Banking on bitcoin: cryptocurrency’s growth in the Gulf
Recent news that US billionaire and self-confessed Bitcoin sceptic Mark Cuban plans to invest in a crytocurrency fund was the latest vote of confidence in the fast-growing virtual money transfer scheme.
Cuban announced he would invest in 1confirmation, a fund that plans to raise $20m to invest in companies based on the blockchain technology underpinning Bitcoin and other digital currencies.
This was despite him tweeting in June that he thought Bitcoin was in a bubble that would burst and cause its trading price to plummet in the near future.
He explained to Bloomberg: “I have always looked at blockchain as a foundation platform from which great applications can be built.”
The tech investor’s pledge was good news for the industry, which underwent chaos of the sort only dedicated Bitcoin brains can fully understand, when the cryptocurrency split into two entities, Bitcoin and Bitcoin Cash, on August 1.
The new offshoot, Bitcoin Cash, is built on a new version of blockchain technology that promises faster transactions, via an eight megabyte ‘block’ versus the original Bitcoin’s one megabyte. This means it can charge lower fees to customers moving money via its platform.
Traders were excited. Bitcoin Cash surged 40 percent in a single day on Friday August 18, to hit $655, and although it fell 20 percent the following Monday it remains up about 110 percent since its launch at the start of the month.
Meanwhile, the original Bitcoin is still strong, trading at more than $4,000 after hitting an all-time high of $4,522 the same Friday, with a market value of $70bn. It is the second biggest digital currency by market capitalisation, behind Ethereum and above Bitcoin Cash.
In the Gulf, the Bitcoin trading boom has had less of an impact as the industry remains underdeveloped. However, experts claim investor enthusiasm in the US could shine a useful spotlight on a virtual money transfer system still struggling to reach the mainstream.
Bitcoin is a virtual currency that allows users to exchange online credits for goods and services for a minimal fee. The blockchain technology behind it is a public and transparent ledger of all Bitcoin transactions.
With the GCC accounting for a substantial proportion of global remittances, foreign exchange houses are big business and many say incorporating Bitcoin-enabling technology would be commercially advantageous, as it would help them to cut costs and provide better services to customers.
Bitcoin enables anyone to send or receive any amount of money anywhere without restriction.
Jameel Ahmad, Dubai-based vice-president of corporate development and market research at FXTM, tells Arabian Business: “Adopting Bitcoin for remittance and forex business is where the industry is heading.
“It is a massive market: worldwide, around 230 million people send $500bn in remittances every year, using traditional firms like Western Union, MoneyGram and other smaller players.
“Collectively, these remittance facilitators control over one million retail locations and handle more than 25 percent of the world’s annual remittance transactions.
“Despite their popularity, the typical international money transfer requires a lot of steps for facilitation, and Bitcoin streamlines that process.
“We made the decision to accept Bitcoin as a payment method because we wanted to help individuals transact with ease, regardless of their location. With the fast adoption of the currency, it made good business sense.”
Ahmad says Bitcoin is “positive all round, because of security, ease of use and low fees on international transactions”. And he insists demand for cryptocurrencies will only increase. “There has been a significant shift in investor demand towards Bitcoin in the last year,” he says. “While it’s a stretch to say Bitcoin has become a safe haven, traders seem to be hedging with the instrument when there is speculation of uncertainty in the world. Year-to-date, Bitcoin [original] has advanced by just over 340 percent, which is an impressive track record.
“More recently, Bitcoin moved aggressively to the upside as a result of increased geopolitical tensions between the United States and North Korea.
“It was previously thought that lack of accessibility would provide Bitcoin with a major barrier to growth, but many brokers are now adding it to their portfolios. There are currently over 700 cryptocurrencies, so it looks like they’re here to stay.”
Other exchange houses in the GCC are viewing Bitcoin as an important development. UAE Exchange invested in two blockchain-based companies, Loyyal and Bankchain, in the first half of 2017 and is in talks with a third – a firm statement of its confidence in the nascent technology.
UAE Exchange CEO Promoth Manghat tells Arabian Business: “We have been watching developments in blockchain for the past six or seven years and actively backing it for three. We are a great believer in the technology, and Bitcoin is a great way of transferring currency at a reduced cost.”
Dubai is leading the way in pioneering the application of new blockchain-based technology.
He explains why Bitcoin’s value lies in the fact that it removes the need for “multiple middle men” for each transaction, all of which heap extra costs on facilitators and customers. Blockchain, meanwhile, provides a secure platform enabling customers to protect their identity without supplying bank details and other personal information that could be stolen.
For the GCC, the cost reductions may not be so great as for other regions, given that its main remittance destination corridors of South Asia, Southeast Asia and North Africa are already well served and competitive, says Manghat. He claims UAE Exchange customers in these regions can send and receive money within two minutes.
However, Arundhoti Banerjee, associate vice-president, strategy & digital, at Xpress Money, an affiliate of UAE Exchange, believes Bitcoin could bring cost savings of between 10-20 percent, even for forex houses serving busy corridors. When you consider that the average international transfer fee is nearly 20 percent between some countries, this is significant.
