The central banks of the UAE and Saudi Arabia want to pilot a shared digital currency for cross-border bank transactions, they said on Saturday, a move that could revolutionise the remittance industry and build investor faith in cryptocurrencies, according to experts.
“This partnership between the UAE and Saudi Arabia is a great sign for the region’s emerging cryptocurrency environment and hopefully other countries will follow,” said Andrea Bonaceto, chief executive of Eterna Capital, a fund manager in London that gives investors access to blockchain-related investment opportunities.
Blockchain, an electronic transaction processing and archive system, is the underlying technology on which cryptocurrencies such as Bitcoin operate. It allows parties to log information in a secure network without the need for third-party verification, reducing instances of fraud and loss of information.
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Banks, governments, exchange houses and financial services companies are increasingly looking to adopt emerging technologies such as blockchain to cut the costs of doing business. Spending on blockchain technology in the Middle East and Africa was projected to double in 2018 to $80.8 million, up 107 per cent from $38.9m in 2017, according to IDC last February.
For the GCC region – which accounts for a sizeable proportion of total global remittances each year, according to the World Bank – a blockchain-based system could revolutionise banks' cross-border payments mechanisms, said experts.
“Distributed ledger technology is all about improving the speed, security and efficacy of transactions, so this could be a revolution,” said Hans Fraikin, chief executive of the Libra Project based in Abu Dhabi, which is developing virtual equity tokens to finance green energy infrastructure.
“It’s a no brainer,” added Mr Bonaceto.
“Blockchain can enable transactions to settle at almost zero cost for banks.”
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“While the pilot does not directly impact the cryptocurrency trading and investment market, it is one of the first government-led initiatives that demonstrates a specific use case for blockchain, and shows that its impact across industries should be taken seriously,” Mr Bonaceto said.
The Saudi-Emirati Co-ordination Council, a group of officials from the two countries formed last year, said on Saturday it is looking to develop and test the shared virtual currency as part of a previously announced blockchain pilot to assess the feasibility of widespread adoption of the technology.
The "first of its kind" cryptocurrency was one of seven initiatives announced during the first meeting of the council last week, according to the UAE's state news agency Wam. "The cross-border digital currency will be strictly targeted at banks in an experimental phase with the aim of better understanding the implications of blockchain technology and facilitating cross-border payments," it reported.
The proposed currency will rely on use of a blockchain database between the two central banks – Saudi Monetary Authority and UAE Central Bank – and participating retail banks. It will aim to "safeguard customer interests, set technology standards and assess cybersecurity risks and determine the impact of a central currency on monetary policies", said Wam.
In December, the two institutions confirmed they were working on the blockchain pilot to show how the technology could facilitate cheaper and faster cross-border payments using a shared digital currency.
The pilot is still in an early stage with few details known.