Blockchain technologies have the potential to revolutionize the rapidly growing financial services sector in the UAE and broader GCC region, according to a report by consulting and technology firm Booz Allen Hamilton.
The report titled Blockchain: Application to Financial Services in the GCC Region, has pointed out how blockchain can impact key areas of finance, including retail payments infrastructure, remittances, forex trading, trade finance, capital markets and compliance activities.
Using math and cryptographic tools, blockchain helps create an open and decentralized database of transactions, monetary or otherwise. This creates a record whose authenticity can be verified by everyone involved in the transaction, effectively allowing institutions like banks to cut transaction cost and time.
Blockchain also allows trading parties to track information via a secure network, without the requirement for any third party verification.
The UAE government is working to establish the country as a major financial 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 record wills and trusts.
The adoption of blockchain was given an additional boost in February when Dubai’s Museum of the Future formed a research council focused on blockchain technology that will comprise 32 members including government entities, international companies, and blockchain start-ups.
The report has also outlined how central banks could lead this initiative by supporting broader issues on regulation, and knowledge sharing, as well as encouraging commercial banks to collaborate with fintech firms to test fresh business models.
“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.
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, the report has said. Banks could look to develop payments infrastructure and systems to make them blockchain compatible, but implementing blockchain will require investment to upgrade existing infrastructure.
GCC countries account for an estimated $98 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 could reduce this complexity by eliminating the need for correspondent banks, reducing the cost for customers and providing a near-instant settlement.
This would enable banks to levy cheaper fees and compete better even if exchange houses also adopted blockchain technology, the report has said. Remittance industry leaders like Western Union are already investing in blockchain companies to see how the technology can help improve service.
Given the scale of the remittance market in GCC countries, this is an area that needs to be explored by banks and exchange houses alike, the report has stated.
Trade finance is another area that could benefit from blockchain technology adoption.
Trade finance 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.
Use of blockchain technology will help to have all parties on a shared system with permissioned access. This will enable real-time exchange of information, increase speed and provide visibility across the transit of goods and flow of information.