The Central Bank of the UAE (CBUAE) is inching closer to fully launching its central bank digital currency (CBDC) — the digital dirham — for domestic and cross-border transactions with the commencement of the CBUAE CBDC Strategy, the first phase of which is expected to complete over the next 12 to 15 months.
Aimed at developing the ecosystem needed to implement the digital dirham, the central bank signed new agreements with Abu Dhabi’s cloud computing company G42 Cloud and financial digitization services provider R3 to be the infrastructure and technology providers of the CBDC implementation.
The first phase of the CBDC Strategy consists of the soft launch of ‘mBridge’, which facilitates cross-border CBDC transactions for international trade, along with proof-of-concept work for bilateral CBDC bridges with India and domestic CBDC issuance for wholesale and retail use.
The CBDC refers to a form of digital currency that is issued by a country’s central bank. It is similar to cryptocurrencies, except its value is fixed by the central bank and equivalent to the country’s fiat currency.
According to the CBUAE, the CBDC will help address the pain points of domestic and cross-border payments, and enhance financial inclusion and the move toward a cashless society. The digital currency is also envisioned to further strengthen the UAE’s payment infrastructure by providing additional robust payment channels.
The issuance of a CBDC is one of the initiatives under the CBUAE’s Financial Infrastructure Transformation program, a new program it launched just last month to accelerate digital transformation in the financial services sector, as the Emirates aims to become a leading global financial hub.
“The launch of our CBDC strategy marks a key step in the evolution of money and payments in the country. CBDC will accelerate our digitalization journey and promote financial inclusion. We look forward to exploring the opportunities that CBDC will bring to the wider economy and society,” Khaled Mohamed Balama, the governor of the CBUAE, said.
Interestingly, a recently issued IMF working paper found that jurisdictions with Islamic banking systems are most vulnerable to possible negative effects of the CBDC. While the issuance of CBDCs may promise many benefits, the IMF warned that it can also have adverse macroeconomic consequences, including for monetary policy, if not well designed.
According to the IMF, CBDCs may affect monetary policy through their effect on money velocity, bank deposit disintermediation, volatility of commercial bank reserves at the central bank, currency substitution and capital flows.
In the same vein, the General Council for Islamic Banks and Financial Institutions (CIBAFI) in its latest briefing issued last month also cautioned that Islamic banks may risk losing business to conventional counterparts as they would be excluded from any CBDC dealings in the case where a central bank of a given jurisdiction decides to deploy the CBDC for monetary policy and adopt an interest-bearing embedded feature in its design.
CIBAFI also warned that even without such a feature embedded, monetary policy and financial safety net instruments based on CBDCs may well emerge and Islamic banks would thus require parallel developments on a non-interest basis, as they do in relation to existing forms of money.
To date, 11 countries have successfully launched their CBDCs including Nigeria, 17 have deployed pilot projects such as Saudi Arabia and Malaysia while 33 others are currently developing CBDCs including Bahrain, Turkiye and Indonesia. According to CIBAFI, 39 other central banks are actively researching CBDCs, such as Morocco, Qatar, Oman, Bangladesh and Pakistan.