Will Saudi Arabia become a true pioneer of blockchain innovation?
Blockchain technology is gaining ground in Saudi Arabia, but can it become a leader in the space? The country is certainly aware of its potential, as evidenced by the involvement of the Central Bank of Saudi Arabia in various blockchain projects and the appointment of Mohsen Al-Zahrani to lead its central bank digital currency and virtual assets program.
But will it be adopted in other areas? The answer depends on how blockchain technology is used. Until now, the technology’s rollout has been held hostage to the hype surrounding its earliest incarnations: cryptocurrencies and early-stage startup tokens. However, there are much more practical and conventional applications for the decentralized ledger.
Take tokenization, for example, the process of converting an item of value into a digital token that can be used in a blockchain application. Imagine that an established company is seeking an investment of $1 billion. You could go the usual route or invite people to access 10,000,000 tokens, each priced at $100.
Cashing out the chips
Token trading opens transactions to a large and highly liquid market. It can also be applied to real estate developments or assets such as houses, ships or oil fields. In addition, this system could open the door to millions of potential new investors from destinations that previously considered the Middle East as 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 introduces a whole new avenue for foreign direct investments. Targets could include institutional investors and anyone interested in carving out a niche for themselves in the region while diversifying their portfolio.
We are already seeing tokenization in action. Riyadh-based football club Al Nassr has launched a blockchain-based fan token that can be traded on various online platforms, and this is just the beginning. It is only a matter of time before other industries explore this potential.
Changing of the guard and its impact
But the opportunities extend beyond the private sector; Blockchain also has the potential to be harnessed as an enabler of digital government.
Technology has come to the fore since the start of the COVID-19 pandemic, highlighting the need to speed up digitization and remote communication between individuals and governments. While data security, privacy, and trust issues may have slowed progress, the introduction of a distributed ledger would address all three areas.
For example, it provides much greater data security than paper, as mathematics can be used to determine if data has been compromised.
Blockchain also offers greater privacy through the use of a hash algorithm, a one-way cryptographic function that makes it impossible to recover the original data through decryption. When personal data is stored on the blockchain, only the hashes that validate the integrity of the data remain public. The rest of the data remains private. The digital ledger can also validate your identity, addressing the lack of trust around government-provided IDs and signatures. The ledger enables the use of digital government services over the Internet and can also “remember” when items were signed.
Despite these apparent advantages, the public remains skeptical about these apps, and seeing them implemented would require a significant mindset shift. While this may be possible, it would be a slow process. The government may need to implement legislation based on new public sentiment.
It is not necessary to go far to discern the reason for the public’s reluctance to adopt the implementation of distributed ledger technology in public and private sector environments: it goes back to the 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 spectacular rise and fall, not to mention its dubious association with black markets and money laundering.
Beyond the shadow of a doubt
Whether justified or not, the shadow surrounding cryptocurrencies is a deterrent between asset tokens and Riyal transactions as crypto remains the default intermediary. Therefore, the future of blockchain depends on the ability of users to build trust in the technology.
Fortunately, some mechanisms could be exploited here. The introduction of regulatory legislation to codify novel holding companies, where the beneficiaries are token holders rather than traditional shareholders, could dispel any doubts in transactions between those token holders and the registered host countries.
Of course, trust remains an essential element for potential investors. Still, if these special purpose vehicles are legal in the destination countries, and the rule of law in those countries is perceived as unimpeachable, then close management of the details may be all that is needed to build greater trust. by company statutes.
Is Saudi Arabia capable of building public trust to this level and becoming a true pioneer of blockchain innovation? Perhaps yes, but only if it first overcomes the prevailing skepticism towards cryptocurrencies as a link between asset tokens and money.
The country would also have to overcome technical limitations that prevent scalability. At the same time, the high power consumption that certain types of blockchain require must be addressed, along with the challenges related to integration with the legacy system.
If the Kingdom can solve these challenges, it can enjoy all the gains that come with first-mover advantage. Otherwise, blockchain is likely to remain a restricted tool for use in a particular niche, serving only a small fraction of the population and wasting many future opportunities.
• Jad Haddad is head of the digital practice at consulting firm Oliver Wyman in the India, Middle East and Africa unit.
Disclaimer: The opinions expressed by the writers in this section are their own and do not necessarily reflect the views of Arab News.