December 7, 2017

GulfCoin: The New Petrodollar?

Bitcoin ATM
A man uses a Robocoin kiosk to sell bitcoins outside of the 500 Startups’ Bitcoinferance in Mountain View, California, March 20, 2014. (AP Photo/Jeff Chiu)

In financial circles, cryptocurrency is the elephant in the room: Everyone can see it, imposing itself onto the existing order, and yet no one is willing to address it. Not so for the Gulf states – they are throwing parties in its honor.

Globally, digital currencies and the blockchain technology they ride in on have received a lukewarm response – if any at all. They are, after all, unchartered territory. With the exception of Estonia, hoping to build its entire economy on blockchain, few governments are willing to gamble on a new game whose rules have yet to be conceived. Few, too, are bold enough to gamble on volatility; it is a currency that can change overnight. In mid-November, bitcoin sank to $5,550 from $6,300, and in the span of two weeks, has now reached the $15,000 mark. Vertigo like that does not consumer confidence create.

Not one, however, to shy from novelty, the United Arab Emirates is at the forefront of the fintech revolution: In October, Aisha Bint Bishr, director general of Smart Dubai, the emirate’s technology initiative, announced that by 2020, Dubai would be the first government run on blockchain technology. According to Mohammed bin Rashid al-Maktoum, UAE vice president and prime minister, and ruler of Dubai, “the Dubai Government will issue its last paper transaction in 2021.”

Evidence that the UAE is making strides in this direction came mid-November when the Dubai International Financial Center launched a $100 million fintech fund to leverage the growth of the fintech industry, run on blockchain technology. In early October, the Dubai Land Department became the world’s first government bureau to adopt blockchain technology to manage its Ejari real estate intiative responsible for rental services and digital payments. Tenants will soon be able to make rental, water, and electricity payments, as well as vouch for their identities and credit histories via blockchain technology. Most salient, however, is that Dubai is investigating the feasibility of developing its own cryptocurrency, EmCash (a portmanteau of Emirates Cash), which would make history as the first government-backed digital currency.

Bahrain, too, after record successes in bond markets with its last issue that raised $3 billion, about 10 percent of its economic output, has expressed an interest in issuing bonds in digital currency. Bahrain Central Bank Governor Rasheed Mohammed Al Maraj revealed Bahrain’s ambitions to be a pioneer in the fintech space. In fact, in early November, it was announced that come February 2018, Manama would be home to Bahrain FinTech Bay, the largest fintech hub in the Middle East and North Africa.

Oman has also joined the fray. In November, Muscat hosted a blockchain symposium corraling leaders and innovators in the fintech field to consult with the Omani government on ways to incorporate blockchain technology and cryptocurrencies into the local economy, to boost trade and position Oman for the digital future.

Saudi Arabia, while not as adventurous as the UAE or Bahrain, or quite as eager as Oman, has indicated plans for a pilot project headed by the Saudi Arabia Monetary Agency for a virtual riyal, to be traded between banks. The Saudi Islamic Development Bank is also interested in developing sharia-compliant products incorporating blockchain technology. Should this gain traction in Islamic finance circles, blockchain and cryptocurrencies could prove to be very profitable.

On the other side of the spectrum is a less enthused Kuwait, which has prohibited the use of bitcoin in local banks and cautioned against it. This has not, however, prevented Kuwaitis from investing in the global bitcoin rush: Kuwaiti trading makes up about 1.5 percent of the $70 billion global cryptocurrency turnover, with nearly 12,000 Kuwaitis owning investments of about $1 billion.

On the surface, it is easy to see what draws the Gulf states toward cryptocurrency and the technology behind it. Borrowing from the language of the late journalist Anthony Shadid, these states deal in the politics of superlatives. To be the first government to create a cryptocurrency, the only government to run on blockchain entirely, and to boast the largest fintech hub are flattering indeed – and excellent ways to depict the Gulf states on the world stage.

Moreover, with the recent crackdowns on cryptocurrencies by China and South Korea, it bodes well for the Gulf states to demonstrate their willingness to adopt liberal economic policies. After all, especially since the Qatar crisis, each Gulf Cooperation Council state has endeavored to portray itself as more liberal than its neighbor, at least on the world stage. Cryptocurrency prides itself a “disruptor” to the current status quo and stronghold of financial institutions. Blockchain was invented to democratize the financial process, enabling a peer-to-peer transaction, eliminating the need for banks and the profit they make with financial transactions. Essentially, highly skilled computer programmers mine, or find, a unique, protected chain of data that represents a financial ledger – a coin or token, in cryptocurrency parlance. As paper money became the signifier for gold bullion in the modern economy, so, too, does a cryptocurrency chain of data come to represent money in the postmodern one. Just as the value of paper money relies on gold available on reserve, so too do the value of cryptocurrency tokens rely on the supply of unique codes in the cybersphere. Supply is limited to the number of codes miners find.  This coded ledger, mined through computers and logarithms, which becomes the cryptocurrency, is then traded on the market by miners who find these tokens, for purchase to the consumer. What gives cryptocurrency its value is the limited supply of the unique ledgers generated by computers, mined by programmers. Ergo: no banks; no middle men. As a model, it is democratic indeed for it eliminates the layers that stand between the consumer and what is produced. For monarchies criticized for authoritarian tendencies, liberal policies reflect well.

