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Middle Eastern central banks eye CBDC for cross-border payments

Central bank digital currencies (CBDCs) could transform cross-border payments in the Middle East and give central banks a more effective tool for monetary stabilization, two of the region’s leading central banks say.

Yazeed Al-Nafjan, the deputy governor of Saudi Arabia’s Monetary Authority (SAMA), believes a wholesale CBDC would best serve his country. The country’s digital payment penetration increased to 70% last year, and thus, a retail CBDC isn’t needed, he stated.

Al-Nafjan spoke at an open forum convened by the World Economic Forum (WEF) in Riyadh, the country’s capital. He joined a panel consisting of Jihad Azour, the IMF’s Middle East Director, and Khalid Humaidan, the Bahraini central bank governor.

“Our experiments on how a CBDC can improve the market are ongoing,” he told the attendees.

“We believe that it can translate into reducing the costs, increasing the efficiency, reducing systemic risk and increasing the overall transparency of the cross-border market.”

SAMA is one of the official observers of mBridge, the cross-border CBDC project by the central banks of neighboring UAE, China, Thailand, and Hong Kong. The governor revealed that Saudi Arabia intends to participate in the pilot and continue pursuing other local CBDC projects.

Al-Nafjan believes the final product is years away, despite some, like Hong Kong, claiming mBridge would launch a minimum viable product this year. He urged caution with CBDC implementation, noting that there’s no first-mover advantage, especially with wholesale digital currencies.

“It should be done in a coordinated manner, taking into account any potential risks on the broader economy,” he stated.

Bahrain’s Humaidan concurred with the need for a CBDC for cross-border payments. He noted that Middle Eastern countries have high expatriate populations, making cross-border transfers a crucial part of their economies.

A lack of trust in CBDCs has been cited as one of the greatest hurdles to adoption, as has been observed with frontrunners like Nigeria. However, Humaidan says the Middle East is already in the digital payments era, where cash usage is dwindling daily. This will make the transition to CBDCs easier, he believes.

Humaidan also touched on an interest-bearing CBDC, which has been a divisive topic globally. Some, like Israel, believe this would push commercial banks to offer better services as they would be competing directly with the central banks. However, across Europe, commercial banks have been adamant that they will only support a CBDC that doesn’t infringe on their target market.

The Bahraini regulator suggested using an interest-bearing CBDC as a monetary tool, ensuring that the central banks’ interest rate adjustments are transmitted to the consumers immediately and directly.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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