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Ripples in the Dunes



Correspondent banking should be for study by archaeologists, not a current reality.

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Nestled neatly between sea and desert, a modern metropolis has grown out of the sand. One might see camels and the tents of Bedouins in the old section of the city but you'd be forgiven the cultural jet lag upon arrival in the bustling new areas where the world's largest and most luxurious hotels stand watch in the sky while below on palm lined boulevards police cruise by in a Lamborghini WhenMoon...sorry...Aventador or Bugatti Veyron. This of course, is Dubai, one of the emirates comprising the United Arab Emirates (UAE), a wealthy and modern state lying below the Persian Gulf.


Along with her sister states, Bahrain, Oman, Qatar, Kuwait and Saudi Arabia (KSA), they formed the Gulf Co-Operation Council (GCC): a collaborative body fostering common goals and unity for its members (1).


Colloquially, we think of them as the Gulf states, a comparatively small region of economic power-houses heavily dependent on oil exports. KSA alone controls nearly 1/4 of the world's oil reserves and is the world's largest exporter. Oil and gas contribute around 50% of its GDP (2). It's sitting on proven reserves of an immense 266 billion barrels of oil equivalent (BBOE). The UAE has a tidy 97 BBOE proven reserves and the oil and gas sector accounts for around 40% of its GDP (3).

As of 2016 the GCC states collectively control 29% of known oil reserves in the world (4).

This is a problem for them.

Over the last few decades, the GCC states have deployed their oil income in ways to improve the overall standard of living in their countries with spending on public education, health and infrastructure. But they have struggled to diversify their economies (5). This leaves their revenue generation exposed to supply/demand volatility. Both sides of that equation face major risks. On the supply side, the USA has slowly been ramping up output production with shale oil sources contributing to output growth. Russia and Iran for instance have also been steadily growing their shares of export production. On the demand side, there are significant global headwinds with carbon emissions being seen as extremely problematic for world climate patterns resulting in the exponential growth of renewable energy sources and projects.

Economically speaking, the GCC states are facing a potential perfect storm. Growing production competition from other countries who do not have the same GDP input risk and increasing pressure on demand from non-fossil fuel energy pathways. Navigating these waters necessitate creative thinking in diversifying their economies.

The first obvious pivot away from energy revenue dependence is using oil and gas to manufacture new products - plastics, chemicals, screen coatings, etc. To this end Saudi Aramco (KSA's state owned oil company, currently the highest valued co. in the world), has bet US $20 billion on a new complex to develop this business, and as part of the Saudi "Vision 2030" blueprint for the post-oil future (6,7).

What is Vision 2030?

Broadly speaking, it is a wide and ambitious plan to reshape the KSA economy away from fossil fuel energy towards producing a diverse range of goods and services across technology, petro-chemical industries, tourism, privatising some government services, and international trade and finance (8). Several points worth highlighting are Saudi Arabia's desire to create the world's largest sovereign wealth fund, and a goal to become a cashless society by 2030.

The Council for Economic and Development Affairs recently approved the Financial Sector Development Program, one of 12 programs slated by CEDA to help progress towards Vision 2030 goals.

"Our aim through the Financial Sector Development Program is to place the Saudi financial market among the largest markets in the world by easing and enhancing the access for foreign investors to the local market, increasing the share of capital market assets. This will be achieved through a number of means, including enhancing the account opening process for foreign investors, establishing co-trading linkage with developed markets, expanding product offerings, increase the flexibility of managing risks and returns for the investors , and providing attractive investment opportunities. In doing so, we seek to deepen the capital markets which will lead to increase the liquidity of the financial market." (9)

Additionally, Ziad Al-Yousef, Director General of Payment Systems at the Saudi Arabian Monetary Authority (SAMA), the KSA central bank, said that fintech "can increase financial inclusion in the kingdom and improve the speed and efficiency of fund flows through electronic means" (10).

Banking the unbanked

The World Bank definition of financial inclusion "means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way." (11)

It's about opening up financial services to the unbanked and underbanked, those people who are currently excluded from or limited in participation in the wider economy. The GCC states rate comparatively highly in terms of overall inclusion though there is still a large margin of improvement available. But importantly, this region has high outward remittance flows to other nations that include large unbanked populations. This becomes a challenge shared between countries, not just within any one state. Financial inclusion has significant positive measurable effects on social wellbeing, the economy and the environment (12).


