UAE. Blockchain technologies have the potential to revolutionize 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 global consulting and technology firm outlines how the technology could have many useful applications, including in retail payments infrastructure, remittances, trade finance and syndicated loans, capital markets, and compliance activities such as Know Your Customer (KYC), benefitting both the financial sector and consumers.
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.
Booz Allen Hamilton identifies a number of specific opportunities in the financial services sector to shape and drive blockchain adoption, and recommends how the region can best organize and co-ordinate efforts for future research and development.
The report also outlines how central banks could lead this initiative by supporting broader issues on regulation, and knowledge sharing, as well as encouraging commercial banks to work together and collaborate with fintech firms to test and utilize new business models using the technology.
Lutfi Zakhour, Senior Vice President, Booz Allen Hamilton MENA, believes that it is imperative for commercial banks to actively look to embrace blockchain: “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.”
The report identifies a number of key areas of finance that blockchain has the potential to revolutionize in the GCC, including:
Retail Payments Infrastructure
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 specialized 'fintech' firms and startups, could help offset some of these costs.
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 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.
Remittance industry leaders like Western Union are already investing in blockchain companies (in this case, Digital Currency Group) to see how the technology can help improve their service. Given the scale of the remittance market in GCC countries, this is an area that needs to be further explored by banks and exchange houses alike.
Foreign exchange (FX) trade volume in the GCC has increased 50% year on year since 2011. Blockchain technology could be utilized 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. Utilizing 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.
The report concludes with recommendations on how GCC governments, central banks and the banking sector can help shape and drive blockchain development and application in the region. Understandably, new technologies and disruption often leave governments and regulators playing catch up, and blockchain is far from a complete and proven technology.
What is clear, though, is that leadership and direction are vital for a meaningful and productive initiative, which could ultimately deliver profound change and benefits to financial services within the GCC region.
Photo caption: Lutfi Zakhour, Senior Vice President, Booz Allen Hamilton MENA
About Booz Allen Hamilton
Booz Allen Hamilton has been at the forefront of strategy and technology for more than 100 years. Today, the firm provides management and technology consulting and engineering services to leading Fortune 500 corporations, governments, and not-for-profits across the globe.
In the Middle East and North Africa (MENA) region, Booz Allen builds on six decades of experience partnering with public and private sector clients to solve their most difficult challenges through a combination of business strategy, digital innovation, data analytics, cybersecurity and resilience, operations, supply chain, organization and culture, engineering and life-cycle project management expertise.
With regional MENA offices in Abu Dhabi, Beirut, Cairo, Doha, Dubai and Riyadh, and international headquarters in McLean, Virginia, the firm employs more than 22,600 people globally, and had revenue of $5.41 billion for the 12 months ended March 31, 2016.
To learn more, visit mena.boozallen.com. (NYSE: BAH)