Introduction
The "consensus" process used to validate the accuracy of the ledger determines the type of blockchain. In some cases, other participants may not be allowed to see certain data sets in the ledger.
Blockchain Evolution
Within a few years and specifically in 2013, the second generation of blockchain (Blockchain 2.0 or Child prodigy Ethereum) has appeared. Therefore, the third generation of blockchain (Blockchain 3.0 or the killers) is currently being developed to overcome the previously mentioned challenges.
Blockchain as an Enabler to Cryptocurrencies
Some industries expected market capitalization to reach $1 trillion before the end of 2018 (24). However, by the end of 2018, the market capitalization of cryptocurrencies fell to USD 105 billion, which shows the volatile nature of this currency.
Blockchain and Financial Services: Challenges and Opportunities
Blockchain Opportunities for Traditional Financial Services
Ensuring transparency and reliability which are two elements at the center of the financial transaction. The use of blockchain in the banking sector can increase trust, efficiency, transparency, available information, increase the availability of banking services and reduce the time and cost associated with providing such services. In addition, NASDAQ has been testing a blockchain-based trading platform to increase the efficiency of the trading process.
35 BISsearch, "Blockchain Technology in the Financial Services Market - Analysis and Forecast: 2017 to 2026 (Focus on Opportunities and Use Case Analysis)". Banking on Blockchain: A Value Analysis for Investment Banks. and BISsearch, "Blockchain Technology in the Financial Services Market - Analysis and Forecast: 2017 to 2026 (Focus on Opportunities and Use Case Analysis).". 39 BISsearch, "Blockchain Technology in the Financial Services Market - Analysis and Forecast: 2017 to 2026 (Focus on Opportunities and Use Case Analysis)".
As a result, many banks and financial institutions have tested the limits of using blockchain technology in financial services to unleash the untapped opportunities.
Blockchain and Financial Inclusion
Mobile devices and blockchain are very promising solutions for providing financial services to billions of financially disadvantaged people. Many DLT platforms have been designed with features that provide access to financial services to the underserved. Specifically, DLT contains three features that could greatly contribute to greater financial inclusion, including digital identity, property registries, and smart contracts (41).
DLT can help those people to have a digital biometric identifier that allows them to open accounts remotely to get financial services especially in rural and remote areas with little access to financial services. On the other hand, the financially underserved face difficulties in gaining access to finance without registered collateral. A work that is usually done in cooperation with the local government and gives financial institutions the necessary guarantees for extending financial facilities to underserved segments.
In addition, under certain conditions and circumstances, a smart contract could provide insurance services to people who are not financially helped (for example, smart contracts linked to climate applications can provide farmers with insurance services against the drought).
Using Blockchain in Providing Financial Services: Current
This can be attributed to some general and particular challenges that hinder the widespread use of the DTL in the financial sector for the time being. Blockchain: Challenges in the use of the financial sector, Focus, the World Federation of Exchanges, Aug and IFC (2017). Furthermore, there are some challenges associated with the use of DLT in some specific financial activities.
For example, one of the main challenges facing the use of DLT in payment systems is that its performance is affected by the size of the network and the distance between nodes. Much work is needed to ensure the sound legal framework, the sustainability of the governance structure and the ability of the technology to meet industry needs and regulatory requirements. Furthermore, according to BIS, the changes and benefits associated with the efficiency of using DLT in.
STELLA - a joint research project of the European Central Bank and the Bank of Japan Payment Systems: Liquidity Saving Mechanisms in a Distributed Ledger Environment", Sep.
Blockchain: The Advances in Policy Making
Although the blockchain technology is developing very quickly, there is no global or comprehensive regulatory framework governing this technology. According to the Basel Committee on Banking Supervision's sound practices on the implications of fintech developments for banks and banking supervisors, banking standards and supervisory expectations must be adaptable to innovations, while maintaining appropriate prudential standards(46). On the other hand, G20 is seeking guidance from international institutions to regulate crypto-assets in accordance with The Financial Action Task Force (on Money Laundering) (FATF) standards(48).
Informing the G20 about the potential risks of using crypto-assets in money laundering and terrorist financing. A group of more than 100 member banks and financial institutions have joined a consortium led by R3 and released a prototype of "Corda", raising $150 billion in capital to invest in blockchain financial applications . Blockchain Insurance Industry Initiative, including 15 leading insurance companies working on blockchain opportunities in the insurance industry.
Many regulators see blockchain as a whole new business model that offers financial services without financial intermediaries.
