Governments can’t afford to be nostalgic about cash in the age of crypto

The rise of cryptocurrencies is a serious issue for governments. As yet, there is no clear model to protect national currencies in this strange, new, decentralised world, and some of the world’s brightest minds are pondering regulatory and fiscal responses and how actions taken today could positively or negatively impact a nation’s wealth over the coming decades.

It’s therefore no surprise to see global responses range from the bullish to the sluggish. China has been eager to establish first mover advantage, beginning trials of the digital yuan – the world’s first CBDC – this month, as the superpower vies to compete with the might of the US Dollar. The potential for this currency to circumvent US sanctions is much talked about, while the move also curtails the rise and revenues of private payment companies like Alipay, while ostensibly supporting business with immediate payment clearing and added security.

Meanwhile, India is pushing hard to limit the impact of digital currencies through punitive regulation, with a draft bill that would essentially ban all private cryptocurrencies, while leaving options open for the official digital rupee.

The UK too is dipping its toe in the water, announcing a new task force to develop a CBDC with the aim of future-proofing sterling against cryptocurrencies.

Then there is Facebook – more populous than any nation, with 2.7bn users – announcing piloting of its own digital currency, the Diem, pegged to the US Dollar, later this year.

As I said, it’s a busy time in the world of crypto.

So where does this leave the GCC?

Saudi and the UAE are leading the charge with Aber, a common digital currency project announced in 2019 and officially launched last November. Still in development, I am sure the Aber team have been watching recent news with interest.

And as a proud Bahraini, I want to see my nation reassert its pioneering spirit in finance and commit to exploration and investment either in its own CBDC or as a partner in Aber with its trusted neighbours.

There is of course some wisdom in watching and waiting. Being too quick to regulate can curtail innovation, and much can be learned from seeing what works and what doesn’t for early adopters, while isolating yourself from initial risks and exposure. However, we know that our region cannot afford to be left behind when the financial sector – and increasingly fintech – is critical to further diversification and job creation.

But establishing a CBDC is about far more than being positioned as a fintech player. Threats to governments are potentially significant if they don’t invest, and invest now, in their own digital currencies. Although it remains a remote risk, the control central banks have over monetary policy could be damaged if a significant volume of payments migrate to private digital currencies, as if these fail or fluctuate beyond acceptable levels it will leave public and businesses exposed.

The rewards too are noteworthy. Bahrain could save almost half a billion dollars on producing and managing distribution of bank notes and Saudi could reallocate 1.6 per cent of GDP currently used for cash management for the Kingdom’s ATMs. Add the savings to governments and businesses as immediate, rather than delayed, transfers become the norm; the increased security of fully digitised, centralised payment systems; and the boost to the broader fintech and other hi-tech industries, and you have a compelling argument for acting sooner, rather than later. For the Gulf it is perhaps even more pressing – we have built our recent wealth around the petrodollar. As the shift away from fossil fuel continues, we must consider how a change in currency pegging to other energy sources – as well as crypto investment in oil – will impact the dollar’s value and stability.

This issue is as personal for me as it is political. My great uncle, Sayed Mahmood Ahmed Al Alawi, was Bahrain’s first Minister of Finance and National Economy and served as financial advisor to the late Prime Minister Prince Khalifa Bin Salman Al Khalifa until his own death in 1994. He played a central role in establishing Bahrain’s national currency, the dinar, in 1965 and ensuring Bahrain was part of a world monetary system that determined its value according to international criteria. Yet I doubt even he could have foreseen that just over half a century later, that currency would be on the brink of transformation once again, or that the notes and coins he worked so hard to introduce could be consigned to the history books within a decade or two.

It is easy to be sentimental about money in its cash form, but now is no time for nostalgia.  Our region’s leaders are championing the move from the oil age to the information age. If we are to follow this trajectory, the region – independently or collectively – must act now to protect our economic and technological futures.

MilleniumAssociates is currently working with GVE, the Japanese CBDC specialist, to advise the region’s Central Banks on Digital Currency adoption

Hussain Al Alawi, International Partner and member of the Global Advisory Board at Zurich headquartered M&A advisory MilleniumAssociates