Will Saudi Arabia become a true leader in blockchain innovation?

Will Saudi Arabia become a true leader in blockchain innovation?

Will Saudi Arabia become a true leader in blockchain innovation?

Blockchain technology is steadily gaining momentum in Saudi Arabia, but can it become a leader in this field? The country certainly realizes its potential, as evidenced by the Saudi Central Bank’s participation in several blockchain projects and the appointment of Mohsen Al-Zahrani to lead its virtual assets and central bank digital currency program.

But will it be embraced in other regions? The answer depends on how blockchain technology is used. So far, the technology’s rollout has been hostage to the hype surrounding its early incarnations: cryptocurrencies and early startup tokens. However, there are much more practical general applications of decentralized ledgers.

Take coding, for example, the process of converting an item of value into a digital code that can be used in a blockchain application. Imagine an established company looking for a billion dollar investment. It can take the usual route or invite people to access 10,000,000 tokens, each priced at $100.

Make money from tokens

Token trading opens transactions to a large and highly liquid market. It can also be applied to real estate developments or assets such as homes, ships or oil fields. Moreover, this system can open the door to millions of potential new investors from destinations that previously considered the Middle East a far corner of the world, such as Europe or the United States.

With token trading, not only can individual companies reap the rewards, but it also offers a completely new avenue for foreign direct investment. Targets can include institutional investors and anyone interested in gaining a foothold in the region while diversifying their investment portfolio.

We are already seeing the coding process. Al-Nasr Football Club, based in Riyadh, has launched a blockchain-based fan token that can be traded on several online platforms, and this is just the beginning. It is only a matter of time before other industries explore this potential.

Changing the guard and its effect

But the opportunities go beyond the private sector. The blockchain has the potential to be used as an enabler for digital government as well.

Technology has gained prominence since the onset of the COVID-19 pandemic, highlighting the need to accelerate digitization and telematics between individuals and governments. Although data security, privacy, and trust issues may slow progress, introducing a distributed ledger will address all three areas.

For example, it provides much greater data security than paper, where mathematics can be used to ensure that data is compromised.

Blockchain also provides greater privacy using the hash algorithm, a one-way encryption function that makes it impossible to retrieve original data via decryption. When personal data is stored in the blockchain, only hashes verify the integrity of the data that remains public. The rest of the data is kept private. A digital ledger can also verify your identity, addressing mistrust surrounding government-provided identities and signatures. The ledger allows the use of online digital government services and can also “remember” when items were signed.

Despite these obvious advantages, the public remains skeptical about these applications, and seeing them implemented would require a major shift in mindset. While this may be possible, it will be a slow process. The government may need to implement legislation based on new public sentiment.

One does not have to look far to see why the public was reluctant to embrace the application of distributed ledger technology in public and private sector settings: it goes back to its early use cases and their speculative nature. As a result, blockchain has become almost synonymous with Bitcoin, a term that evokes strong emotions thanks to its incredible ups and downs, not to mention its questionable connection to black markets and money laundering.

Behind the shadows of doubt

Justified or not, the shadow around cryptocurrencies is a deterrent between asset tokens and riyal transactions, with crypto still being the default medium. Therefore, the future of the blockchain depends on the ability of users to build trust in the technology.

Fortunately, some mechanisms can be harnessed here. The introduction of regulatory legislation to legalize new holding companies, where the beneficiaries are token holders rather than traditional shareholders, could ease any uncertainty in transactions between token holders and registered host countries.

Of course, trust is still a key element for potential investors. However, if these special purpose vehicles are legal in the target countries, and the rule of law in those countries is seen as unquestioned, then all that is needed to generate greater confidence may be the close management of the details through company constitutions.

Is Saudi Arabia able to boost public trust at this level and become a true leader in blockchain innovation? Perhaps yes, but only if you first overcome the prevailing skepticism towards cryptocurrencies as a link between asset tokens and money.

The country will also need to overcome technical limitations that hinder scalability. At the same time, the high power consumption required by certain types of blockchain, along with the challenges of integrating with the legacy system, must be addressed.

If the kingdom can solve these challenges, it may enjoy all the gains that come with the first mover advantage. If not, the blockchain will likely remain a restricted tool for use in a particular niche, serving only a small portion of the population and wasting many opportunities to come.

• Jad Haddad is Head of Digital Practice for Oliver Wyman Consulting in India, Middle East and Africa.

Disclaimer: The opinions expressed by authors in this section are their own and do not necessarily reflect Arab News’ views

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