Blockchain was first used for the cryptocurrency Bitcoin, which solved the problem of having a secure database and not needing a trusted administrator.
Dubai - Tech has potential to truly disrupt multiple industries and make processes more democratic, secure, transparent and efficient
Blockchain technology, one of the hottest and most intriguing technologies currently in the market, has the potential to revolutionise the rapidly growing financial services sector in the UAE and broader GCC region.
With the UAE taking the lead in implementing the game changing initiative, blockchain, mostly known as the backbone technology behind Bitcoin, has the potential to truly disrupt multiple industries and make processes more democratic, secure, transparent, and efficient.
According to a new report from Booz Allen Hamilton, the technology can 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.
Last week, Emirates NBD became the first lender to introduce the service in the GCC. Several other global banks including Barclays and Royal Bank of Scotland, have announced that they may adopt the Blockchain system as it ensures a foolproof system, making fraud more difficult, while speed up trading systems and make deals more transparent.
Booz Allen Hamilton said in its report that blockchain would be used to preserve and record wills and trusts, for instance at the Dubai International Financial Centre, 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 organise 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 at 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," said Zakhour.
The report identifies a number of key areas of finance that blockchain has the potential to revolutionise in the GCC, including retail payments infrastructure, foreign exchange transaction, remittances and trade finance.
"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 startups, could help offset some of these costs," said the report.
In the remittance industry, blockchain application could potentially reduce transaction costs and time by eliminating the need for correspondent banks, thus reducing cost for customers and providing near instant settlement.
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.