Kuwait-based investment banking and asset management firm Kuwait Financial Centre, also known as Markaz, has published a new report on bitcoin in which it heralds digital currency as a disruptive technology that could help ignite the region's e-commerce industry.
Entitled 'Disruptive Technology: Bitcoins, Currency Reinvented?', the 20-page report provides a broad introduction to bitcoin, while highlighting the opportunity it presents to investors in the Gulf Cooperation Council (GCC) and its member countries Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).
Markaz examines bitcoin's strengths and weaknesses, the differing stances of global regulators and the details of the Mt. Gox collapse, but its overall takeaway is encouraging for both the Middle East's local bitcoin operators and for the wider digital currency industry.
The report concludes that, despite the risks, the benefits bitcoin could bring to the region should not be overlooked by Middle Eastern investors. It reads:
"If properly nurtured, this technology can help e-commerce take off in a big way. Micropayment and cashless payment technologies would make it easier for people to carry just their smartphone and pay for it."
Markaz also noted that bitcoin may be uniquely suited to the needs of the Middle East given its high smartphone penetration – 50% of its mobile phones are smartphones – and comparatively youthful demographic, writing:
"Bitcoin initially is hard to comprehend, however, GCC nations have a majority of younger population [sic] who are in their 20s and educating them is much easier. Social media forums show that it is people from this age group who actively participate in bitcoin related threads."
The report follows bitcoin's appearance at Dubai's recent ArabNet Digital Summit 2014. There, local entrepreneurs from bitcoin startups Yellow and Umbrellab introduced new members of the region's tech community to the technology.
Investment opportunities limited
Investors in North America and Europe are currently capitalizing on an increasingly varied field of bitcoin startups for investment. However, Markaz noted that GCC investors have fewer local options and will have to take on more risk to achieve gains or turn to international services.
Markaz concluded that angel investment is now the best, if only, regional option for GCC investors. As such, it stated that those interested should approach with caution:
"Investors however should conduct their own due diligence in ventures before investing as they are risky investments. Bitcoin, still being in an experimental phase, has an 80% probability of going to zero, as the value of bitcoin is basically driven by people’s acceptance."
More immediate obstacles are presented by the lack of development in the MENA startup scene. The report notes "there are no GCC-based bitcoin exchanges", but does provide a section on how to open a bitcoin exchange that covers the basics of digital currency exchange trading.
For now, the report directs investors to international investments such as the Bitcoin Investment Trust. Lead by CEO Barry Silbert, it lauded the investment vehicle for allowing investors to gain "exposure to the price movement of bitcoin without the risks of direct bitcoin ownerships such as buying, storing and safekeeping bitcoins".
Bitcoin could improve oil trade
One of the more interesting findings in the report may be its conclusion that bitcoin could be used to help generate savings for oil exporters. The industry currently accounts for 90% of GCC exports and 75% of government revenue, according to Markaz, but also must deal with the costs of receiving payments from all over the world.
Specifically, it suggests bitcoin could be used to reduce the clearing time for international payments, which it says currently take between one and three days to process.
The report envisions a wide range of potential uses for bitcoin technology to improve the region's oil trade, stating:
"Revamping the payment system in line with bitcoin systems will yield in savings in terms of cost, time and paperwork involved. Alternatively the same payment method could be adopted for fund transfers among the GCC regions as well as the whole of [the] Middle East."
Tread with caution
Markaz also examined the road ahead for bitcoin, suggesting that informed industry observers believe it could be 10 years before the Middle East is significantly affected by bitcoin technology.
Bitcoin, Markaz concluded, has "a long way to go" to catch up to the transaction volumes of Visa and MasterCard, citing Coinmetrics data that places bitcoin's daily transaction volume at $89m.
Potential roadblocks to the ultimate realization of bitcoin as a currency and system of payment, the report said, are most likely to come from conservative governments – which will wait for other jurisdictions to take the lead on lawmaking – and an overall lack of acceptance.
As a result, Markaz warns that bitcoin presents a high-risk investment opportunity:
"Bitcoin rests on the foundation of people’s acceptance. If acceptance does not gain widespread traction, bitcoin might vanish into internet’s oblivion."
To learn more, view the complete report.