Central Bank Digital Currencies (CBDCs) are virtual currencies that are part of an institution’s obligations that are issued by the central bank of a nation and linked to the national unit of account.
Unlike more well-known cryptocurrencies like Bitcoin and Ethereum, the value of CBDCs is anticipated to stay mostly steady, like that of a country’s official currency. This is because they are state-issued rather than governed by private businesses.
CBDCs fall into two categories: wholesale CBDCs and retail CBDCs, commonly referred to as general-purpose CBDCs. Whereas wholesale CBDCs only permit transactions between financial institutions, retail CBDCs enable transactions between people and companies.
Only a handful of countries have implemented CBDCs. Some of these countries include Nigeria, the Bahamas, and Jamaica. In the Middle East, only a few countries have looked into exploring CBDCs.
UAE and Saudi Arabia
The Central Bank of the United Arab Emirates (CBUAE) and the Saudi Arabian Monetary Authority (SAMA) collaborated to create a pilot program for a wholesale CBDC that was termed “Aber” (meaning “crossing” in Arabic) and completed in November 2020. Project Aber sought to identify any related risks or obstacles with putting in place a digital currency system, as well as to assess the viability and possible benefits of using a CBDC for cross-border transactions. The project’s results were positive. Both central concluded that a CBDC might provide a number of advantages over more conventional cross-border payment systems, including faster transaction processing, lower costs, and more security and transparency.
UAE
CBUAE completed the first and largest central bank digital currency experiment in October 2022 as part of Project mBridge. Twenty commercial banks participated in this project. CBUAE collaborated with the Bank for International Settlements (BIS), the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Hong Kong Monetary Authority. These banks used the test program for more than 160 payments and foreign currency transactions during six weeks, totaling more than AED 80 million (USD 22 million). In line with G20 economic aims, Project mBridge served as an example of quicker, more affordable, and secure cross-border financial settlements using central bank money.
Bahrain
The Central Bank of Bahrain stated in May 2021 that it will be working with Bank ABC and J.P. Morgan to settle digital money. After a successful first experiment in January 2022, Bank ABC was able to start paying Aluminium Bahrain (ALBA) in real-time via Onyx, which helped ALBA’s partners in the US. The trial was conducted using J.P. Morgan’s JPM Coin System.
Takeaways
Regulatory agencies, financial institutions, and central banks throughout the globe are actively monitoring the possible social effects of CBDCs to get a thorough understanding, even though these innovations are still in the early stages of development.
There is still a lot of research and analysis to be carried out to fully use the potential that the deployment of the CBDC offers within the existing banking infrastructure. This would make it easier to evaluate possible outcomes, predict upcoming disruptions, and investigate the possible role that CBDCs can play in the digital transformation of the financial system.
