Blockchain could potentially revolutionize the GCC region’s financial sector. The region needs to take required steps to transform blockchain from a disruptor to a vital enabler of the region’s FinTech space.
Marmore Mena Intelligence noted in its latest report that financial firms across the GCC region are evaluating the use of blockchain for cross-border payments, trade settlements and data and identity management purposes. The central banks have allocated more resources to blockchain technology, exploring the potential of the technology and digital currencies through experimental learning.
Citing International Data Corporation (IDC) data, the Marmore analysts noted MENA region’s total spending towards blockchain or distributed ledger technology (DLT) is expected to reach $370m in 2021, at a CAGR of 77.4 percent between 2016 and 2021, with the financial services sector accounting for 35.5 percent of the total spending.
DLT provides several benefits over the legacy systems, especially reducing the transactions, settlement and reconciliation costs. Various factors like interest in technological innovations, emergence of new entrants into payment services and intermediation, declining use of cash in few countries and emergence of private digital tokens have caused central banks to consider the option of introducing fiat digital currencies.
Interest on Central Bank Digital Currencies (CBDC) is increasing over years, as a number of experiments involving CBDC have been conducted. The Bank of International Settlement (BIS) report on CBDC concludes that wholesale digital currencies combined that wholesale digital currencies combined with the use of DLT enhances settlement efficiency for the securities and derivatives transactions, even though proposals so far look broadly similar and not clearly superior to the existing infrastructure.
The Marmore analysts said one of the central banks in the GCC region is currently working with a regional monetary authority on a digital currency to speed up the financial transactions between the two countries. These countries have launched a distributed ledger Proof-of-Concept (PoC) system to facilitate cross-border settlements.
The PoC which is at an early development stage is expected to be completed in the last quarter of 2019. A tech company is tasked with leading PoC implementation. The Proof of Concept simulation supported by fiat currencies of the two countries will demonstrate the feasibility and practical potential of implementing the project.
According to Marmore, central banks around the world are testing CBDC for different use cases. India is studying the feasibility to introduce CBDC due to the rising cost of managing the fiat paper/ metallic currency. For Sweden, CBDC benefits against the absolute decline in the amount to cash in circulation. Many central banks believe CBDC could be one of the solutions to solve the challenges in the cross-border payment and settlement space.