Dubai: Blockchain technologies have the potential to revolutionise the rapidly growing financial services sector in the UAE and broader GCC region, according to a new report from Booz Allen Hamilton, titled Blockchain: Application to Financial Services in the GCC Region. The UAE government is working to establish the country as a major financial technology (fintech) player and has already started to experiment with the potential uses of blockchain in the public and private sectors.
At the Dubai International Financial Centre, for example, blockchain will be used to preserve and record wills and trusts, while the Abu Dhabi Global Market free zone has expressed its ambition to become the financial technology capital of the Gulf.
The adoption of blockchain was given an additional boost in February when Dubai’s Museum of the Future announced the formation of a research council focused on blockchain technology that will comprise 32 members including government entities, international companies and blockchain start-ups.
“The digital economy is moving so rapidly that adopting a ‘wait and see’ approach is not advisable. Our report shows that there are a number of very real opportunities that will provide genuine long-term benefits. We are seeing significant momentum now at the global level which means that GCC institutions need to start planning the most effective ways to engage and implement blockchain solutions into their future business operating models,” said Lutfi Zakhour, Senior Vice President, Booz Allen Hamilton Mena.
The report identifies a number of key areas of finance that blockchain has the potential to revolutionise in the GCC:
Introducing blockchain will speed up transactions and reduce costs, provide near instantaneous clearing and settlement, and manage complete transaction records, which would boost the accuracy of data and allow for improved monitoring by regulators. Banks could look to develop payments infrastructure and systems to make them blockchain compatible, but implementing blockchain will require investment to upgrade existing infrastructure. Collaboration between banks on an equal partner basis to develop a co-owned blockchain payments system, or partnerships with specialised “fintech” firms and start-ups, could help offset some of these costs.
GCC countries account for an estimated $98 billion (Dh359.6 billion) in annual outward remittance flows which are likely to continue to grow given the high percentage of migrant workers. However, transaction costs and time are relatively high, reflecting the complexity of the clearing and settlement chain. Blockchain application could potentially reduce this complexity by eliminating the need for correspondent banks, thus reducing cost for customers and providing near instant settlement. This would enable banks to levy cheaper fees and compete better even if exchange houses also adopted blockchain technology.
Foreign exchange (FX) trade volume in the GCC has increased 50 per cent year on year since 2011. Blockchain technology could be utilised to meet this increase in demand in order to enable direct peer-to-peer foreign exchange transactions. By allowing parties to access a much larger pool of currency exchange markets, costs can be driven down and the speed of transactions increased.
Trade finance is another key area that could benefit from blockchain technology adoption. Trade finance is a complex process that involves a number of manual checks to verify the legitimacy of a client, its trading partners and the goods that change hands. The majority of these processes involve the exchange of paper documents between buyers and sellers via their respective banks, ensuring transactions are verified and processed, and allowing for payments to be made. Utilising blockchain technology could yield significant benefits. Having all parties on a shared system with permissioned access will enable real time exchange of information, increase speed and provide visibility across the transit of goods and flow of information.
GCC governments, central banks and the banking sector can help shape and drive blockchain development and application in the region.