Arab Monetary Fund Releases a Study on “Using Blockchain In Financial Services”
In line with its continuous efforts to support the decision-making process in the Arab countries, the Arab Monetary Fund (AMF) has recently released a study on the “Using Blockchain In Financial Services”. The study sheds light on the evolution of the blockchain over the past ten years, and the expected economic gains from the use of this technology in the provision of financial services, as well as the global supervisory and regulatory developments in this regard. In addition, the study highlights the Arab Central banks and Monetary Authorities’ efforts to explore possible opportunities of using blockchain in the provision of financial services and increasing financial inclusion and the role of the Arab Monetary Fund in this context.
The study indicated that although blockchain was initiated to serve as a platform for cryptocurrencies, it has invaluable potential uses in many industries like financial services, property registries, medical records, and government services. There are many reasons behind the growing global interest in the blockchain technology among which that the broader use of the blockchain would lead to global economic gains estimated at USD 3.1 trillion by 2030().
The study refers to the promising opportunities of using blockchain in financial services as despite the advancements that have been witnessed in the financial services over the past decades, middle- and back-office functions in many financial activities are mostly slow and inefficient. Many financial firms suffer from running multiple and sophisticated procedures involving many counterparties, manual processes, and third-party service providers. In this context, some believe that the blockchain technology could dramatically transform the financial services in a way that the internet had transformed the media industry. It could enable people to have financial services without financial intermediaries or what so-called the “internet of value” or the idea of “the narrowing of the banking sector”.
At the banking level, blockchain can contribute to a wide reduction in the cost of banking services, including transaction, compliance, disclosure, and know your customer (KYC) costs ranges between 30 to 70 percent of the total cost of these operations. The resulting savings are estimated at USD 8-12 billion annually for major investment banks(). Accordingly, several banks are investing in these technologies. Industry estimates indicated that around 91 percent of banks have invested in the development and use of the blockchain technology in 2018().
Using blockchain in payment Systems is another promising area. Clearing and settlement processes involve multiple processes and parties while the process itself is heavily regulated which creates bottlenecks that delay settlement time and increase the costs. Using blockchain can facilitate real-time, point-to-point transactions hence reduce settlement times from days to minutes. Blockchain-based solutions could also meet the performance requirements of a Real-Time Gross Settlement (RTGS) system and strengthen the resilience and reliability of the settlement systems.
Stock Exchanges are trying to benefit from using blockchain technology in reducing the cost and fostering the speed of trading and settlements securely(). NASDAQ is leading the world’s top exchanges to adopt blockchain. NASDAQ used blockchain in 2015 to enhance the capabilities of its Private Market Platform which was launched in 2014 to enable pre-IPO trading among private companies(). Additionally, NASDAQ has tested a blockchain-based trading platform in order to increase the efficiency of the trading process. The blockchain technology will be used to trace and record all the investors’ transactions in real-time. Similarly, the London Stock Exchange (LSE) has recent plans to develop a blockchain platform to be used for issuing SMEs private shares(). Overall, the use of blockchain technology can help international stock exchanges to save around USD 50-60 billion a year resulted from the reduction of operation and information technology expenses().
Blockchain technology will encourage global remittances by reducing the cost and time required to transfer money. It could enable instant and relatively low-cost money transfer services across the borders. This technology could boost the global remittances which estimated at around USD 500 billion every year using the traditional remittances channels().
Blockchain could also serve trade finance well. Traditional trade finance requires multiple manual processes and stringent procedures. The use of blockchain will enable banks and trade financing institutions to automatically store, secure, and exchange contracts details and financial terms; coordinate trade logistics and payments on an integrated real-time network; and streamline digital trade processes. Streamlining trade financing procedures would help bridging part of the trade finance gap especially in developing countries and generate a total saving of about USD 30-40 billion years annually().
Additionally, blockchain has the power to foster financial inclusion. The mobile and blockchain are very promising solutions to provide financial services to billions of financially un-served people. Such technologies could generate banking revenues of about USD 380 billion in 2020 (of which USD 270 billion from covering SMEs financing needs and USD 110 billion from providing financial services to un-served individuals().
Although the interest in blockchain technology is growing rapidly, it is noticeable that the spread of this technology is still limited until now. This may be attributed to some general and particular challenges that hinder the widespread use of the blockchain in the financial sector for the time being. A very significant challenge is that the financial industry in its nature is regulated by many legal, regulatory, and institutional frameworks and requirements, particularly after the financial crisis. In addition to other challenges related to the nascent nature of these technologies which have not yet been properly tested or widely adopted; the uncertainty of the legal and regulatory status and their variabilities among different jurisdictions; data protection and privacy concerns; the need to ensure network security and resilience of the technology against cyberattacks; the potential difficulties of interoperability of various blockchains when needed; and the high- initial capital costs.
On the other hand, the study addressed the regulatory frameworks governing the use of this technology in the financial sector worldwide and indicated that despite the fast evolution of blockchain technology, there is no global or comprehensive regulatory framework governing this technology. Conflicting policies at the national jurisdictions could impose risks hindering the technology advances. Now, there is only global guidance on how the regulators could deal with fintech development. As per the Basel Committee on Banking Supervision’ Sound Practices on the implications of fintech developments for banks and bank supervisors, banking standards and supervisory expectations should be adaptive to innovations while maintaining the appropriate prudential standards. The IMF and the World Bank “Bali Fintech Agenda” highlights key issues to be considered by policymakers when formulating their fintech policy approaches.
