Central Bank Digital Currency (CBDC) in the UAE

CBDC meaning: What is a Central Bank Digital Currency? 

A Central Bank Digital Currency (CBDC) is a digital version of a country's official currency that is issued and regulated by a Central Bank. It can be used for payments and transactions, just like physical cash or other digital payment methods. CBDCs are the digital version of fiat money, a government-issued currency that’s not backed by a commodity (such as gold) and has no intrinsic or fixed value. Most modern paper currencies are fiat currencies.  

Every nation or region has a Central Bank, the financial authority that oversees a country’s currency, everything from the supply of money to monetary policy and interest rates. Unlike other forms of digital currencies like cryptocurrencies (eg. Bitcoin and Ether), a Central Bank Digital Currency is less volatile as is backed by the government. 

Features of Central Bank Digital Currencies:

• A widely accepted form of payment that can be used for everyday transactions 

• A good store of value - maintains value over time, just as physical cash would 

• A unit of account - a common way to measure and compare the value of goods and services 

There are typically 2 categories of CBDCs: 

1. Retail CBDC - for public use in everyday transactions 

2. Wholesale CBDC - for financial institutions and settling transactions between banks 

However, there is no single type, and many countries are approaching the development of CBDCs differently. In some places, digital currency can only be held in an account with the Central Bank while in others, it can be held as electronic tokens (on mobile devices, prepaid cards, or digital wallets). 

Are CBDCs safe? 

In general, CBDCs are considered a risk-free form of money since they are guaranteed by the government. CBDCs are pegged to the country’s national currency, so each unit of digital currency is worth the same as a unit of physical currency. CBDCs won’t experience drastic fluctuations (unless, that is, the country’s currency is experiencing fluctuations as a whole). 

Overall, CBDCs will be one of the safest digital assets to have, with no credit or liquidity risk. 

What are the benefits of Central Bank Digital Currency (CBDC)? 

There are countless benefits of CBDCs, given that they are well-developed, implemented, and adopted in a given country. 

Here are some of the main benefits of CBDCs: 

• Increased payment efficiency - reduce transaction times and lower costs due to less reliance on physical infrastructure. Also, facilitate cross-border payments. 

• Greater financial inclusion - provide access to financial services for unbanked or underbanked populations with direct access through mobile phones and other devices.

• Better informed monetary policy - central banks can more accurately track the flow of money to make decisions about interest rates and other monetary policies. 

• Reduced systemic risk - provide a safe and secure way to store value and make transactions, bolstering people’s confidence in the stability of financial systems. 

• Improved visibility - help central banks track and monitor transactions to prevent illicit activities like money laundering and terrorist financing. 

• Innovation and competition - encourage the creation of new products and services in the financial sector that could benefit consumers and businesses alike. 

What are the drawbacks of Central Bank Digital Currency (CBDC)? 

However, there are always two sides to each coin. As with any new technology with such widespread effects, there are some serious drawbacks regarding CBDCs to consider.

Here are some of the main drawbacks of CBDCs: 

• Security concerns - greater vulnerability to cyber attacks could lead to financial losses.

• Less privacy and anonymity - implications for taxation and traceability could significantly slow or limit consumer adoption. 

• Prone to technological issues due to a crash, natural disaster, etc.  

• Undermine financial stability - change the traditional banking system and encourage people to withdraw money from banks. 

• Weak business case - large investment needed to properly develop a CBDC with largely unknown outcomes. 

The UAE’s previous progress with CBDCs 

The UAE Central Bank (CBUAE) previously participated in two notable international projects focused on the development of CBDCs: Project Aber and the mBridge project. 

Project Aber was a wholesale CBDC proof-of-concept launched in 2019 between the CBUAE and the Saudi Central Bank. During this project, the countries used decentralized ledger technology to settle domestic and cross-border transactions with central bank money. 

The mBridge Project was undertaken in 2021 by the central banks of the UAE, China, Hong Kong, and Thailand to develop multiple CBDCs more quickly and efficiently through collaboration. This project was also focused on wholesale CBDCs and was a successful pilot of real-value transactions on a cross-border CBDC platform.

The UAE Digital Dirham launch 

The Digital Dirham was recently launched in March of 2023 as part of the Central Bank’s Financial Infrastructure Transformation (FIT) Programme. The FIT Programme has 9 key initiatives aimed at supporting the financial services sector, promoting digital transactions, and furthering the UAE as a global financial and digital payment hub. One of its key initiatives is the Central Bank Digital Currency, also known as the Digital Dirham.

The first stage of the FIT Programme focuses on digital payment infrastructures and services with the:

1. Launch of a Card Domestic Scheme - the first unified, secured, and efficient card payment platform in the UAE. 

2. Launch of an Instant Payments Platform - a secure, efficient, and robust payment platform. 

3. Issuance of CBDC for cross-border and domestic uses 

This initial phase is expected to be completed in around 12 to 15 months. 

The next stage will focus on developing and implementing a series of digital infrastructures including the Financial Cloud, eKYC, and Open Finance Platforms. Then the remaining three initiatives include Supervisory Technology (SupTech), Innovation Hub, and Excellence & Customer Experience. Full integration of the FIT Programme is expected in 2026. 

The impacts of the Digital Dirham 

Since the implementation of CBDCs across the globe is fairly recent, it’s hard to predict the full impacts that the Digital Dirham will have on the UAE’s economy in the coming months and years. 

Some of the anticipated impacts of the UAE CBDC include: 

• Secure and cost-effective instant payments for individuals, businesses, and government entities within the UAE. 

• Less reliance on hard cash (eg. banknotes and coins) and a move towards a cashless society.

• Greater regulatory oversight and transparency in tracking payments. 

• Improved financial inclusion allows those without a bank account to make digital payments. 

• Faster and less expensive cross-border payments by cutting out intermediaries. 

• Increased efficiency in both domestic and cross-border payments, including use in wholesale and retail sectors.

Some of the sectors that will likely be affected by the Digital Dirham launch, either to their advantage or disadvantage, include local banks, fintechs, and other network players (such as SWIFT, Visa, Mastercard, etc.). The CBDC will certainly create numerous opportunities for innovation, collaboration, and new technologies across many sectors. 

CBDC progress around the world

Over 100 countries are currently exploring a Central Bank Digital Currency. Combined, these countries represent over 95% of the global GDP. 

The UAE is in the top 29 countries when it comes to developing a CBDC. The Bahamas was the first country in the world to launch a CBDC, called the Sand Dollar, in October 2020.

The following 11 countries have launched a CBDC: 

The following 18 countries have a CBDC in its pilot phase: 

As mentioned above, there are many different forms of CBDCs. For example, in the Eastern Caribbean islands, consumers have direct deposit accounts with the Central Banks. In China, on the other hand, private-sector banks manage digital currency accounts for customers. 

The Atlantic Council has an interactive CBDC tracker where you can compare and explore the CBDC progress in active countries, including the use case, status, technology, and more. 

Going forward 

Central Bank Digital Currencies around the world are set to have a large impact on the global financial sector, bringing many unique benefits and opportunities for further innovation. CBDCs have the potential to make public and financial institutions operate more quickly, easily, and securely. At the moment, digital currencies will complement physical currency in the UAE and elsewhere; however, this could be a pivotal point in a national transition towards a cashless society. It will be interesting to see the developments and the uptake of the Digital Dirham in the UAE as the first stage of the FIT Programme progresses in the coming months.

For those interested in learning more about the UAE’s real estate and financial sector, our blog section contains informative articles on a wide range of topics. 

Photo credits: 

• Photo from Ledger Insights 

• Photo from World Bank Blogs

• Photo from The National