As the United Arab Emirates (UAE) prepares its core infrastructure for the future of finance, the UAE Central Bank has started implementing its central bank digital currency (CBDC) strategy, the Digital Dirham. A CBDC is a digital representation of government-issued currency. They are comparable to cryptocurrencies in that their value is determined by the local monetary authority and is equal to the value of the corresponding fiat currency.
In a statement last week, the regulator stated that it had signed an agreement with Abu Dhabi based G42 Cloud and R3 (a digital finance services provider) to successfully become the primary infrastructure and technology providers for the eventual rollout of the new CBDC.
What issues will the CBDC solve?
The Digital Dirham seeks to solve the main recurring problems of both domestic and cross-border payments, in addition to improving financial inclusion as well as the eventual transition to a fully cashless society. The CBDC will also look to help strengthen the payment infrastructure in the UAE by adding new channels and enhancing accessibility.
The CBDC strategy, which is just one of nine initiatives launched by the Central Bank in February, will reportedly further position and solidify the country as a leading global financial hub, according to Khaled Balama, Governor of the UAE Central Bank.
The launch of the CBDC strategy is a significant step forward in the evolution of money and payments in the country, and the Digital Dirham will hence play a significant role in accelerating this journey and promoting financial inclusion going forward.
The UAE continues to impress
The Reserve Bank of India and the UAE Central Bank recently signed an initial agreement to enhance collaboration and empower innovation in financial products and services, part of which includes proof-of-concept and pilots of a bilateral central bank digital currency bridge to facilitate cross-border CBDC remittances and trade.
According to the UAE Central Bank, the main goal is to ensure that the country is ready and able to integrate payment infrastructures with future potential tokenization options which could also involve the tokenization of both financial as well as non-financial activities.
There is a recurring argument that CBDCs offer some semblance of stability in the volatile cryptocurrency market. They mitigate the risks associated with crypto use and provide a reliable means of exchanging digital assets.
CBDCs are hence often thought of as a risk-free form of digital money that is issued and guaranteed by the central bank which also serves as a safe, cost-effective, and reliable form of payment as well as long term store of value. However, many have argued against this viewpoint by claiming that CBDCs have their own risks as well.
Regardless, central banks around the world are actively looking into the development of digital currencies, as cryptocurrencies continue to gain popularity as an asset class among retail and institutional investors. In fact, as per the US-based think tank Atlantic Council, 65 countries are already in late stages of CBDC development as of March 1st. According to the report, the UAE is one of 18 countries which have made the most progress in CBDCs by 2023, joining the likes of Australia, Brazil, China, Canada, India, Japan, Kazakhstan, Montenegro, Russia, Saudi Arabia, Ukraine, and the United Kingdom.