Will Saudi Arabia become a true trailblazer for blockchain innovation?
Blockchain technology is steadily gaining traction in Saudi Arabia, but can it become a leader in the space? The country is certainly aware of its potential, as evidenced by the Saudi Central Bank’s involvement with 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 areas? The answer depends on how blockchain technology is used. Until now, the technology rollout has been held hostage by the hype surrounding its earliest incarnations: cryptocurrencies and early-stage startup tokens. However, there are far more practical, mainstream 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 on a blockchain application. Imagine that an established company is looking for an investment of $1 billion. It could go the usual route or invite people to access 10,000,000 tokens, each priced at $100.
Cashing in on the 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 houses, ships or oilfields. Moreover, this system could open the door for millions of prospective new investors from destinations that previously considered the Middle East some distant corner of the world, such as Europe or the US.
With token trading not only do individual companies stand to reap the rewards, but it also presents an entirely new avenue for foreign direct investments. The targets could include institutional investors and anyone interested in gaining a foothold in the region while diversifying their portfolio.
We are already seeing tokenization in action. Riyadh-based Al Nassr Football Club 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.
Change of guard and its impact
But opportunities extend beyond the private sector; blockchain has the potential to be leveraged as an enabler of digital government, too.
The technology has gained prominence since the onset of the COVID-19 pandemic, highlighting the need to expedite digitalization and remote communication between individuals and governments. While data security, privacy and trust issues may have slowed the progress, introducing a distributed ledger would address all three areas.
For example, it provides far greater data security than paper, as mathematics can be used to ascertain whether data has been compromised.
Blockchain also offers greater privacy by using a hashing algorithm, a one-way cryptographic function that makes it impossible to retrieve original data via decryption. When personal data is stored in blockchain, it is only the hashes validating the data integrity that stay public. The rest of the data remains private. The digital ledger can also validate your identity, addressing the lack of trust surrounding government-provided IDs and signatures. The ledger allows the use of digital government services across the internet and can also “remember” when items were signed.
Despite these apparent advantages, the public remains skeptical about these applications, and to see them implemented would require a significant shift in mindset. While this may be possible, it would be a slow process. The government may need to implement legislation based on a new public sentiment.
One does not have to look far to discern the reason for the public’s reluctance to embrace the implementation of distributed ledger technology in public and private sector settings: it comes back to those earliest 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 warranted or not, the shadow around cryptocurrencies is a deterrent between asset tokens and Riyal transactions, as crypto is still the default intermediary. Therefore, the future of blockchain depends on users’ ability to build trust in the technology.
Fortunately, some mechanisms could be harnessed here. The introduction of regulatory legislation to codify novel holding companies, where beneficiaries are token holders rather than traditional shareholders, could ease any doubts in transactions between those token holders and registered host countries.
Of course, trust is still an essential element for potential investors. Still, if these special purpose vehicles are legal in target countries, and the rule of law in those countries is perceived as unimpeachable, it may be that all that is needed to engender greater trust is close management of the details by company constitutions.
Is Saudi Arabia capable of fostering public confidence at this level and becoming a true trailblazer for blockchain innovation? Perhaps yes, but only if it first overcomes the prevailing skepticism toward crypto as the link between asset tokens and money.
The country would also need to overcome technical limitations impeding scalability. At the same time, the high energy consumption required by certain types of blockchain must be addressed, along with challenges around integration with the legacy system.
If the Kingdom can solve these challenges, it may enjoy all the gains that come with the first-mover advantage. If not, blockchain will likely remain a tool restricted to use in a particular niche, serving only a tiny fraction of the population and laying waste on many upcoming opportunities.
• Jad Haddad is head of consultancy Oliver Wyman's Digital practice in India, Middle East & Africa unit.