Noelle Acheson is a 10-year veteran of company analysis, corporate finance and fund management, and is a member of CoinDesk’s product team.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to our subscribers.
CoinDesk published a news item this week that, at first, seemed pretty ordinary. Dig deeper, though and you uncover an unusual development that highlights intriguing socio-economic and geopolitical trends.
To begin, let’s look at the “what, where and why”.
The What
A bank is implementing a blockchain-based cross-border payments system.
The National Bank of Abu Dhabi (NBAD), the second largest lender in the United Arab Emirates (UAE), announced it would introduce real-time cross-border payments using Ripple technology – a move that makes it the first bank in the Middle East to do this.
The Where
The UAE is the sixth largest originator of remittances in the world, sending approximately $19bn a year (staggering given that it ranks 93rd in population).
This stems from the fact that 90% of the UAE’s residents are expats. Most are relatively low-paid workers from India, who help to fulfill the demand for labor generated by high infrastructure growth.
The region’s finance, technology, transport and energy sectors also attract a large community of foreign professionals.
The Why
It makes sense for banks to invest in a technology that can boost remittances in a region with strong cross-border flows. And according to the bank’s statement, the aim is to offer customers cheaper and faster payments.
However, that’s not the whole picture.
NBAD already has an innovative remittance structure. Given the weight of cross-border payments in bank activity, innovation in the sector has been flourishing, and prices have been under pressure due to stiff competition.
Many bank cross-border payment services take less than an hour as it is.
But with prices coming down, margins are tight, and banks have a strong incentive to reduce the costs of managing remittances. So, it’s likely that the move to the blockchain has more to do with the bank’s profitability than the client’s experience.
Yet, even that is unlikely to see a big immediate impact. To start with, NBAD will not be migrating its remittance services to a blockchain. Instead, it plans to integrate the new service into its current offering, which mitigates both risk and the benefit to the bottom line.
While the effect will eventually be positive, the most interesting part of this step does not lie with the bank’s business model.
The big picture
Let’s take a look at the outlook for the region.
While infrastructure growth is expected to remain strong at least until the 2020 World Expo, declining oil revenues cast clouds on the capacity of the government to maintain the same level of expenditure.
A resulting drop in immigration would have a negative impact not only on bank profits but also on the region’s GDP, compounding the effect of falling commodity prices and shifting international trade politics.
Here’s where we see change.
Recently, UAE institutions have shown increasing interest in blockchain technology and its use cases. Dubai’s Ministry of Finance is co-hosting a blockchain conference later this month with the IMF. One of the UAE’s largest telcos recently began securing health records on the blockchain. The Abu Dhabi Stock Exchange has launched a blockchain-based voting system. The government of Dubai is looking into the technology as part of its Smart Cities drive.
And this is just scratching the surface…
So, the latest initiative seems to be part of a broader push to explore and implement a promising new technology, which itself is part of an even grander goal.
With its future as a global energy center uncertain, the UAE has for some time been looking for other ways to maintain its role on the world stage. The flourishing communities of academia and research, a favorable tax regime, and the push to attract FinTech and blockchain startups all point to a strategy of strengthening the emirates’ position as a financial and technology hub.
Assuming it succeeds, the resulting inflow of talent and investment will create a virtuous cycle of innovation and more investment, cementing the region’s global reputation and relevance.
The lesson to all of us is that the blockchain is about much more than efficiency and innovation. It also is a powerful tool that can help to future-proof the growth and wealth of entire regions.
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