UAE Central Bank starts implementing Digital Dirham strategy

The UAE Central Bank has begun implementing its digital currency strategy, Digital Dirham, as it prepares the country's infrastructure for the future of finance.

It signed an agreement with Abu Dhabi's G42 Cloud and digital finance services provider R3 to be the infrastructure and technology providers, respectively, for the implementation of its central bank digital currency (CBDC), the regulator said in a statement on Thursday.

Digital Dirham aims to address the “pain points” of domestic and cross-border payments, enhance financial inclusion and the move towards a cashless society, and further strengthen the UAE's payment infrastructure by providing additional channels, it said.

The strategy, one of the nine initiatives of the Financial Infrastructure Transformation programme launched by the Central Bank in February, will “further position and solidify the UAE as a leading global financial hub”, said Khaled Balama, Governor of the UAE Central Bank.

“The launch of our CBDC strategy marks a key step in the evolution of money and payments in the country. The CBDC will accelerate our digitalisation journey and promote financial inclusion,” he said.

A CBDC is a digital form of a government-issued currency. They are similar to cryptocurrencies, except that their value is fixed by the monetary authority and equal to the country's fiat currency.

CBDCs are expected to provide some middle ground for the highly volatile cryptocurrency market. They reduce the risks associated with using cryptocurrency and provide a stable means of exchanging digital assets.

“CBDC is a risk-free form of digital money issued and guaranteed by the central bank and serves as a secure, cost-effective and efficient form of payment and a store of value,” the Central Bank said.

Central banks around the world are looking into the development of digital currencies amid the growing popularity of cryptocurrencies as an asset class among retail and institutional investors.

As of March 1, there are 65 countries that are in advanced stages of CBDC development, with more than 20 central banks having already launched their pilot programmes, according to the US-based think tank Atlantic Council.

The UAE has been identified as among 18 countries that have made the “most progress” in CBDCs in 2023, joining a list that includes Australia, Brazil, Canada, China, India, Japan, Jordan, Kazakhstan, Laos, Montenegro, the Philippines, Russia, Saudi Arabia, Turkey, Ukraine, the UK and the US, it said.

"Countries that are part of the CBDC mechanism are better positioned to enjoy and reap the benefits of globalisation and keep pace with more recent international FinTech advances," Arun John, chief market analyst at Century Financial, said.

Aside from boosting the competitiveness of the UAE as a "central FinTech hub", the CBDC would help address issues "more smoothly and holistically", including "ensuring maximum inclusion of the population in the banking system, and reducing fraud and money laundering", he said.

The UAE Central Bank said its strategy aims to “ensure the readiness of the UAE to integrate the payment infrastructures with the future potential tokenisation world, [and] the tokenisation of the financial and non-financial activities”.

Tokenisation is a process that replaces sensitive data such as bank and credit card numbers, with alternative codes on the blockchain called “tokens”. This boosts security by removing the most valuable data that cyber criminals can steal during the transaction process.

Global tokenised payment transactions are expected to increase 47 per cent to more than 1 trillion by 2026 from about 680 billion in 2022, according to data from Juniper Research.

The implementation of Digital Dirham comes as the UAE Central Bank enters the “next major milestone” of its CBDC strategy, and after previous successful partnerships and initiatives, including Project Aber with Saudi Arabia's central bank in 2020, and the mBridge project for cross-border CBDC transactions for international trade settlements, it said.

The mBridge initiative was carried out last year in collaboration with the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People's Bank of China and the Bank for International Settlements.

Last week, the UAE Central Bank and the Reserve Bank of India signed an initial agreement to boost co-operation and enable innovation in financial products and services, part of which is conducting proof-of-concept and pilots of a bilateral CBDC bridge to enable cross-border CBDC transactions of remittances and trade.

“We look forward to exploring the opportunities that CBDC will bring to the wider economy and society,” said Mr Balama.

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