Will Saudi Arabia become a true pioneer of blockchain innovation?

Will Saudi Arabia become a true pioneer of blockchain innovation?

Blockchain technology is steadily gaining ground in Saudi Arabia, but can it become a leader in space? The country is certainly aware of its potential, as evidenced by the Saudi central bank’s involvement in several blockchain projects and the appointment of Mohsen Al-Zahrani to lead its virtual assets and the central bank’s digital currency program.

But will it be embraced in other areas? The answer depends on how the blockchain technology is used. Until now, the rollout of the technology has been held hostage by the hype surrounding its earliest incarnations: cryptocurrencies and early-stage startup tokens. However, there are far more practical, mainstream applications for the decentralized ledger.

Take tokenization, for example, the process of converting an object of value into a digital token that can be used on a blockchain application. Imagine that an established company is looking for a $1 billion investment. It can go the regular route or invite people to access 10,000,000 tokens, each priced at $100.

Collection of tokens

Token trading opens transactions to a large and highly liquid market. It can also be used for property development or assets such as houses, ships or oil fields. Moreover, this system can open the door to millions of potential new investors from destinations that previously considered the Middle East a distant corner of the world, such as Europe or the United States.

With token trading, not only can individual companies reap the rewards, but it also presents a whole new avenue for foreign direct investment. The targets can include institutional investors and anyone interested in gaining a foothold in the region and at the same time diversifying their portfolio.

We are already seeing tokenization in action. Riyadh-based Al Nassr Football Club launched a blockchain-based fan token that can be traded across multiple online platforms, and this is just the beginning. It is only a matter of time before other industries explore this potential.

Changing of the guard and its impact

But the opportunities extend beyond the private sector; blockchain has the potential to be leveraged as an enabler for digital government as well.

The technology has gained prominence since the outbreak of the COVID-19 pandemic, highlighting the need to accelerate digitization and remote communication between individuals and governments. While data security, privacy and trust issues may have slowed progress, introducing a distributed ledger will address all three areas.

For example, it provides far greater data security than paper, as mathematics can be used to determine whether data has been compromised.

Blockchain also offers greater privacy by using a hashing algorithm, a one-way cryptographic function that makes it impossible to retrieve original data via decryption. When personal data is stored in the blockchain, only the hash that validates data integrity remains public. The rest of the data remains private. The digital ledger can also validate your identity, addressing the lack of trust around government IDs and signatures. The ledger allows the use of digital public services over the internet and can also “remember” when items were signed.

Despite these apparent benefits, the public remains skeptical of these applications, and seeing them implemented will require a significant change in mindset. While this may be possible, it will be a slow process. The government may need to implement legislation based on a new public attitude.

One does not have to look far to see the reason for public reluctance to embrace the implementation of distributed ledger technology in the public and private sectors: it goes back to the earliest use cases and their speculative nature. As a result, blockchain has become almost synonymous with bitcoin, a term that evokes strong emotions thanks to its spectacular rise and fall, not to mention its dubious association with black markets and money laundering.

Beyond the shadow of a doubt

Whether justified or not, the shadow surrounding cryptocurrencies is a deterrent between asset tokens and Riyal transactions, as crypto remains the default intermediary. Therefore, the future of blockchain depends on the ability of users to build trust in the technology.

Fortunately, some mechanisms could be exploited here. The introduction of regulatory legislation to codify new holding companies, where the beneficiaries are token holders instead of traditional shareholders, may ease any doubts in transactions between these token holders and registered host countries.

Of course, trust remains an important element for potential investors. Nevertheless, if these special purpose vehicles are legal in target countries, and the rule of law in those countries is perceived as impeccable, then all that is needed to instill greater trust may be tight control over the details of company constitutions.

Is Saudi Arabia able to foster public trust at this level and become a true pioneer of blockchain innovation? Perhaps yes, but only if it first overcomes the prevailing skepticism towards crypto as the link between asset tokens and money.

The country will also have to overcome technical limitations that prevent scalability. At the same time, the high energy consumption required by certain types of blockchain must be addressed, along with challenges surrounding integration with the legacy system.

If the kingdom can solve these challenges, it can enjoy all the gains that come with the first-mover advantage. If not, blockchain is likely to remain a tool limited to a specific niche, serving only a small fraction of the population and laying waste to many upcoming opportunities.

• Jad Haddad is head of consultancy Oliver Wyman’s digital practice in the India, Middle East and Africa unit.

Disclaimer: Views expressed by authors in this section are their own and do not necessarily reflect the views of Arab News