Investing in Finance - the foundations

This focus on upgrading their financial services sector including infrastructure and inclusion is a challenge identified earlier in an IMF study which noted, "Within the broader Middle East and North Africa (MENA) region, shortcomings in trade-related infrastructure and access to finance are also likely to hamper intraregional trade" (5).

Both KSA and the UAE are racing towards developing major fintech hubs. They are planning ecosystems to incubate and nurture new businesses in the region, as well as improving trade rails and access to finance. This group of countries understand the local and global headwinds and are committing fortunes to build new economic possibilities.

KSA Crown Prince Mohammed bin Salman announced the development of a $500 billion hi-tech mega city powered entirely by renewable energy (13). In the UAE, their Smart City initiative intends to streamline the public sector by deploying blockchain solutions to create efficiencies and savings, and develop the urban areas more broadly by installing high speed internet and Wi-Fi with universal access, creation of a smart power grid, electric vehicle charging points, and innovating with AI, big data, and the Internet of Things (IoT) to connect, accelerate and optimise practically everything. A strong theme of digital transformation runs through the whole GCC region (14).

As part of their long-term strategies to broaden their economic bases and become globally competitive in sectors that traditionally haven't been their strong suits, the Middle East is looking Far East. China is positioning itself as a global soft super-power with the One Belt, One Road (OBOR) initiative - a huge undertaking to develop regional trade and transport infrastructure and mature trade relationships along pathways linking dozens of countries, many of which are emerging economies and covers 1/3 of the world's population. China's direct, outbound investment in OBOR is expected to be $300 billion by 2030, according to the Bank of China's chief economist (15). Some estimates see it as high as $1 trillion or more.

It's nearly impossible to overestimate the significance of this project. "According to McKinsey, it could potentially cover a third of global GDP and a quarter of all the goods and services in the international economy." (16)


Geographically, the Gulf states are strategically located on the maritime route and link Asia to Africa and Europe. The UAE is already home to the largest Chinese trading hub outside of the mainland (16). China is currently the number 1 customer for KSA oil exports though they import more from several other countries (17). As part of the diversification agenda, KSA has signed tens of billions of dollars worth of new bilateral investment deals with China including real estate, technology and petrochemical industries alongside energy investments (18,19).

If you've followed me this far, one thing should be very clear. All of this adds up to a lot of money flowing across borders. And despite predictions otherwise, all of the money flowing at these levels of business and government will be moving via the traditional paths of commercial and central banks.

Rippling of payments in the region

The basis of a financial system is payments infrastructure - the processes by which real money is moved from an account at one bank to an account at another bank. This is a multifaceted eco-system including payment service providers, settlement facilitators (often a central bank at the local level, or services like CLS Group for cross-border) and the banks themselves who hold the accounts.

With a view towards a unified regional approach, the GCC discussed in 2016,

"the latest developments in the area of linking the GCC payment systems. This project has reached very advanced levels following dedicated efforts by professional members of the Payment Systems Technical Committee and under support and guidance of Their Excellencies, the Governors. Needless to say, the finalization of the payment system linking project will be a key step in promoting the financial position of the region; facilitating the clearing and settlement of cross-border financial transactions in a secure and effective manner and at a lower cost; establishing an infrastructure allowing for swift, unified and secure transfers of payments within the GCC countries. This will eventually facilitate trade and enhance investment and tourism among the member countries" (20).

In February 2018, SAMA and Ripple announced a pilot program overseen by SAMA which enables KSA banks to join RippleNet through xCurrent (21). xCurrent is a Ripple software solution that allows real time payments and settlement using pre-funded accounts at network partner banks. RippleNet is the network of financial institutions (FIs) connected by Ripple products.

