Blockchain and the Birth of a New Financial Instrument

Noelle Acheson is a 10-year veteran of company analysis and the author of CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to CoinDesk subscribers.


The Emirates Islamic Bank’s announcement last week that it was planning to integrate blockchain technology with paper checks may have left many pondering the incongruity: Why waste such a modern invention on such a traditional payment method? Aren’t paper checks like, you know, so last century?

However, dig a bit deeper and you find that things are not quite what they seem.

One peculiarity of the UAE banking system is the preferred form of security for bank loans: paper checks. The established practice is that the borrower writes the lender a post-dated check for the amount of the loan, plus interest. When the loan is due, the happy lender simply cashes the check. If the repayment is monthly, the lender will often ask for a stack of post-dated checks to cover the individual payments.

This makes the process of lending much easier. With a signed check in hand, the lender can avoid rigorous vetting procedures and confirmation hassles.

Also, banks often ask for a signed paper check to cover the monthly limit before issuing a customer with a credit card. Ah, you ask, but in all the above cases, how do they know the check won’t bounce?

Game theory

It’s a question of incentives. If you are an individual and your check bounces, you can go to jail.

At least, that was the case until a few years ago, when the bouncing of checks issued as collateral for an entire loan was decriminalized (not for monthly payments). Last year, the bouncing of any type of check from small and medium businesses (SMEs) was also decriminalized (but not yet for individuals).

With this in mind, the ‘blockchain tech meets paper checks’ idea becomes more interesting.

The project developed by the Emirates Islamic Bank (part of Emirates NDB, one of the largest banking groups in the Middle East) involves printing a unique QR code on each check and registering it on a blockchain platform. The checks will then be scanned when issued to validate authenticity.

Taking into account that checks are regularly used as loan collateral and repayment, the importance of their role in the financial system becomes apparent, as does the temptation to forge them. Being able to increase their reliability will be a relief to the banking sector.

Bigger impact

If banks can worry less about fraud, they are likely to be more willing to lend, which will have a positive effect on economic activity.

The IMF recently revised upwards its forecasts for the UAE to relatively healthy figures, but easier lending will boost the outlook for SMEs, the sector that was hardest hit by the oil price crunch of the past few years.

While an overhaul of the UAE banking system to reduce the reliance on checks is likely to eventually happen, deep cultural changes take time. The Emirates Islamic Bank idea could provide a short-term solution to a systemic problem, as well as evolve the sector’s understanding of the technology’s potential.

What’s more, the concept of combining digital networks with pieces of paper is intriguing, and could point to a new vector of innovation.

Physical ‘guarantees’ of payment that are resistant to both forgery and technological vulnerabilities? We could be looking at the birth of a whole new type of financial instrument.

Desert sunrise image via Shutterstock

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