security and privacy protection. Blockchain-based trust systems guarantee that data cannot be tampered with taking the question of trust completely out of the equation.18

Conclusion

Given the safe and secure manner in which smart contracts work, they certainly might be the answer for e-commerce businesses in Africa to overcome the hurdle of fraud and allow businesses to safely transact with their customers and thereby continue on their path of growth, by among other things, taking advantage of the opportunities that AfCFTA currently offers them.

In spite of the benefits that are likely to arise from AfCFTA for e-commerce businesses, it is important to keep in mind that the agreement currently does not have a framework for e-commerce businesses themselves. In this regard, e-commerce has only recently been included in AfCFTA through a decision of the African Union Heads of State and Government Assembly in February 2020 and it will be integrated through a third phase of negotiations.19 The decision will definitely be another contributing factor to the continued growth of the African e-commerce market.

AfCFTA’s lack of a comprehensive framework for the African e-commerce market suggests that whatever positive effects AfCFTA is likely to have on the growth of the African e-commerce market, they are likely to be somewhat indirect. There are therefore calls for a framework 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 e-commerce specific negotiations should consider, among others, digital business taxation, by trying to provide a framework for harmonising indirect taxes on digitally traded goods, to promote digital industrialisation, ensure a level playing field among local and foreign suppliers and to bolster revenue.20

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