Independently of this initiative, individual FIs in the GCC area are already onboarding with Ripple. These are announced partners (22):

  • National Bank of Kuwait
  • Kuwait Finance House
  • Bank Dhofar - Oman
  • First Abu Dhabi Bank - UAE (merger of National Bank of Abu Dhabi & First Gulf Bank)
  • UAE Exchange
  • Al Rajhi Bank - KSA

This extends RippleNet across 4 of the 6 GCC states. Sources have also confirmed other unannounced customers in the region and more in discussion/evaluation stage. Arab Exchange Market (AEM) Sec-Gen Fadi Khalaf indicated that UAE banks are aiming for similar agreements (presumably with their central bank involved as well) (23).

How should we understand the central bank lead expansion of RippleNet in the Gulf states against the backdrop of preplanning for a unified regional cross border payment and settlement system as elucidated in the 2016 GCC speech (20)?

It's the core question.

Upgrading the financial infrastructure of the region has multiple valuable benefits. Frictionless money flow in a secure, transparent system:

  • enhances trade finance increasing investment opportunity and business expansion
  • facilitates the expansion of financial services & fintech as a sector
  • decreases costs of participants
  • decreases capital lock up time needed for payment settlements freeing that capital for other use
  • provides a foundation for the digitalisation of the GCC economies
  • helps progress the goal of cashless societies
  • promotes financial inclusion (delivering financial services to the unbanked)
  • increases the rate of economic diversification lowering GDP input risk from fuel exports
  • expands government revenues from new business licensing fees and taxes which in turn leads to public goods such as spending to improve healthcare and education
  • increases the global competitiveness of the region as a financial centre

Many more factors could be added to this list and these elements are cyclical, creating virtuous feedback loops. Buried in this is Jevon's Paradox, or the rebound effect. Loosely speaking, if something is cheaper and easier to do, more of it will happen. Or the surplus created by efficiencies will be put to use elsewhere.

One example of how this could work in a Ripple powered Gulf region can be drawn from remittances - migrant workers transferring money home to their families. Remittances are so important to many economies that they constitute measurable effects in GDP and other metrics (24,25).

Moody's estimate that the SAMA + Ripple partnership will create system wide savings of US $200-400 million per year (23). It's unclear how much of those savings will be passed on to retail customers of the banks but that which is, will translate into extra cash in the pockets of migrant workers. They are likely to either send more money home more frequently, or increase their discretionary spending locally. More money flowing home has positive economic effects in recipient economies. Higher local spending directly and positively impacts local economies. Because of this...

I'm going to make a prediction here - Ripple has been in discussions with every GCC central bank and all or most are already customers or will be soon.

Many readers will already understand the following but it's worth a digression to provide context for people new to the world of Ripple.

Ripple provides new financial plumbing

What we know is that Ripple's strategy is to build their network on xCurrent (26). It immediately provides time and cost savings along with security and transparency of transactions and it's business and government friendly as it works inside of FI firewalls and encrypts data so that only the transacting parties (and not Ripple) are privy to details. xCurrent is currency and ledger agnostic because it utilises ILP, the Interledger Protocol. It allows customers to transfer any fiat value to each other. They could also use internal banking tokens, Ether, XRP, or Dogecoin if they wanted to.

ILP is an open source technology (developed by Ripple) that acts as a foundation to Ripple's suite of proprietary products. xCurrent, one of those products, provides a new rail system on top of the foundation. There are no regulatory hurdles to use xCurrent because it simply connects existing ledgers and in the case of fiat-to-fiat cross-border payments, operates on traditional methods of settlement using pre-funded accounts that FIs hold with each other.

Because of its speed, security and transparency it unlocks the economic benefits discussed earlier at up to 80% cheaper (27) than existing cross-border pathways. But one of the downsides to pre-funded accounts is how it locks capital away for periods of time solely for settling payments. That capital can't be used productively elsewhere by an FI. There's also the need for having existing relationships with other banks around the world where trust is required to maintain accounts with each other. These banking relationships have been complicated by additional laws surrounding Know Your Customer (KYC), Anti Money Laundering (AML) and Counter Financing of Terrorism (CFT). Other considerations (such as new liquidity requirements post-GFC) and information disparities have lead to shrinking of bank to bank relationships precisely in those countries which would benefit most from an upgraded financial system (28).