Cryto Currency

Domestically, besides providing sources for revenue generation should digital currency bond issuance take flight, transitioning the entire economy toward blockchain technology enables the development of a new industry: fintech. Well aware that the oil and natural gas revenue fueling their rentier economies will eventually dwindle, the Gulf states have been intent on diversifying their local economies. They vary in specificity and focus, but every national vision plan of the GCC states – Saudi Vision 2030, UAE 2021, Oman 2020, New Kuwait 2035, Qatar National Vision 2030, and Bahrain Economic Vision 2030 – demonstrates a commitment toward economic diversification by developing a knowledge-based economy and expanding sectors and industries that allow for job creation and encourage non-oil based revenue. The fintech industry would be a way to do so.

Not only would the introduction of cryptocurrency provide new fintech jobs, it would additionally help to develop tangentially related industries. For example, laws would have to be penned regulating blockchain technology and cryptocurrency use, machinery and technology would have to be invented and introduced, fraud detection would need to be developed to monitor transactions, and funds would have to be allocated toward research and development. The entire population would have to be taught the ways of the new economy. Should the GCC states successfully manage to make the transition and market themselves as ambassadors of digital currency, however, cryptocurrency, or a kind of “GulfCoin” could be the next petrodollar – the currency for a post-oil age. Backed by the state, this GulfCoin could gain credence as the most reliable cryptocurrency in circulation, one that would present a comparative advantage for the GCC states.

With the ease of transactions with cryptocurrencies, transfers become instantaneous. Indeed, trade can happen in a nanosecond, facilitating flows and investments. But, on the other side of the coin, so to speak, so can blockades and the freezing of assets. Recent crises and corruption arrests in the Gulf are examples. While forming a monetary union with an integrated currency, as the GCC states have discussed in the past, would be easier through cryptocurrency, it would also be far easier to shut out certain cryptocurrencies from a national or regional fintech ecosystem than it would be to refuse physical cash in times of political crises; as experience with totalitarian or authoritarian governments has demonstrated, there is always the underground economy. But once the underground economy – currently the cryptocurrency ecosystem – becomes recognized, it would be far easier to regulate. Without cash, it would be far more difficult, as well, to hide and smuggle assets – which brings us to cryptocurrency‘s most dubious characteristic: traceability.

Most people have been reticent to jump on the bitcoin bandwagon because of fears of anonymity. A Saudi cleric has even declared it haram. Yet in reality, blockchain is far more traceable than money. While money can be traced and indexed through serial numbers, it would be nearly impossible to track every individual who has touched a single bill. With cryptocurrency, however, every transaction is recorded on the digital ledger; it carries with it its forensic history. Terrorist financing, for instance, would be easier to trace, along with corruption, bribery, and other practices of poor governance.

Outside the Gulf, most cryptocurrencies have emerged as a riposte to the ever-growing power of banks and financial institutions. Hence, their reputation as disruptors of industry to take back power from the banking elite. Emanating from the underground and the margins, the hope is to diminish the layers of bureaucracy and the reach of corporations and government in quotidian life. Development of the fintech sector, therefore, takes place in the private sphere. Not so in the Gulf: In the Gulf, it is state-led – as most things are.

In fact, the UAE Central Bank has issued warnings about the use of nongovernment-endorsed digital currencies in trading. As a recent slew of scams in the Gulf have demonstrated, financial transactions that are difficult to verify, such as those conducted with nonstate-backed cryptocurrencies, can be treacherous. The state alone can testify to the authenticity of a cryptocurrency. Unless it is state-sanctioned, the assumption is that the source could be questionable. With the deep pockets of Gulf states as guarantor, concerns of fraud dissipate. It is easy to see how, in the Gulf – and in other countries, should they adopt the Gulf model of state-led fintech revolution – the move to crypto can be less precarious and more reassuring for the citizenry.

For the Gulf states, fintech and developing cryptocurrency could prove to be lucrative. Economies would benefit from diversification and adding new sources of revenue generation. Fintech would allow Gulf economies to be pioneers in new industries. Trade could be facilitated by faster transactions, with less overhead in the long run, eliminating layers of transaction fees. Fraud and corruption would eventually be diminished and traceability of funds heightened. More significantly, however, without the middle men, the state could assume a bigger role. It is no wonder Gulf governments are seizing the opportunity not only to address the crypto-elephant in the room, but to harness its potential and make the Gulf its home.

K. Elizabeth Salome is a research associate at the Arab Gulf States Institute in Washington.