Blockchain technology, which holds the potential to reduce banks’ business operations costs worldwide by up to 50 per cent, is increasingly disrupting the region’s banking sector, say experts.
The technology is an online, encrypted database that allows multiple parties to have real-time access to transactions related to documents, shares, financial products and digital currency.
"Blockchain holds the promise of bringing greater efficiency and transparency to the banking industry, for instance, allowing cross-border transactions to be made in real time, and money to be exchanged at the speed with which information moves today," Motasim Iqbal, head of transaction banking at British lender Standard Chartered, UAE, told The National.
The global financial services industry spends about $1.7 billion per year on blockchain as banks and other financial institutions start to roll out commercial distributed ledger technology, the US-based research firm Greenwich Associates said in a report in June.
Around 60 per cent of the UAE’s chief executives expect to invest in blockchain technology in 2018 while more than 70 per cent of global banks are experimenting with permissioned blockchain, which allows to appoint a group of participants who are given the authority to provide the validation of blocks of transactions, according to the KPMG’s study. The Central Bank of the UAE has also announced a joint project with the Saudi Arabian Monetary Authority to use blockchain to issue a digital currency for cross-border transactions between the two countries.
Standard Chartered, which is working with clients to bring new financial capabilities to the market, has signed a pact with Siemens Financial Services and TradeIX (a digital trade provider) to carry out an industry-first client pilot to create an end-to-end blockchain-based smart guarantees service in trade finance. This will transform the traditionally paper intensive bank guarantees business and fully digitise the process.
“We believe this technology can be helpful to improve security, efficiency and over all simplification of processes in the industry,” said Mr Iqbal. “We are focusing on blockchain technology’s trade and cash applications. We have been engaged in a number of projects and initiatives to use this technology in innovative ways to improve the experience and efficiency for our clients and industry.”
UAE is a key market for Standard Chartered and this industry-first client pilot is in line with the Emirates Blockchain Strategy 2012, that was launched earlier this year to transform 50 per cent of government transactions into the blockchain platform by 2021.
However, service providers feel that regional banks need to adapt to fully take advantage of blockchain disruption.
“Its [blockchain] main aim is to eliminate all intermediaries, add transparency, security and reduce costs. It will certainly impact traditional ways of banking. Though countries like the UAE and Saudi Arabia have already started the work, regional banks need to transform to stay relevant in the new space,” said Rasheed Al Omari, principal business solutions strategist – South Europe, Middle East and Africa at VMware, whose parent company is Dell Technologies.
VMware, which is providing infrastructure to enterprises to adopt blockchain technology at reduced costs, is going to announce new solutions in the region in the coming days. Through their new project Concord, VMware is poised to help businesses harness blockchain technology in an efficient manner to advance their business goals.
Worldwide spending on blockchain solutions is forecast to reach $11.7bn in 2022, according to an International Data Corporation report.
“Blockchain, with its peer-to-peer networking model, enables near real-time settlement models for most types of financial transactions, which could eliminate counter-party risk, free up capital and radically reduce transaction costs,” said Jeroen Schlosser, managing director at major data centre provider Equinix, Middle East and North Africa.
However, industry experts say blockchain uptake and use in the banking sector is nascent at present.
"Blockchain technology development is still in its infancy, with numerous issues still remaining unsolved, notably in terms of scalability, efficiency, privacy and cyber security," Alberto Perucchini, analyst at Swiss private banking group Julius Baer, told The National.
“Consequently, working applications in the financial and banking sector, whether in capital markets, payments or back office processes, remain a longer-term prospect.”
Kalle Bjorn, director of systems engineering at Fortinet, a cybersecurity software developer, told The National: "Success of blockchain in banking greatly depends on how robust cybersecurity is to ward off threats from all directions. It is important that all participants be protected from any unauthorised access."