Moreover, the advances in policy making in this area are expected to benefit from the current efforts towards blockchain standardization like for instance efforts exerted by: the World Wide Web Consortium (W3C) which is one of the oldest bodies to focus on blockchain standardization, and the International Organization for Standardization (ISO) which works on issuing a standard ISO307 for blockchain.
On the national jurisdiction level, there three main policy approaches to deal with fintech and blockchain technology as follows:
1. Wait and See: Many regulators see that blockchain is a comprehensive new business model offering financial services without financial intermediaries. However, they prefer to gather data, monitor business models and assess potential risks, then formulate the appropriate regulatory framework. The advantage of this approach is avoiding inaccurate regulation, while the disadvantage is lacking the regulatory clarity in addition to the risk of being exposed to the threats of unregulated business.
2. Establishing Regulatory Sandboxes to Explore the Opportunities: Some regulators strike a balance between encouraging industry development and ensuring financial stability by allowing blockchain platforms to operate within a controlled regulatory environment. The regulatory sandbox is mutually beneficial for both sides and there are many examples like the UK, Canada, Australia, EU, Singapore, Switzerland, Luxembourg and many Arab countries.
3. New legislation and regulation: Despite the lack of a generally accepted terminology and standards, some national jurisdictions were keen to address this issue and enacted laws and regulations related to blockchain financial applications.
In addition, the study highlights the Arab Central banks and Monetary Authorities’ efforts to explore possible opportunities of using blockchain in the provision of financial services and increasing financial inclusion and the role of the Arab Monetary Fund in this regard. It indicated that digital transformation is embedded within the future and strategic visions of many Arab countries as it is considered as a significant enabler to economic diversification and resilience.
Within this context, there are many initiatives to benefit from the evolution of using blockchain in financial services. In the UAE, Abu Dhabi Global Market (ADGM) has adopted a FinTech strategy to encourage meaningful applications of the blockchain. ADGM was the first in the MENA region to establish a dedicated and open FinTech regulatory framework. ADGM Regulatory Laboratory (RegLab) is one of the most active global FinTech regulatory sandboxes. In early 2018, ADGM announced the initiation and development of an (e-KYC) utility in close collaboration with the UAE’s largest financial institutions using bloackchain(). This platform will help increase the efficiency of financial services and support financial inclusion.
On digital currencies domain, the Saudi Arabian Monetary Authority (SAMA) and the Central Bank of the United Arab Emirates have recently launched a common digital currency project called "Aber". Aber will use blockchain technology for financial settlements between the two countries. This project will also facilitate direct financial remittances between banks in both countries(). This is likely the first time through which two monetary authorities have cooperation in this field.
On the other hand, Tunisia was on of the leading countries in the world to have a state-run electronic payment system based on blockchain technology. Tunisia decided in 2015 to boost its eDinar digital currency using the blockchain building on the previous achievements of the Tunisian Post which is a leader in financial and social inclusion by promoting the provision of digital services. It worth noting that Tunisia has in use an electronic fiat currency known as eDinar in use through the Tunisian Post. Most of the adults that have a bank account in Tunisia have an account with the Tunisian Post, while there are still three million adults who don’t have banking accounts. The official vision is to count on blockchain to provide financial services to the financially unserved segments. Therefore, the government is cooperating with blockchain companies to deploy its first application for a full ecosystem of digital payments().
The use of blockchain technology in Arab countries is not limited to financial services. The Dubai Blockchain Strategy in the UAE aims at facilitating blockchain development. By 2020, Dubai will be the first blockchain powered government as all the government services in Dubai will be provided through blockchain which is expected to mobilize saving of around USD 1.5 billion annually().
As a response to the financial technology (fintech) evolution, the Arab Monetary Fund (AMF) is exerting diversified efforts to monitor the evolution of fintech industry and its implication on the financial services and financial stability in the Arab region. As the AMF takes the responsibility of the Technical Secretariat for the Council of Governors of the Arab Central Banks and Monetary Authorities, blockchain evolution is being addressed in many technical committees and task forces emanating from this council.
Within this context, the Arab Committee for Banking Supervision and the Financial Stability task force discussed this issue in terms of its repercussions on financial stability and the role of central banks in the regulation of such activities, while the Regional Financial Inclusion Task Force tackles addresses the role of Fintech in enhancing financial inclusion by encouraging the use of digital financial services in the Arab countries. The Arab Committee for payment and settlement systems also addressed Fintech and its implications for the payment systems and how it could be used to reduce the cost of remittances and financial transactions. Furthermore, The Arab Credit Information Committee discussed several aspects related to using financial and big data technologies, including the role of these technologies in the exchange of credit information.
Additionally, the AMF has established a Regional Fintech Working Group in 2018 to formulate pertinent guidelines, policies and conduct proper activities aiming at enhancing digital finance in Arab countries while ensuring financial stability. The group involves diversified expertise from all the Arab region and around the globe, which represents different segments, mainly regulators, private sector, fintech industry, international financial institutions (IFIs), regional and global associations…etc. The main mandates of the group include among others, supporting the regulatory framework and creating the appropriate ecosystem to properly develop Fintech industry in Arab countries, monitoring the evolution of blockchain technologies, supporting fintech innovation through Business Accelerators and Incubators activities…etc.
Using Blockchain In Financial Services
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