“Financial systems in most countries are governed by a regulator in the form of a central bank, but with Bitcoin there is no central governing body,” Banerjee explains. “Because of this, there are fewer intermediary parties and fewer costs involved.
“Think of the load of back office functions at remittance houses that help make the money move. By cutting out the middle men, you can significantly reduce the cost of transmitting money across the globe.”
Ola Doudin, CEO and co-founder of Dubai-based start-up BitOasis, which facilitates Bitcoin transactions across the Middle East and North Africa (MENA), claims typical fees payable on Bitcoin transactions are around one to three percent, compared to seven percent for some exchange houses, depending on the destination. “Our customers see it as a cheaper and easier alternative to traditional channels — you are not having to pay fees at both ends,” she says.
On the flipside, it is an unregulated industry and that brings risks and challenges. “This is a source of worry,” admits Manghat. He cites the recent fluctuations in Bitcoin’s trading value — it surged from $800 to $4,500 in a matter of months — as evidence of a volatility that could be too risky for some prospective beneficiaries, most notably low-income workers in the GCC who are remitting comparatively low amounts to their home countries.
However, Doudin counters that argument by saying that many of BitOasis’ customers are low-income workers in the UAE who are using Bitcoin to facilitate payments and transfers back home.
Banerjee notes that the latest package of regulations from the UAE Central Bank this year did not cover Bitcoin and associated industries. “Until the industry comes within a formal regulatory framework, remittance houses are going to be reluctant to execute Bitcoin processes as they may regard it as too risky.”
FXTM’s Ahmad adds: “Regulation obviously plays a big role, and what complicates matters is that Bitcoin skirts the traditional regulatory parameters. Firstly, is it intrinsically secure as a payment source, and, secondly, there is still a debate around the question of, ‘Is it a currency or commodity?’.
ADGM and UAE Exchange have agreed to develop and promote the fintech ecosystem in the UAE.
“Many authorities are still trying to agree on appropriate regulations. Once the proper framework is in place, it should speed up the adoption of the currency.”
Lack of awareness and opaque marketing are other barriers to greater take-up of Bitcoin in the Gulf, he says. “There is still a lot of confusion around cryptocurrencies, so their adoption may be limited. Education is always the go-to solution when you are trying to encourage the adoption of a new product or platform.
“For example, customers need to know that Bitcoin transactions are irreversible — they can only be refunded by the person receiving the funds, so if you have buyer’s remorse, or the product you receive is unsuitable, you are stuck with relying on their honesty. You can’t get loss protection for Bitcoin; if you are hacked, you have to absorb the loss.”
Consumers need to trust Bitcoin as a currency in the same way that they trust fiat currencies before the rate of adoption increases. However, with global remittances declining amid economic slowdown, the forex industry is under pressure to keep abreast of any new technologies that may help it to cut costs and provide a smoother service.
Lower oil prices and fiscal tightening in the GCC were the main factors behind a 6.4 percent decline in remittances to the South Asia region, including India and Bangladesh, in 2016, and a 6.7 percent decline in remittances to Nepal, according to the World Bank’s latest remittances report published in April. Pakistan saw only modest growth of 2.8 percent.
Experts say that, apart from offering a faster and cheaper service, Bitcoin’s underlying infrastructure allows remittance firms to focus on other elements of the customer experience, including tracking tools, culturally relevant user interfaces and other products – which are vital to maintaining a healthy and resilient business.
“The industry must always seek to adopt new technologies and products and has to ensure that it remains ahead of the curve. That’s why we made those two investments earlier this year and are now in the process of tying up a deal with distributed ledger start-up Ripple, to support real-time cross border payments,” says UAE Exchange’s Manghat.
It seems he could do worse than look at Bitcoin. In 2015, UK-based technology M&A consultancy Magister Advisors published a survey claiming Bitcoin would become the sixth largest global reserve currency within 15 years.
The industry is certainly growing, with new global players entering the market almost every week. A system called Litecoin has recently been touted as the future “digital gold” and is apparently a useful solution for small, day-to-day payments, or micro-transactions. Some experts predict it could even gain global momentum as a non-correlated asset class.
Meanwhile, BitOasis’ Doudin claims to have seen increasing interest from a range of parties, including governments, regulators, free zones — Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) have both developed fintech frameworks — banks and customers, and predicts that “over the next two years the space will mature”.
Bitcoin advocate and tech entrepreneur Niko Younts tells Arabian Business: “I believe the future of payments, savings, investments, trades and business in general will undoubtedly be based on the technology that the invention of Bitcoin delivered to the world.
“Cryptocurrency for payments is quicker and cheaper than most existing options. You don’t have to commute to an office or exchange window. You don’t need a membership. There is no confusing paperwork, high fees, day- or week-long delays, chance of account freezes or rejection, or any arbitrary limits.
“You can send one dollar or one million dollars with two ‘Bitcoin wallets’ [accounts] for the same small fee and within the same timeframe. Like email, it just works — provided you do your homework and find a reputable provider.
“Many may laugh,” he adds, “but Bitcoin may end up being the best form of money our planet has ever seen.”