Blockchain: Central Banking Approach
The Impact of Central Bank Digital Currency (CBDC)
Traditionally, the central banks limited access to (digital) account-based forms of central bank money (the liabilities) to limited actors (the banks and some other financial institutions), while the public physical central bank money is widely accessible to the public. This is why many central banks have warned against trading cryptocurrencies (as will be illustrated in the next section of this document) due to the potentially disruptive impact on financial stability. While the future CBDC proof-of-concept could be more robust and efficient, according to the BIS, central banks still need more experimentation and experience before adapting a wholesale CBDC.
Regarding the implications of CBDC for Monetary Policy, the issuance of CBDC can support central banks' monetary policy instruments by adding a new instrument that can strengthen the transmission mechanisms of monetary policy to the market rates and enable central banks to address the issue of the zero floor or even lower interest rate. The implications of wholesale CBDC could be more pronounced for monetary policy and the financial market if it becomes an attractive asset available to institutional investors competing with the other tradable assets, especially short-term government bills. On the other hand, issuing CBDC may pose some financial risks if it has previously financed illegal activities, thus affecting Financial Stability.
Likewise, the introduction of a public CBDC could lead to a flight towards central bank assets during periods of stress.
Blockchain: Central Banks’ Stances
Many central banks are testing the use of blockchain technology in different domains, but with disparate viewpoints. Recently, many central banks are exploring the use of blockchain technology to test whether this technology can bring significant benefits to the financial services industry. In the same context, the Bank of England launched a blockchain-based financial technology accelerator last year and sees this technology as a major opportunity to enable central banks to strengthen cybersecurity and improve the payment system.
In the field of digital currencies, central banks are more interested in the idea of central bank digital currencies (CBDCs) rather than decentralized cryptocurrencies (private currencies). Currently, some central banks, such as the Bank of England, are working to better understand the implications of central bank issuance of digital currency. On the contrary, some central banks are still reluctant to move to digital currencies, such as the Bank of Japan, which views issuing central bank digital currency to the public as the central bank giving everyone access to their accounts.
While some central banks are tackling the idea of issuing central bank cryptos as mentioned earlier, they are less interested and sometimes totally against the idea of issuing privately owned cryptos.
Blockchain in Arab Countries and the Role of the Arab Monetary
In the same context, the Reserve Bank of India has banned the use of cryptocurrencies as they could be used for money laundering and terrorist financing. Blockchain Use Cases in the Arab Region: From Digital Identities to Cross-Border Transfers”, GIZ. As a response to the development of the financial technology (fintech), the Arab Monetary Fund (AMF) exercises a diversified effort to monitor the development of the fintech industry and its importance for the financial services and financial stability of the Arab region.
The session highlighted some of the applications of blockchain in financial services in the Arab region, ranging from digital identities to facilitating cross-border transfers. In the UAE, Abu Dhabi Global Market (ADGM) has adopted a FinTech strategy to encourage meaningful applications of the blockchain. ADGM was the first in the MENA region to establish a dedicated and open FinTech regulatory framework.
On the other hand, Tunisia was one of the leading countries in the world with a state-run electronic payment system based on blockchain technology(62).
Conclusion and Policy Implications
Blockchain technology has evolved over the last twenty years from just a database to a full-fledged, globally distributed cloud computing platform. There are many reasons for the growing global interest in the blockchain technology, as wider use of the blockchain is expected to lead to global economic benefits estimated at $3.1 trillion by 2030. The use of blockchain technology in the Arab countries is not limited to the scope of financial services, but also other fields, the most important of which is the provision of government services in support of social and economic development.
Blockchain technology will not only revolutionize financial services, but may also have significant implications for the business model of central banks. Many central banks are testing the use of blockchain technology in various financial areas, but in a cautious and uneven manner. A growing attention to the possibilities of Blockchain in Financial Services within the context of Regulatory Sandboxes in some Arabs.
The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM), the international financial center of Abu Dhabi, announced in early 2018 the initiation and development of an electronic Know-Your-Customer (e-KYC) tool in close collaboration with a key team of the UAE's largest financial institutions. BISsearch, "Blockchain Technology in Financial Services Market - Analysis and Forecast: 2017 to 2026 (Focus on Opportunity and Use Case Analysis)". 34;Economic Possibilities of Blockchain Technology", Keynote Address by Chief Executive, Monetary Authority of Singapore, at Global Blockchain Business Conference, October.
