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Are cryptos a bubble or the future of finance?
The Middle East region has a keen eye for financial technology and the initiatives that are being implemented from Tel Aviv to Dubai underscores how digital assets are making inroads into the region
Cryptocurrencies, once a potential rival of gold as a safe-haven store of value, they have lost their lustre among institutional investors after a volatile plunge from record-highs following a crackdown on mining and trading activities. Considering the growing interest in cryptos from some of the world’s leading financial institutions and individuals alike, regulators including some from the Middle East region have called for cryptos to carry the toughest bank capital rules of any asset.
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Deloitte said, “An increasing number of companies worldwide are using Bitcoin and other crypto and digital assets for a host of investment, operational, and transactional purposes.”
Regulators and investment experts often dismissed cryptocurrencies as excessively volatile, a bubble, too risky to invest in. However, those in favor of cryptocurrencies especially financial technology experts argue that they are a hedge against inflation and fiat currency fluctuations.
Those arguing in favor of cryptos also say that they can survive any economic or infrastructure collapse, a belief that is being widely shared following the global economic fallout due to the pandemic.
“Regulation is a stumbling block, but regulators have shown that they see the value of blockchain and cryptocurrencies, and are working to support these technologies, which bodes well for future adoption,” said Accenture.
However, not all think the same way. The Basel Committee on Banking Supervision, a global committee of banking supervisory authorities, cautioned earlier in June that the growing use of cryptocurrencies has the potential to “increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.”
Cryptocurrency users leverage blockchain technology, a decentralized ledger system of all transactions across a peer-to-peer network that enables participants to confirm transactions without a need for a central clearing authority.
– Accenture
KPMG said that, unlike the traditional financial systems which use a centralized database with a single point of authority, blockchain technology allows for a distributed database that holds a growing number of records.
The Middle East has a keen eye for financial technology and the initiatives that are being implemented from Tel Aviv to Dubai underscore how blockchainbased currencies are making inroads into the region as some governments look to tech to diversify their economies.
However, despite risks and volatility associated with digital coins, they captured the attention of investors from billionaires Elon Musk and Jack Dorsey to hedge-fund moguls including Alan Howard and Paul Tudor Jones. Similarly, the surge in trading in Bitcoinlinked securities also underscores how investors are increasingly looking to gain exposure to or bet against cryptocurrencies on traditional markets rather than buying the digital currencies outright. But later, in May 2021 Elon Musk stopped accepting Bitcoin payment for Tesla vehicle purchases over environmental concerns relating to Bitcoin mining. However, at the B Word event on the 21st of May, he said that if the percentage of renewable energy used to mine Bitcoin rises to or above 50%, with an increasing trend, the electric car company is “likely” to again accept cryptocurrency in payment.
Cryptos in the Middle East
The Middle East joined the crypto frenzy in August 2019 when the Central Bank of Bahrain awarded cryptocurrency exchange firm Rain a license that allows it to buy, sell and store crypto-assets. The issuance of the license to Rain after a two-year regulatory sandbox made the kingdom the first jurisdiction in the region to issue a crypto-asset module license. The crypto exchange platform has satellite offices in Saudi Arabia, Egypt, and the US, allowing users to buy and sell digital coins across the GCC, according to information on its website. Canadian Bitcoin fund manager 3iQ listed its Bitcoin exchange-traded fund “The Bitcoin Fund” on Nasdaq Dubai, becoming the region’s first indexed
cryptocurrency digital asset-based fund in June 2021. The Canadian fund, which received its regulatory clearance in April, plans to use its listing in Dubai to expand its regional footprint and work closely with banks in other GCC states.
However, other regional countries such as Kuwait and Turkey have sounded alarm bells saying trading in digital coins exposes individuals to digital breaches, cyberattacks and is unsustainable. Accenture said that some countries in the Middle East view cryptocurrencies with caution due to their lack of a central authority and are beyond the control of monetary policy.
Speaking at Bloomberg’s Qatar Economic Forum in June 2021, Qatar Investment Authority (QIA) chief Mansoor Bin Ebrahim Al Mahmoud cautioned that cryptocurrencies “need a bit of maturity before we make our view about investing.”
Regulators in Kuwait and Turkey share the same sentiments as Al Mahmoud. In May, the Central Bank of Kuwait (CBK) cautioned financial institutions operating in the Gulf state against dealing or trading in Bitcoin, Ethereum or other cryptoassets. CBK cautioned that dealing in digital coins leaves room for illegal uses of funds, unauthorized transactions and money laundering given that the assets are not regulated by any central authority in the Gulf state.
