Dubai has the image of a Middle Eastern city-state with more money than its people know how to spend.
One of the main reasons for apparently having so much money is that its financial sector is among the largest in the world, proportionately speaking.
Unusually for a Middle Eastern nation of fewer than 3 million people – most of whom are immigrant workers – its economy is not dependent on, or even heavily reliant on, oil.
In fact, Dubai has very little oil compared to its neighbouring city-states such as Abu Dhabi, another one of the seven city-states that make up the United Arab Emirates, which is one country.
On the surface, it’s an intricate political framework, although essentially it’s a simple monarchy, which has for decades been diversifying the UAE’s, and in particular Dubai’s, economy away from oil and towards what they consider to be international and advanced sectors.
Finance was one of them, and it has served the emirates well. Dubai’s annual gross domestic product is more than $100 billion, and approximately 12 per cent of that is from the financial sector.
Dubai is the hub for many large oil-trading companies, and geographically – located on the Arabian peninsula – it’s also right at the centre of the great importers and exporters of the east, such as China and India, and their counterparts in the west, such as Europe and the Americas.
Now, the authorities in Dubai are looking to adopt cryptocurrencies for many transactions that either pass through the city or stay within its limits.
The new cryptocurrency will be called emCash, and it is believed to the first state cryptocurrency.
According to Ali Ibrahim, deputy director general of the Dubai economy, whose comments were reported on CoinTelegraph.com, emCash will become legal tender “for various government and non-government services, from their daily coffee and children’s school fee to utility charges and money transfers”.
The digital currency has been described as a “sovereign cryptocurrency”, which would apparently indicate the state’s highest level of backing, but it’s probably still in the testing phase.
But if any country can make a cryptocurrency work, it would be one where the financial sector is relatively large – as is the case with Dubai.
One thing that may be new to Dubai is blockchain, the public ledger system which forms the basis for blockchain, keeping records of transactions and so on.
The blockchain system does not require a central banking system, and it is totally dependent on computer networks.
While financial technology, understandably, is widely implemented and used in Dubai, blockchain and digital currencies are relatively new to everyone.
As quoted by Coin Telegraph, Ibrahim says: “The fast-paced environment and incredible willingness to adopt innovative technology has made Dubai the perfect place for us to do business.
“This project is a great example of the ambition we have met here, together we are essentially creating a whole new economic ecosystem.
“It [emCash] will harness blockchain technology to make financial transactions cheaper, faster and more secure while demonstrating the huge advantages of embracing this technology for governments, business and customers alike.”
It’s too early to say whether Dubai’s decision to adopt a cryptocurrency will be praised or criticised by its fellow city authorities, such as Abu Dhabi, which has a much larger, oil-based economy; as well as surrounding countries such as Saudi Arabia, Iran, Qatar and a whole host of giant oil and gas traders, all of which use US dollars to trade.
In Europe, Estonia is looking into the idea of launching its own cryptocurrency, called estCoin, and canvassing opinion online.
It’s only an idea suggested by a relatively junior official, who is not even part of the government as such, but it’s already been sharply criticised by arguably the most powerful banker in Europe.
Mario Draghi, president of the European Central Bank, said Estonia’s plan for a cryptocurrency cannot be allowed to happen – and no European country which presently uses the euro as its currency can start its own cryptocurrency.
Commenting on the Estonian decision, Draghi said: “No member state can introduce its own currency. The currency of the euro zone is the euro.”
But governments the world over are looking into cryptocurrencies, even if none of them seem entirely sure what to do with them.
Some of them are testing cryptocurrencies with a view to adopting them, others are warily monitoring cryptocurrency companies within their borders and disrupting some of their activities.
One idea being suggested to try and make cryptocurrencies more acceptable is to link them to central banks.
As pointed out in the MIT publication, Technology Review, “some economists have argued in recent years that a cryptocurrency tied to central-bank-backed money could give governments a way to issue digital tokens that are a lot like cash”.
In other authoritative observations, the Bank of International Settlements is said to have indicated that there may be some value in using two types of cryptocurrencies – one for “retail” and one for “wholesale”.
By retail they mean consumers, and by wholesale they mean bank-to-bank transactions, which tend to be quite large.
And meanwhile, the head of the International Monetary Fund, Christine Lagarde, has suggested that ignoring cryptocurrencies may not be an option for governments.
“It may not be wise to dismiss virtual currencies,” said Lagarde in a speech in the UK recently.
She said that at the moment, virtual currencies – such as bitcoin and others – do not challenge the existing order of fiat currencies and the financial system.
But they might pose technological challenges in the future, when some countries might opt to use cryptocurrencies instead of conventional currencies for international trade.
“For instance, think of countries with weak institutions and unstable national currencies,” said Lagarde. “Instead of adopting the currency of another country – such as the US dollar – some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.”
Lagarde added that some people might find digital currencies easier and safer to obtain than paper bills, and virtual money might actually become more stable.