The UAE’s CBDC ambitions could provide a test bed for future global adoption

In fact, most central banks talk about it. As far back as 2021, Switzerland’s Bank for International Settlements (BIS) found in a survey of central banks that 86 percent were “actively researching the potential” of CBDCs. In March, the UAE Central Bank announced it had already picked its infrastructure and technology partners and announced the “Digital Dirham” strategy as a prelude to the launch of a CBDC. Since the UAE is poised to be a leader in state-guaranteed digital currencies, now seems a good time to explore the implications of such moves.

That the UAE is a leader in the transformation to a cashless society is not in doubt. Mashreq is famous for its virtual branches. First Abu Dhabi Bank (FAB) launched a cashless payments system in December. And many others continue to evolve their offerings to accommodate the digital preferences of their customers. While all these developments were taking place, crypto rose to become undeniably popular, so it is perhaps unsurprising that so many thoughts in the UAE now turn to CBDCs.

The ‘plus’ column

After all, CBDCs have many apparent advantages. They are inherently digital, so they represent a substantial reduction in management costs over physical cash. These cost savings also extend to transactions because of the efficiency of blockchains, which can also dramatically shrink transaction times to fractions of a second. CBDCs’ digital nature makes them eminently programmable, providing a direct channel for central bankers to take macroeconomic actions like modifying interest rates.

Across the region, we see countries with large unbanked populations. CBDCs could be invaluable in providing secure access to savings and credit. When brought together with mobile applications and digital identification tools, CBDCs in these countries could facilitate more participation in the financial system than ever before. CBDCs can even extend their reach beyond the domestic market. Cross-border payments could be made faster, cheaper, and more accessible by reducing the number of intermediaries needed to complete a transaction. However, it should be pointed out that success in global payments will greatly depend on the degree of interoperability between CBDCs, so international cooperation between issuing authorities will be vital.

Another major positive for CBDCs — and one that is particularly relevant when considered alongside the escalation of cybercrime — is their effectiveness in combating money laundering. Blockchains facilitate the identification and blocking of suspicious activity. Governments may even be able to seize and remove illicit funds from circulation entirely. Currently, blockchain analytics tools can help government agencies and private institutions track similar types of transactions and activity on public blockchains like Bitcoin.

The ‘minus’ column

But everything has its downsides. Among the nations that have already implemented a CBDC, a range of issues have dampened pre-launch enthusiasm. India’s Q4 2022 launch of the digital rupee did not gather significant steam. In March, Nigerians took to the streets to protest their government’s introduction of a CBDC. The Central Bank of The Bahamas issued the Sand Dollar in 2021, but as of January this year, adoption was not stellar and had been hit hard by the FTX scandal.

Dcash, issued against the East Caribbean dollar (governed by the East Caribbean Central Bank) is legal tender in member islands of the East Caribbean Currency Union (ECCU), but it suffered a prolonged outage in 2022. And as of February last year, China’s digital renminbi (e-CNY) had topped 100 million users and was clocking billions of yuan in transactions, but continues to be plagued by privacy concerns.

Because of the abundance of cautionary tales, some of the world’s largest economies, such as the US, may be deterred from participating in the CBDC rush. Without such nations on board, the global utilitarianism of CBDCs may be called into question. 

All eyes on the UAE

In light of this uncertainty, the UAE’s foray into CBDC territory will be closely watched. The nation is already a member of the successful mBridge program, a platform built on distributed-ledger technology (DLT) for the issue and exchange of CBDCs. The UAE is home to a large expat population and will be in a strong position to leverage CBDCs for foreign remittances. Furthermore, the reluctance we have seen among citizens in other nations to adopt CBDCs is unlikely to be duplicated in the UAE, owing to its digital-savvy residents’ history of tech adoption. It could be argued that all that is required for CBDC success in the UAE is a guarantee of the same effortless, seamless experiences consumers have enjoyed in the past.

Indeed, the Digital Dirham strategy suggests the UAE has learned from the mistakes of others. In raising concerns about CBDCs, critics often cite the necessity to incorporate commercial banks into the design of the system, warning that failure to do so will deprive banks of their deposit bases and destabilise domestic financial systems. The first phase of the UAE’s Digital Dirham strategy appears to address that point by focusing on domestic wholesale usage, suggesting that traditional banks will be active participants in the rollout.

The UAE’s accomplishments are the resume of a forward-thinking nation — a nation that dreams big, plans shrewdly, and leaves nothing to chance. Very few countries can include a successful mission to Mars in their histories. And only one can claim to have appointed the world’s first minister of state for artificial intelligence or established the world’s first fully functional 3D-printed building. That is the UAE — a pioneer at heart. And now that heart is set on a CBDC. We must all watch this space.