Written by Ashlene Ramadan, Marketing Manager for Plug and Play Fintech.
About a year ago, the Crown Prince of Dubai announced a plan to secure government documents on the blockchain by 2020, making it the first blockchain-powered city, ever.
Dubai’s blockchain strategy is built on three pillars: government efficiency, industry creation, and international leadership. With limited time to spare, Smart Dubai Office launched the SDO Blockchain Challenge to incentivize startups to lead their blockchain initiative.
This technology has the potential to revolutionize the financial sector in the UAE including the GCC as a whole in trade financing, retail, and international remittances.
Trade Finance and Logistics
Trade financing is a complex process that requires several steps to authenticate the parties involved and the goods being traded. The majority of the work lies with the exchange of paperwork between the importer and exporter via their respective banks acting as an intermediary to ensure the verification of the transaction and making sure the payments are made.
A common problem in trade financing is the issuing of a Letter of Credit (LC). Exporters need a guarantee for their payment and therefore requires the importer to issue an LC from their respective bank. Banks from both parties will then become the intermediary to ensure verification which leads to a continuous exchange of paperwork and, in return, can cause delay and administrative problems.
Implementing blockchain technology can alleviate the bottlenecks in trade financing by providing a platform for all parties to observe the transfer of goods.
Skuchain, a blockchain-based startup, provides secure smart contracts and aims to govern all aspect of trade agreements. A large problem in trade financing is issuing Letters of Credit. Skuchain plans to eradicate the use of paper-based Letters Of Credit and are working with banks to shift towards electronic Letters Of Credit that will sit on top of the blockchain. The goal is to increase transparency into trade visibility and eliminate the time spent on exchanging documents for verification. Skuchain is already working alongside Commonwealth Bank and Wells Fargo focusing on trade finance for the global cotton market.
Remittances through blockchain
The GCC (Gulf Cooperation Council) countries reached $26.9 billion in remittances to the Philippines alone. Despite this high number, transaction rates that migrant workers have to pay in order to send money back home can range from 15 to 20 percent in transaction fee.
Abra, a digital wallet that lets you transfer money anywhere in the world can eliminate this problem by lowering transaction costs and provide seamless money transfer. You can simply fill up an Abra digital wallet and withdraw the money in any nearby Abra Teller. A blue collar worker living in Dubai can now send money to his family in Nepal at a much lower cost. This could then double the percentage of remittances in the GCC.
Bitwage is a blockchain-based payment startup that provides employers with a platform to pay their international employees in almost any currency including digital currency such as bitcoin. For example, a freelancer in India who typically receives his payment through international wire transfer would usually take three to five days to process with no payment tracking. With Bitwage using blockchain, the freelancer can now receive his money in less than 48 hours and track his payment throughout the entire process. Implementing Bitwage can encourage an increase in international collaboration between small businesses and employers.
The global spending on anti-money laundering (AML) compliance in 2014 alone summed up to $10 billion and has increased since then.
Know Your Customer (KYC) is a crucial part of the AML process at a bank when onboarding new customers or institutions issuing credit. A certain due-diligence procedure takes place to ensure that institutions are not involved in anti-money laundering activities.
Through blockchain, banks will have the capability of secure customer sharing and enable encrypted updates of clients to be shared amongst all banks in one platform. KYC checks are not usually shared and their costs are very high. Therefore implementing blockchain has the capability of reducing compliance costs and simplifying the AML process.
Take Tradle as an example, they are a blockchain based startup aiming to simplify and secure KYC requirements through blockchain and cut the costs of KYC checks. All banks will be able to access this network and prove to the regulators that they have an automatic AML procedure in place.
A great example of this initiative is with the Monetary Authority of Singapore (MAS) launching a national KYC function for Singapore. MAS has partnered with the Ministry of Finance and GovTech to roll out a pilot with two Singaporean banks and expand the MyInfo service to the rest of the financial industry.
MyInfo is a personal data online platform verified by the government and contains private information such as home address and national ID number. The service enables residents to provide their private information just once to the government and is used for resident’s online transaction with the government. The goal is to expand it to the rest of the financial industry and eliminate repetitive form filling.
If Dubai succeeds in implementing blockchain by 2020 for all the financial institutions, this will increase agility, simplicity, security, and transparency. To put this into context, an average mortgage will contain around 1000 pages of paper – Blockchain can eliminate all of this and replace it with smart contracts. This smart city will not only enhance the banking industry digitally, but help to protect the environment from paper waste.
If you liked what you read, please share it with friends.