The Central Bank of the United Arab Emirates (CBUAE) announced this week its plans to launch a digital currency with the aim to position the monetary authority “among the world’s top ten central banks”. Unregulated cryptocurrencies are already popular in the UAE, and a government-issued coin could reduce the risks around crypto transactions and help the oil-rich country continue the diversification of its economy.
The ‘govcoin’ or CBDC (central bank digital currency) is one of seven initiatives that seek to boost digital transformation in the financial services industry of the Gulf country listed in the CBUAE’s 2023 to 2026 strategy, which will also involve adopting the latest AI and big data solutions and accelerating the adoption of cloud computing. It joins the list of more than 60 countries worldwide that have started CBDC projects. Today, the European Central Bank announced that has decided to “launch the investigation phase of a digital euro project“.
Two UAE-based fintech experts shared with Tech Monitor their thoughts on the new digital currency plans and the likely obstacles for its implementation.
Cryptocurrencies are popular in the UAE but are not regulated
The UAE has positioned itself as a country keen to embrace the latest technology developments and be digital-first. The government’s UAE Vision 2021 and UAE Centennial 2071 strategies show the focus placed on technology as a pillar for the country's progress. It also uses a national digital identity system that allows users across all Emirates to use government services online and sign documents digitally.
This shift to a digital economy is part of the UAE’s efforts to diversify its economy and avoid a reliance on its traditional big export: oil. Indeed, since 2015 70% of the country’s GDP came from non-oil industries, according to official figures.
Although cryptocurrencies are popular in the UAE and there are a number of trading platforms in place, the CBUAE does not accept crypto assets as legal tender and there is no legislation in place regulating them. Veteran CIO and fintech and digital transformation adviser Mohamed Roushdy said that there has been mounting pressure from consumers to regulate cryptocurrencies as many people in the market see the benefits of using them.
“Regulatory bodies should come with a solution that brings the benefits of crypto while eliminating the high risks associated with these products,” Roushdy told Tech Monitor. He adds that the introduction of CBDC would eliminate the speculative nature of cryptocurrencies but also bring two important benefits, including lowering transaction fees and enable high-speed transactions (near to real-time) with proper auditing and transparency.
“On other aspects, we see healthy competition among regional countries in being innovative and leading the region in fintech and start-up ecosystems,” said Roushdy. “So far, the UAE has been leading and I believe it would like to keep that position too when it comes to digital currencies.”
'Project Aber' and potential problems for UEA digital currency
In 2019, Saudi Arabia and the UAE launched ‘Project Aber’ (from the Arabic "crossing boundaries"), a CBDC proof of concept to experiment and better understand CBDC and distributed ledger technology (DLT) in a national digital currency context. The project’s report, which was published in late 2020, concluded that a cross-border, dual-issued, digital currency was technically viable and could offer a significant improvement over centralised payment systems in terms of architectural resilience.
“I believe these initiatives [such as Project Aber] and a collaboration approach will help UAE to go for the next step and issue its own CBDC,” said Roushdy, who thinks that the challenge of CBDC adoption will come at the time of adoption and reaching maturity.
For Dubai-based Nicholas Watson, tech entrepreneur and co-host of the Encrypted fintech podcast, the greatest challenge for the UAE's CBDC is a cultural one. Despite its high level of innovation, there are still many companies and institutions that would rather operate with fiat currency and paper-based methodologies, he says. These “incumbents” usually benefit from the bureaucracy derived from traditional methods and transactions so changing their mindset could present an important obstacle.
"In reality, there are a lot of companies who need to embrace digital business models and new ways of thinking, otherwise it will cause potential bottlenecks, so the challenge will be to get them on board," he adds.