Central Bank Digital Currency (CBDC) or digital currency issued by the public sector is gaining worldwide traction. Their popularity can be attributed to the crucial role they play in facilitating international trade and cross-border payments. CBCDs are the key to simplifying complex financial systems and expediting trade across different time zones by helping with processing of payments.
UAE will soon join the growing number of nations that have adopted CBCDs. The Central Bank of the UAE (CBUAE) is set to roll out digital currency for domestic and cross-border trade. The move is part of the central bank’s newly launched Financial Infrastructure Transformation Program (FIT), which aims to propel the digital transformation of the financial sector and ultimately drive the Emirates towards a cashless society. The digital dirham, an electronic version of the cash issued by CBUAE, is expected to be accessed through digital wallets provided by private companies.
Growing Need for Digital Currency
Developed as well as developing economies the world over are considering CBDCs to ease cross-border trade and strengthen the banking sector. The Bank of England has endorsed this global need for digital currency by announcing its plans for a digital pound. Apart from this pilot testing for digital currency is underway in several leading nations such as China, Russia, Sweden, India, Canada and Turkey.
CBUAE has christened its pilot ‘Project Aber’, which aims to build trust in the dirham while protecting the UAE’s financial system. The Central Bank has also announced the plan to open an innovation hub, establish finance platforms, apart from adopting measures such as electronic ‘Know Your Customer’ (eKYC) identity verification and supervisory technology (SupTech).
Let’s look at the reasons that are driving the prominence of CBCDs across the globe:
CBDCs are instrumental in enabling smooth transfer of payments while ensuring monetary surveillance by central banks.
They are the building blocks for recreating efficient global financial systems by assuring financial inclusion, co-existence and interoperability.
International institutions such as the International Monetary Fund (IMF) and World Economic Forum (WEF) have emerged as key players backing the global adoption of CBDCs.
Creating a ‘FIT’ Economy
The launch of the digital currency is an integral part of the FIT program aimed at establishing the UAE as a financial and digital payment hub and a global focal point for innovation and digital transformation.
The launch of CBDC and initiation of digital payment platforms is the first stage of the program that comprises nine key initiatives.
These initiatives align with the “We the UAE 2031” vision and National Digital Economy Strategy, with a full integration set for 2026.
The FIT program also encompasses the adoption of advanced supervisory technologies and data management solutions to consolidate CBUAE’s digital leadership.
The measures adopted by the FIT program aim to ensure financial stability and augment regulatory compliance in the UAE.
The Way Ahead
In the coming years, international trade and economic growth will be based on a resilient cross-border payment infrastructure. International payments are governed by interdependencies making the case for collaboration and knowledge sharing. With these changing dynamics, innovative models of cross-border payments such as CBDCs are imperative to ensure smooth global trade.
However, it is important to factor in the cost of developing and testing the CBCDs. The onus is on central banks to go a step further to process and maintain digital currencies and also manage the cost. As regulatory authorities, they will play a crucial role creating the authorization process for digital payments while creating a stable and safe environment for intermediary banks.
Going forward, it is expected that CBDCs will gain more prominence and thrive while co-existing with cash and bank deposits. As more digital currencies are developed and piloted, they will open up new possibilities in domestic and international trade.
Comments