The UAE based ADGM (Abu Dhabi Global Market) Academy research Centre alongside the College of Business and Economics at the United Arab Emirates University (UAEEU) carried out a research project entitled, “Digital Transformation of banking and financial institutions in the UAE: Understanding the common challenges for collective action” aimed at understanding the current landscape of the digital transformation of banking and financial institutions in the UAE.
The results of the research clearly showcase that the UAE banking sector is apprehensive and mostly not enthusiastic about utilizing blockchain technology. The reasons are many, ranging from technical, regulatory and even talent challenges.
The research was supported by senior representatives from across the UAE’s financial sector, who shared their insights via interviews conducted by the research team.
While the research covered an array of technologies, and the digitization history and movement within the UAE, there was a specific section on Blockchain.
Benefits of Blockchain
Interviewees did identify the benefits of blockchain, which according to them facilitated the recording and verification of transactions and their authentication.
The research report also noted that blockchain technology increases the confidentiality and trust for transactions and tracks assets they noted that hybrid systems (blockchain technology and non-blockchain systems) will still be used for the foreseeable future.
Blockchain technology has many other benefits including increased speed of transactions, and reduction in costs and reduced risks because of its tamper proof nature and transparency. So, it is a welcome solution for businesses and customers.
As per the research, blockchain contributes as well to cross border payment, KYC and digital currencies. It states, “It can revolutionize the financial services sector in the UAE by streamlining processes and increasing efficiency and transparency while reducing time and costs. These benefits can lead to increased trust in the financial system as trust is a critical factor in financial decision-making globally.”
UAE Banks and Blockchain
When it came to the research on how ready UAE Banks are for Blockchain, the researchers revealed that both the UAE government and the Central Bank of UAE have supported blockchain initiatives. Yet the technology has only been utilized in some functions in the financial sector.
However, there is no clear indication of how ready the UAE financial and banking system is to move financial statements into a distributed and consensus-driven ledger.
Despite this, interviewees in the report believe that the UAE is an ideal location to leverage the benefits of Blockchain in the financial services and banking sector.
Tech Challenges
Yet some interviewees believe that most banks have not adopted blockchain because of the technology challenges facing blockchain.
There is an opinion that banks will not move solely to blockchain. They believe that many banks are still considering moving financial statements into a distributed and consensus-driven ledger. The reason is that they need more time to be ready with the IT infrastructure required to build the blockchain-enabled ecosystem.
Despite the view by some that blockchain can generate greater trust in products and services, it was identified that there is a need for more confidence in blockchain itself. The use cases are scattered so finding the proper use case can also be problematic.
Furthermore, cyber security remains a challenge as well as implementing complex IT infrastructure-related blockchain technology in multi-cloud ecosystems.
In addition, others believe that the UAE needs to implement a standard protocol among different financial institutions on how to use blockchain. Some replies stated, “Blockchain is a solution looking for a problem to solve.” The opinion exists that there is no universal case for why the UAE needs blockchain and whether it has the skills, technologies, vendors, and partners to implement it.
The report stipulated that there are two opposing views on the status of blockchain adoption in the UAE. This is in line with global studies. OMFIF (Official Monetary and Financial Institutions Forum) indicated that 72% of central banks are unsure that blockchain will be used in future payment systems.
Respondents believe it takes time and is costly to transform the existing system. Secondly a standard protocol for operations is not present. Blockchain is also resource hungry.
Some interviewees also experienced integrating blockchain into the traditional fiat money systems managed by governments as a considerable challenge.
There are also skills gap. Some replies explained that blockchain increases the level of complexity in banking, requiring greater skill levels that are already in short supply.
Regulatory challenges
Another challenge mentioned by interviewees was the lack of a unified regulatory framework making cross border transactions difficult.
As per the research, “Some banks perceive a need for a regulatory framework at the CBUAE for blockchain.”
From a governance perspective, some banks believe compliance and legal could be more blockchain-friendly.
Conclusion
While Blockchain has always looked to be a promising technology for the financial and payments sector, it is still facing resistance, even in the UAE which has been a vanguard for blockchain and advanced technology implementations.
Addressing the concerns mentioned in this study should help propel Blockchain further within the banking sector.