Due to recent technological advancements and thus the pandemic of the coronavirus, there appears to be a worldwide movement toward cashless economies, with alternative concepts like Bitcoin beginning to gain traction. As a result, monetary policymakers around the world are taking steps to avoid falling behind.
The possibilities before us in the near future are that one day; central banks of the nations of the world could make transactional currencies, backed by the integrity of the state, directly available electronically for people to spend using their smartphones.
However, before that becomes a reality; there is bound to be a power struggle which will play out over the future of traditional and the transition to ‘Non-FungibleTokens’ (NFTs) as the basis of monetary transactions, bringing to the fore, issues ranging from privacy to social equality and financial stability.
But where does Dubai and indeed the entire Middle East stand in this global contest? Will it, for instance, have a government-issued currency upheld by oil reserves and endorsed by the Organization of the Petroleum Exporting Countries (OPEC) in the near future; or perhaps a payment-oriented e-dirham approved by a consortium of banks?
Government responses to legal grey areas: Challenges for cryptocurrency
Compared to other regions, the Middle East market has traditionally been a difficult one for cryptocurrency business, compared to other regions. For a region that is considered a hub for technological innovation, it throws up the question of why cryptocurrency companies have so far failed to gain significant ground in the region.
It is difficult to believe that this may be due to a dearth of government-led initiatives; as we find that from the UAE to Bahrain and Saudi Arabia, most public bodies are taking notice of blockchain technology and cryptocurrencies, and consequently funding and launching initiatives.
For instance, in 2017, emCash, a UAE government-sponsored digital currency for payments were introduced. Similarly, in 2018, Dubai initiated a city-wide Blockchain Strategy 2021, which sought to transfer 50% of government transactions into the Blockchain platform by 2021 under the smart cities initiative. In 2019 as well, the UAE Ministry of Community Development also announced a new Blockchain Payment Gateway tailored towards domestic merchants, just to point out a few of the government initiatives in this regard.
Expectedly, there appear to be some reservations about the exchange and investment-side and restricting regulations due to Islamic banking laws forbidding certain types of transactions. Scholars in different jurisdictions have diverging opinions as to whether cryptocurrencies are similar to "monetary speculation" or to a "transfer of rights".
With no clear standard classification and cautious regulations clashing with the changeable nature of an emerging industry; most people and organizations in the Middle East have either refrained from getting into the market or have done so abroad. In this regard, there have been some remarkable positive developments, which have included X8Currency and Coin M digital currencies. These two projects are concentrated on the preservation of value with low volatility and are fully backed by gold and a basket of fiat currencies including USD; a system similar to the proposed Libra reserve.
As a result of tight regulations, a number of financial institutions have opted to offer their services outside the country through subsidiary branches and partners in foreign economies. Only recently, the Swiss branch of Arab Bank, located in Zug, a place that is now famously known as the Crypto Valley, announced it will provide custody and brokerage of cryptocurrencies for some very important customers.
But in spite of the conservative approach; there have been positive developments so far this year, with a Bahrain cryptocurrency exchange receiving regulatory approval – which is actually the first for the Middle East.
Crypto payments and consumer habits
The challenges on the payment side are even more significant due to deeply rooted consumer behaviors. Cash is still the preferred option for transactions, and physical gold is still oftentimes used. It's not unheard of for some services, such as taxis, not to accept cards, which is the generally accepted method of payment in many countries where cash payments are dwindling.
This reluctance to accept cryptocurrencies comes despite significant efforts to promote cards and e-wallets as more convenient forms of payment, such as Emirates Digital Wallet, which has already been approved by the UAE government; Abu Dhabi National Insurance Company's "Payit," and First Abu Dhabi Bank's electronic payment initiative, "mada Pay."
A digital currency powered future
With these many ecosystem challenges in mind, the questions are: what would drive future digital currency initiatives in the region? What would be the objective of a hypothetical e-dirham currency - to complement or replace cash in local economies? Would a digital currency be oriented towards retail transactions in general public purposes; or serve only for interbank settlements?
At the moment, there are more questions than answers regarding the viability, functionality, and acceptability of cryptocurrencies are the new method of payment in the new economic frontiers of the future.
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