Blockchain future is here and Dubai has grabbed it

Security and reliability are reinforced through algorithms and reinforced with encrypted software code

Anyone following Dubai's headlong race to embrace new and emerging technologies in order to streamline governance and improve the quality of life of its residents might have seen the recent headlines announcing Dubai's intention to become the world's first blockchain city. This may have created a few ripples of excitement. I say 'few' because probably not too many people outside the realm of information technology fully understand what blockchain is, how it works and what its potential is likely to be.
Blockchain, as its name implies, is a chain of blocks and not something blocking a chain as first impressions may imply. A block is a register of a particular transaction conducted by one person with another. Transactions could be monetary in nature, or could deal with property matters, trade in goods or legal documents or just about anything involving value. As blocks are approved, they are attached together in a chain which becomes an indelible public ledger where transactions are recorded, confirmed and sealed for all time. Once a transaction is entered into the blockchain, it cannot be altered or undone.
The ingenuity of blockchain technology lies in the fact that its processing power is distributed widely and that there is no single, all-powerful, central controller that can be compromised, hacked or suffer a catastrophe. Instead, thousands of computers (nodes) spread out all over the world control the entry and approval of a transaction into a blockchain and any entry must be approved by a majority of active nodes in the network. Each node has a copy of the entire blockchain and of every transaction therein. This decentralisation simultaneously renders the network anonymous and secure. The blockchain system is designed to skirt around that delicate human foible called trust on which we rely so much in our daily lives. Security and reliability are guaranteed via special mathematical functions called algorithms and reinforced with encrypted software code.
Blockchain technology was invented to facilitate the creation of a new 'cryptocurrency' called Bitcoin. This virtual currency exists today outside the realm of central banks and government-issued fiat money. It is an unregulated commodity currency that only has value because all the people dealing in it agree it does. In theory, it can be used to pay for almost any type of transaction based on value, such as other currencies, goods and services, property, remittances, deeds and contracts. The value of Bitcoin has soared, reaching an all-time high of almost $6,000 and a market capitalisation approaching $100 billion last week.
Bitcoin transactions - buy, sell or transfer - work the same way as for blockchain. Any transaction involving this cryptocurrency must be approved by a majority of nodes in the network.
Bitcoin is thus an algorithm and a distributed network for managing electronic cash without a central administrator. Transactional rules are built into the software code. The supply is limited to a total of 21 million Bitcoin, with 14 million having been 'mined' or minted so far. In some ways, this is similar to the old gold standard, where the money supply of major currencies was linked to a country's stock of gold, and which was abandoned in 1973. Does the same fate await Bitcoin?
To answer this question one needs to look at the current situation. The present financial system, supporting a global economy of over $100 trillion, is largely seen as being opaque, monopolistic and riddled with vulnerabilities, as witnessed in 2008-09. It remains the province of a privileged few with huge swathes of the world's population excluded from participation. In the case of Bitcoin, anyone with an internet connection can theoretically trade in it. The accessibility and decentralisation aspects of Bitcoin and blockchain technology make it attractive. As do the elimination of middlemen and intermediaries. One only needs to think of the pain involved today with an international telegraphic transfer with payments to banks at both ends as well as the involvement of intermediaries like Swift.
But it also raises more questions, some of which do not have answers at present. Will the rise of blockchain see the end of traditional banking as we know it? Not really, at least for the foreseeable future, but judging by the way banks are falling over themselves to incorporate and mate blockchain technology into their current infrastructure, we may see the advent of an interesting hybrid where some of the current costs of transacting business with banks is reduced, if not eliminated entirely. And will cryptocurrencies, which know no international borders, eventually supersede fiat currencies rendering central banks superfluous? And if this happens, who will conduct monetary policy in the future?
The general feeling is that the financial system will use blockchain mainly for efficiency and security reasons but we are unlikely to see free international bank transfers very soon. Before it becomes a serious contender as a true alternative currency, Bitcoin and other cryptocurrencies need to fulfill the three main functions of money - medium of exchange (be universally accepted as payment for goods and services), unit of account (see prices of everyday purchases listed in cryptocurrency) and store of value (confidence of retaining its value to perform the other two functions well into the future).
In Dubai, the potential for using blockchain technology has gained early recognition. Agreements have been signed between the Dubai Financial Services Authority (DFSA) and the Hong Kong financial regulator (SFC) for cooperation on financial technology (fintech). An incubator called the Fintech Hive has been established at DIFC for startups in financial blockchain applications. And under the Smart Dubai initiative, blockchain is being incorporated into government organisations to do away with the 100 million or so documents processed each year and save some 5.5 billion dirhams a year in the process. Dubai is looking to create an open blockchain platform that can be shared with other cities and countries across the globe.
The potential of a widely distributed ledger technology where security is guaranteed by decentralisation and everybody 'watching everyone else' is enormous. Transactions in real estate, banking, healthcare, transportation, urban planning, utilities and even tourism can all benefit from blockchain. Dubai wants to use blockchain to ease entry of tourists to the emirate through pre-approved passport and visa checks and facilitate tourist spend through digital wallets and payments. The list is endless and the potential vast. Blockchain, and its killer app, Bitcoin, were invented in the wake of the financial meltdown of 2008. If the original principled intentions of its inventors can be nurtured and remain uncorrupted, it could very well change the way we transact our lives in the future.
Dr Sanjay Modak is Visiting Professor of Economics at the Rochester Institute of Technology, Dubai.