Strategies for adopting DLT/ Blockchain Technologies in Arab Countries

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Introduction:

This policy guide was produced under the mandate of the Arab Regional Fintech Working Group (WG).
The WG promotes the exchange of knowledge and expertise, strengthening the capacity of the Arab
regulators, as well as building a network of Arab and international experts from the public and private
sectors to promote the fintech industry and foster innovation.

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5 FINAL CONSIDERATIONS AND LIST OF RECOMMENDATIONS

5.1 COST ANALYSIS – WHETHER IT CUTS COSTS OR NOT
Amongst all new technological solutions, the most promising one available today is blockchain. Its unique
characteristics enable institutions to operate quicker and cheaper, with a far lower error rate, fewer resulting
risks, lower capital requirement, and less vulnerability to cyber-attacks.
The analysis done by Gartner predicts that blockchain will generate an annual business value of over
US$175 billion by 2025 and in excess of US$3 trillion by 2030. By 2023, blockchain will support the global
movement and tracking of US$2 trillion worth of goods and services annually. Within the financial services
industry alone, analysts predict blockchain will save US$15–20 billion annually by 2022.xci

5.1.1 Business benefits of Blockchain
The blockchain potential in financial services is huge, and has several applications which spanacross
payments, capital markets, trade services, investment and wealth management, securities and commodities
exchanges. Analysis done by Santander suggests that distributed ledger technology could reduce banks’
infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by
between $15-20 billion per annumby 2022.
The first major application for Blockchain technology is being seen in payments, especially across borders.
International payments remain slow and expensive and significant savings canbe made by banks and endusers bypassing existing international payment networks. In time, distributed ledgers will support “smart
contracts” – computer protocols that verify or enforce contracts. This will lead to a wide variety of potential
uses in securities, syndicated lending, trade finance, swaps, derivatives or wherever counterparty risk arises.
For example, smart contracts could automate pay-outs by the counterparties to swap contracts.
One of the benefits of blockchains is a reduction in overhead costs. Deploying a blockchain system can
help lower overhead expenditures by significantly reducing transactioncosts. Cryptocurrency payments are
handled by peer-to-peer networks and require no centralized verification. This means a small company can
accept payment in Bitcoin or anotherblockchain settlement platform and pay fewer merchant processing
fees.

Another big improvements blockchain can deliver enhanced analytic tools. Business intelligence is more
important than ever, and blockchain provides a backbone for better AI andanalytics tools. This includes
access to more transparent and reliable data, quicker communication and data-gathering, and a broader
reach.

Blockchain proponents have long extolled the benefits of handling identification on the decentralized
ledger. Current systems are outdated and vulnerable to attacks, but switching toa ledger-based ID system
could quickly eliminate these problems. In addition, using the encrypted storage featured by blockchain
makes protecting your data drastically easier. Blockchain’s decentralized nature means that hackers have a
much tougher time breaching thenetwork, or even decrypting an individual user’s private identity.
An interesting application of blockchain technology in financial services, and in particular in the insurance
sector, is related to smart contracts. The exploitation of smart contracts and the removal of intermediate authorities can significantly reduce the associated cost for anyorganization, particularly for financial applications.

Cutting operational costs is not the only benefit in securities trading. Distributed ledgers can increase
investor confidence in products whose underlying assets are now opaque (such as securitizations) or where
property rights are made uncertain by the role of central authorities.

5.1.2 Cost of implementation
Most of the initial blockchain implementations will be in the form of private or permissioned blockchain
networks. The initial infrastructure cost of such a system, which unlike in a publicblockchain, could have
been crowdsourced, has to be borne by the business itself. The high cost of computing and development
has to come from the institution itself, and so will be the ongoing maintenance requirement. Quantifying
this cost element and putting in place a clear system for defraying the same both for the pilot as well as the
scale-up version would need to be done upfront.

The distributed nature of a blockchain system imposes a significant cost, in comparison to anytraditional
system, to maintain such a system, particularly for the storage of transactions and the underlying blockchain
across multiple nodes.

Blockchain-based designs generate specific cost items, yet overall deployment costs should notbe higher
than those for centralized designs. The overall level of implementation costs for blockchain-based designs
and centralized designs is competitive. Blockchain-based services also have a similar structure of nonrecurring costs as centralized services. On the other hand, designs that leverage permissionless blockchains
involve new cost items: fees for validating transactions, denominated in volatile cryptocurrencies. Using
computationally heavy andhence energy-intensive consensus mechanisms to validate multiple transactions
may generatesubstantial operating costs to the administration or citizens. It also generates an external environmental cost.

A quick solution is to utilize the managed blockchain platforms provided by different cloud service
providers. Major cloud providers such as Amazon, IBM, Azure and others provide services for such
managed blockchain platforms, which are relatively easier to deploy and maintain.

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