In May, Turkey said it would add cryptocurrency exchange companies operating in the country to a list of organizations that are regulated by its antimoney laundering and counter-terrorist
financing rules after the authorities closed down two crypto exchange platforms, Vebitcoin and Thodex.
– Deloitte
Digital currencies
The emergence and increase in popularity for major cryptocurrencies such as Bitcoin, Ethereum and Cardano are piling pressure on central banks to ensure they have a viable alternative before unregulated payment forms take over. Just like their counterparts in some of the world’s leading financial centers, some central banks in the Gulf region are currently considering issuing central bank digital currencies (CBDC).
The regulators are concerned about losing control of digital currency if private currencies such as Bitcoin become widely adopted due to the high possibility of advanced technology falling into the wrong hands.
In June, the Bank of Israel was reportedly trying out Ethereum’s technology in a recently launched internal digital shekel trial. The Israeli central bank had issued a report in May in which the regulator said that the digital payment system could have a positive impact on the economy by simplifying payment processes while providing security to both parties in a transaction.
Last November, the Saudi Central Bank (SAMA) and the Central Bank of the UAE (CBUAE) in collaboration with six commercial banks from the two Gulf states completed a proof-of-concept project on a wholesale central bank digital currency ‘Aber Project’. The digital currency pilot is aimed at settling domestic and cross-border transactions using central bank money on a distributed ledger technology.
In their pilot project, SAMA and CBUAE discovered that a distributed payment system offers “significant improvement over centralized payment systems” for domestic and cross-border commercial bank settlements.
Regulatory hurdles
Since the beginning of the year, major cryptocurrencies such as Bitcoin – which reached an all-time high of more than $63,000 in April – have plunged to record lows due to ongoing crackdown in major economies amid regulatory, data security and sustainability concerns.
Binance Holdings, the world’s biggest cryptocurrency exchange by trading volumes, is facing growing scrutiny from financial regulators globally with Thailand and the Cayman Islands becoming the latest nations to curb the operations of the largest crypto exchange platform.
In June, the UK financial watchdog banned Binance from operating in the country, joining Canada, Singapore and Japan as regulators around the world intensify clampdowns on the industry. Meanwhile, in the US several regulatory bodies including the Department of Justice and the Internal Revenue Service (IRS) are also investigating the cryptocurrency exchange firm.
Binance, which offers incentives such as Binance Coin, lower fees and a new digital ledger, is also being probed by in Hong Kong where the securities watchdog said the crypto exchange platform was not licensed to sell stock tokens. The cryptocurrency exchange platform said in July it was winding down support for stock tokens just a few months after it began offering the product.
Chinese authorities have also been particularly strong in cracking down on financial institutions trading in digital assets and cryptocurrency mining, driven by environmental concerns and a desire to promote financial order.
Beijing’s heightened cryptocurrency crackdown has seen Bitcoin plunging below the $30,000 mark as of July 20, 2021, according to crypto-data website CoinGecko.com. The current price level also mirrors the plunge in global markets amid concerns that the fast-spreading and deadly Delta variant of COVID-19 could hamper economic recovery.
Cryptomining business in China accounts for more than half of global Bitcoin production. However, the State Council’s Financial Stability and Development Committee said in May it will clampdown on cryptocurrencies mining and trading activities as part of efforts to fend off financial risks. Since May, several regions in China including Inner Mongolia, Sichuan, Yunnan and Yunnan have declared war on crypto mining and trading activities.
Blockchain
As the technological architecture underlying digital assets, blockchain is far more important than the hundreds of emerging tokens and cryptocurrency exchange platforms. Its adoption across different sectors of the economy and the hype around digital assets is revolutionizing commerce, but lack of trust may stall progress.
PwC said that the implementation of the blockchain is poised to become an integral part of financial institutions’ technology and operational infrastructure.
Blockchain is expected to transform the way that capital markets operate
through the tokenization of traditional bonds, stocks, and other assets and putting them on public blockchains. The public ledger would be instrumental in removing gatekeeping and third parties in the loans and credit system while making it more secure to borrow money and lowering interest rates.
The Middle East is seeing an increasing inflow of fintech firms challenging incumbent banks through better flexibility and better catering to customers’ requirements and blockchain is playing a crucial role in digital transformation in the financial services sector.
– Accenture