Enter on-demand liquidity with xRapid fuelled by XRP. xRapid is another Ripple proprietary product which uses the open source XRP Ledger as a bridging mechanism to enable near real-time settlement on cross-border transactions without the need for pre-funded accounts and still with exceptional cost savings off legacy processes (29). It's difficult to find an exact figure of how much money on average is out-of-action due to pre-funding requirements but estimates vary from $5-27 trillion. Whatever the amount, it is a very significant sum of capital that banks can't use profitably elsewhere.

Ripple offer an excellent high-level overview on how these various products fit together in their vision (30). The strategy can be summed up simply as:

Build the network rails with xCurrent.
Provide high speed value transport with xRapid.

Ripple's customer base in the GCC region have all stated that they are working with xCurrent. A source on the ground with working knowledge advised that SAMA has tested both xCurrent and xRapid. While this may be initially surprising to some, this ought to be expected as central banks are regulatory agents and supervisors of regional payment systems and they will want to understand how these products work as part of their due diligence monitoring the safety and stability of payment networks.

Given the systemic benefits of xRapid, what exactly is the hold-up? Why aren't FIs rushing to jump on it? For starters, it is a new product, still in beta with the first production customers likely to go live in Q3 or Q4 of 2018.

Just as or perhaps more importantly, however is this - regulations.

XRP - a compliant digital asset for FIs

Accenture released a survey report in 2016 that cited regulatory uncertainty as the number one source of internal resistance to blockchain uptake in banks (31).

The landscape hasn't changed a lot since then even if the number of FIs and central banks working with blockchain concepts has continued to grow. Stepping beyond blockchain in general to digital assets specifically, a long collection of quotes could be given providing evidence that it's still the number one reason causing hesitation in uptake. But let's hear from one Ripple customer as representative:

UAE Exchange (a money transfer company) said, "We've had lots of problems with transmission, settlement and reconciliation.... If there is one organisation that could help us with all three elements in an effective manner, we found that Ripple could do that." The settlement aspect here refers to the ability of XRP via xRapid to solve the problems that currently exist around pre-funded accounts, correspondent relationships, counterparty risks, etc. Rahul Pai continues on to say, "but unfortunately because of regulatory restrictions we are not venturing into it at this point in time" (32).

Several sources familiar with the SAMA project offered a similar narrative. The full value of xRapid will only be unlocked in the region when the regulatory framework is clear.

Understanding the importance of this, Ripple has actively engaged government agencies and central banks around the world, educating them on how their products work, how the XRP Ledger fits in and how these elements are differentiated from other cryptocurrencies.

Ripple executive Navin Gupta explains in the discussion with Rahul Pai, regulations need to be in place in both sending and receiving jurisdictions for xRapid transactions. In the video, while Mr Gupta used UAE to India as an example, it's worth noting that Indian lawmakers are currently drafting cryptocurrency regulations (33) and there is positive activity in the GCC region on this front (34,35,36). It's also worth noting that India is the largest recipient of remittances in the world and that UAE Exchange are aggressively expanding their business in the country (24, 37).


Digital assets like XRP, and cryptocurrencies as a group, are a global phenomenon. As long as an individual can access an exchange or create a wallet on a blockchain, then they are able to join the space. Because of this, a united, global response has been called for by regulatory agencies and governments. In July 2018, a framework is expected to be revealed by the G20 forum which will propose a guide for countries in drafting regulations to protect innovation, nurture the inclusion benefits, and address potential risks (38).

Looking at the regional vision for the Gulf states, upgrading the financial infrastructure is a critical component to progress. A clear and positive regulatory framework will promote the use of XRP in FI processes. The speed, ease and low cost of money movement provided by RippleNet will unlock most of the benefits necessary on which GCC regional businesses can grow or be born, and help weave the tapestry of a globally meaningful, interconnected, digitally transformed hub.

Second prediction: most, if not all, GCC states will draft regulations favourable to legitimate digital asset businesses.

Third prediction: all or nearly all commercial banks and money transfer businesses in the region will start working with xRapid by the end of 2020.



