UAE CBDC strategy targets retail, wholesale applications

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The United Arab Emirates has signaled its intention to further explore its central bank digital currency (CBDC) offering, launching a multi-part strategy for a potential launch of the digital dirham.

The Central Bank of UAE’s (CBUAE) strategy for the digital dirham will adopt a phased approach to avoid disrupting the financial ecosystem.

Phase 1 of the CBDC strategy will involve the limited launch of the digital dirham within the ambit of Project mBridge, a cross-border CBDC solution. The UAE had previously collaborated with banking regulators in China, Singapore, and Hong Kong to experiment with the initiative.

The first phase will also include the completion of a proof-of-concept (PoC) for an international CBDC bridge with India. In 2023, India and the UAE signed a memorandum of understanding (MoU) probing the concept of bilateral CBDCs, but the recent strategy document indicates a willingness by the Gulf nation to realize its ideas.

The third ambit of phase 1 will be a proof-of-concept (PoC)—the issuance of the digital dirham for wholesale and retail applications. The UAE’s strategy document reveals that the central bank will wrap up the first phase within 12-15 months, evaluating the studies before proceeding to phase 2.

While the central bank remains mum on the full details of the second phase, experts believe the next chapter will involve a full-scale CBDC pilot involving commercial banks and blockchain technology firms.

“The CBUAE is encouraging all commercial banks and payments processors in the country to participate in a pilot integration with the CBUAE node for issuing Digital Dirham,” read a paper by EY. “The regulator has also decreed Digital Dirham adoption by all UAE licensed financial institutions (LFI) by 2026.”

Technology giants G42 and R3 have been tipped to provide infrastructure and architecture for the digital dirham. Both firms have garnered considerable experience in the ecosystem with R3 participating in several Bank for International Settlements CBDC projects.

CBDC initiatives

Since 2020, the UAE has been exploring the prospects of a digital iteration of its national currency, rolling out Project Aber with Saudi Arabia. The project confirmed the possibilities of using CBDCs for bilateral trade with the UAE.

An MoU with the Reserve Bank of India (RBI) underscored the UAE’s desire to proceed with full cross-border CBDC studies despite the slow pace of local retail and wholesale use cases.

“As part of the UAE’s digital transformation, CBDC will help address the pain points of domestic and cross-border payments, enhance financial inclusion, and the move towards a cashless society,” said the CBUAE.

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.

Watch: Finding ways to use CBDC outside of digital currencies