Blockchain technology is continuously gaining momentum as governments and organizations announce that they are adopting the technology across the world, including in the Middle East.
Last month, Saudi Arabia’s central bank announced it was planning to expand its digital currency, Aber, to other countries, following January’s pilot operation which used Aber to facilitate cross-border bank transactions between the Kingdom and the UAE.
The technology is being considered in other key sectors, with ratings agency Moody’s Investor’s Service recently releasing a note on how blockchain adoption will give significant advantages to Islamic finance.
With the potential to have a transformative impact in the Middle East, governments and businesses across the region are currently investigating blockchain’s implementation in a variety of forms.
Breaking down blockchain
Blockchain is fundamentally a form of record book, or ledger, which is distributed publicly. A cryptocurrency meanwhile is a digital asset that functions as a medium of exchange, similar to conventional currencies such as dollars, but uses blockchain technology and cryptography to verify transactions and is not backed by a single institution.
The records kept on a blockchain ledger are distributed throughout a network, with every member of the network maintaining a full copy of the ledger which they can view, but not edit – this is why blockchain is often referred to as a form of distributed ledger technology.
As every member of the network maintains a copy of the ledger, there is no need for a single trusted entity to validate its contents. A public ledger also improves the security and validation of the data.
Blockchain’s advocates point to its efficiency, transparency, and security. Detractors suggest blockchain is another corporate buzzword whose benefits are expensive, hypothetical, and unrealized.
Common uses for blockchain technology
Blockchain’s arrival was followed by a flurry of analysis of its use for payment processing and money transfers in the banking and finance sector. However, other sectors have since begun looking at the benefits of blockchain adoption.
Implementation of blockchain in supply chains may allow businesses to accurately view items in real time at a lower cost than current solutions, while removing the need for paper.
Governments have also investigated using blockchain to validate digital identification. As data entered into the blockchain cannot be edited, it can be used to combat fraud. The same advantage could also benefit patient record keeping in the medical sector.
Blockchain may also be implemented to help smooth the transfer of assets in transactions of real estate, land, or vehicles. Using blockchain removes the archaic practice of transferring paper, allowing parties to accurately and transparently view who owns an asset, as well as monitor its transfer to a new party.
Implementation initiatives have been well underway across the world, with corporates and governments beginning to proclaim that a particular product or initiative is “blockchain supported.”
Blockchain in the Middle East
Middle Eastern-based companies and governments have likewise begun to investigate blockchain and cryptocurrency technology.
After the success of Aber, Gulf States have looked at other uses for digital currencies. Last year, the Dubai government announced plans to launch the world’s first “blockchain court.”
However, the relatively new nature of these technologies means that many authorities and corporates in the region are still in the investigation, not implementation, stage.
Saudi Arabia’s Vision 2030 economic reform plan could also benefit from implementing blockchain by removing layers of bureaucracy and increasing digital service availability, experts told Al Arabiya English.
Fiorenzo Manganiello, venture capitalist and Professor in Blockchain at the Geneva Business School, believes Saudi Arabia in particular represents an opportunity for cryptocurrency mining – the technology which backs and validates the currency and transactions.
“[Saudi Arabia] is the best place for implementing cryptocurrency datacenters and mining farms, why? Because Saudi Arabia has a huge amount of energy, meaning a very low electricity price, which means that you can deploy large mining farms at low costs, and they will be highly profitable,” Manganiello told Al Arabiya English.
Cryptocurrency mining is a significantly energy-intensive process as so-called miners compete to be the first to complete a complex algorithm that verifies a set of transactions, earning a small amount of cryptocurrency for the work. As such, the cost of electricity usually has the greatest impact on whether mining is profitable or not.
“Today, Saudi Arabia is the largest miner into oil – physical money – the country could become the largest digital miner if they position themselves as innovators and pioneer towards crypto and blockchain,” added Manganiello.
Saudi Arabian investment in solar and renewable energy sources will also affect the miner’s decisions. As mining is an energy-intensive task, many miners are looking for clean energy solutions which allow them to position themselves as responsible companies in line with common environmental, social, and government priorities.
Manganiello believes that blockchain implementation across the Middle East will primarily occur through government-led initiatives.
“What will happen is that implementation will start at the government level to test it and to understand how it works, and then that will go to the market,” he said.
Long-term bets into blockchain and cryptocurrency will be of particular importance, Manganiello said. The trend towards artificial intelligence (AI) implementation is already self-evident across the world, and the Middle East needs to be prepared.
“I see that the big play is for the Middle East to position itself today in mining infrastructure in order to be ready for the switch to AI … there will be huge demand of those datacenters for AI,” said Manganiello.