(1) http://www.gcc-sg.org/en-us/AboutGCC/Pages/Primarylaw.aspx
(2) http://www.opec.org/opec_web/en/about_us/169.htm
(3) http://www.opec.org/opec_web/en/about_us/170.htm
(4) https://gulfnews.com/business/analysis/gulf-s-oil-reserves-still-provide-the-safety-net-1.2044615
(5) https://www.imf.org/~/media/Websites/IMF/imported-full-text-pdf/external/pubs/ft/sdn/2014/_sdn1412.ashx
(6) https://www.bloomberg.com/news/articles/2017-07-02/from-oil-gushers-to-golf-balls-saudi-aramco-bets-on-chemicals
(7) https://www.forbes.com/sites/ellenrwald/2018/01/14/theres-a-great-future-in-plastics-for-oil/
(8) http://vision2030.gov.sa/en
(9) http://www.sama.gov.sa/en-US/News/Pages/news00090052018.aspx
(10) http://www.xinhuanet.com/english/2018-04/16/c_137113402.htm
(11) http://www.worldbank.org/en/topic/financialinclusion/overview
(12) https://www.cgap.org/sites/default/files/Working-Paper-Financial-Inclusion-Measurement-in-the-Arab-World_1.pdf
(13) https://www.weforum.org/agenda/2017/10/saudi-arabia-is-going-to-build-a-500-billion-mega-city
(14) https://www2.deloitte.com/content/dam/Deloitte/xe/Documents/technology-media-telecommunications/dtme_tmt_national-transformation-in-the-middleeast/National Transformation in the Middle East - A Digital Journey.pdf
(15) https://gulfnews.com/business/sectors/investment/china-to-invest-300b-by-2030-as-part-of-one-belt-one-road-project-1.2180823
(16) https://gulfnews.com/business/sectors/banking/banking-on-china-s-global-ambitions-1.2156472
(17) https://atlas.media.mit.edu/en/profile/country/sau/
(18) http://saudigazette.com.sa/article/527979/BUSINESS/Prospects-for-real-estate-along-the-Belt-and-Road-Initiative-for-Saudi-Arabia-ndash-beyond-oil
(19) https://thediplomat.com/2017/08/closer-ties-china-and-saudi-arabia-sign-70-billion-in-new-deals/
(20) http://www.sama.gov.sa/en-US/News/Pages/News23032016.aspx
(21) https://ripple.com/insights/ripple-and-saudi-arabian-monetary-authority-offer-pilot-program-for-saudi-banks/
(22) https://docs.google.com/spreadsheets/d/1E1AcLBd_ykemoDAPwZsbl5f2wyrS7RhlAt94CrHXTAg
(23) https://aawsat.com/english/home/article/1183761/moodys-sama-deal-ripple-provides-400-million-banks
(24) https://gulfnews.com/news/uae/government/uae-expats-fuel-india-remittance-growth-1.2211045
(25) http://www.worldbank.org/en/news/press-release/2018/04/23/record-high-remittances-to-low-and-middle-income-countries-in-2017
(26) https://ripple.com/insights/much-ado-much-part2/
(27) https://www.thepaypers.com/cryptocurrencies-bitcoin-virtual-currencies/cross-border-payments-made-using-blockchain-bbva-ripple-announce/768699-39
(28) https://www.imf.org/external/pubs/ft/sdn/2016/sdn1606.pdf
(29) https://ripple.com/insights/first-pilot-results-for-xrapid/
(30) https://ripple.com/insights/much-ado-much-to-do-part-3/
(31) https://www.accenture.com PDF
(32) https://www.youtube.com/watch?v=rLa1qwGs4FY (4:46-4:57)
(33) https://www.forexnewsnow.com/forex-analysis/cryptocurrency/india-cryptocurrency-regulation/
(34) https://www.arabianbusiness.com/banking-finance/398657-uae-crypto-firm-is-first-to-win-regulatory-sandbox-licence
(35) http://gulfbusiness.com/abu-dhabi-finance-hub-adgm-regulate-crypto-assets/
(36) http://uk.businessinsider.com/saudi-arabia-is-working-on-an-official-policy-for-bitcoin-but-a-ban-is-unlikely-2018-1
(37) https://www.thehindubusinessline.com/markets/forex/uae-exchange-to-expand-in-india/article20477003.ece1
(38) http://thefintechtimes.com/g20-calls-for-cryptocurrency-regulation-recommendations-by-july-2018-2/

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Correspondent banking should be for study by archaeologists, not a current reality.

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