Everything You Must Know About UAE’s Central Bank Digital Currency (CBDC)

According to reports by the Atlantic Council, 134 countries are taking initiatives to create a central bank digital currency (CBDC). This accounts for more than 98% of the global GDP. The Bahamas, Jamaica, and Nigeria are the three countries that have fully launched CBDCs. As a result of technical issues, the Eastern Caribbean Currency Union-consisting of eight countries halted DCash availability.

As of December last year, all G7 economies have moved into the development stage of the CBDC. Similarly, 19 of the G20 countries have reached advanced stages of development. In 2024, around 36 countries are in the testing stages of CBDC. 

So, what are CBDCs and how are they beneficial? In this article, we will explore CBDC in detail and also discuss UAE’s interest in the same.

What is a Central Bank Digital Currency (CBDC)?

A central bank digital currency is virtual money that is issued and regulated by the central bank of a country. It can be seen as a digital form of the country’s fiat currency and can be used as a legal tender for the exchange of goods and services. With a CBDC in place, the traditional forms of money such as banknotes and coins can be replaced and countries can move towards a cashless society with the full backing of the government. 

What is the Difference Between a CBDC and Cryptocurrency?

Cryptocurrencies run on decentralized blockchain technology which means that it’s not regulated by one central hub but rather by multiple hubs all over the world. This means that owners have direct access to the coins, CBDCs, on the other hand, exist under the central bank’s authority. This means that owners can access it through a centralized authority. 

While dealing with popular cryptocurrencies like Bitcoin, you need to use a wallet address for the transaction. This means that you can remain anonymous and do not need to reveal any personal information. But in the case of CBDCs, this anonymity is not possible since your details are attached to your CBDC asset. All the crypto transactions are available to the public while in the case of CBDCs, only the sender, receiver and the bank can access the transaction details.

Types of CBDCs

CBDCs can be categorized into two types – wholesale and retail. 

1. Wholesale CBDC

Wholesale CBDCs are aimed at financial institutions. It is like having reserves in a central bank. That is, the central bank will provide the financial institutions with an account to deposit funds or perform transfers. 

2. Retail CBDC

Retail CBDCs, on the other hand, are for consumers and businesses. It can be used similar to physical currency. Retail CBDCs can either provide users cash-based access (through digital wallets) or account-based access (through bank accounts). 

While countries like Bahrain, Tunisia, Austria and Europe are in the development stages for wholesale CBDCs, other countries Jamaica, the Bahamas, Nigeria etc have already launched their retail CBDCs.

But some countries have chosen to implement a hybrid digital payment model which includes both wholesale and retail CBDC. India, China, Australia, Brazil, and the U.A.E are a few examples of countries that are piloting both types of CBDCs.

Potential Benefits of Adopting CBDCs

CBDCs have many characteristics that make implementing this currency format immensely beneficial. 

• They have reduced transaction costs and hence are more effective than physical currency.

• Since they are legal currencies, they provide safety against cyber-attacks and threats. 

• They support financial inclusion making it easy and convenient for everyone to access money on their phone with or without bank accounts. 

• They can make monetary policy flow swift and easy. 

• They enhance the efficiency of digital payment systems with fast and low-cost exchange mediums. 

• They improve transparency in transaction tracking making it easy to limit illicit activities. 

Challenges of CBDCs

Some countries like Ecuador and Denmark have discontinued their plans to implement CBDCs due to the various drawbacks the idea poses. Some common challenges that countries may have to address with implementing CBDCs are:

• It can impact the entire financial structure of a country and create drastic changes in areas like investments, interest rates, banking reserves, etc. 

• Privacy is a major area of concern when it comes to digital currencies. The authorities will have to implement strict security measures and constantly monitor to avoid system penetration, thefts, etc. 

• The bank structure of a country may be upset because there are chances of deposits being transferred from commercial banks to central banks. 

• Commercial banks may experience a loss of income and borrow money internationally to carry out their operations which could become a threat to the national banking sector.

• Banks may compete with each other and introduce strategies like competitive interest rates or bank deposits, which can be detrimental in the long run. 

CBDC Status in Different Countries – Key Findings

According to the IMF, nearly 100 countries are planning to develop CBDC and some of them have already launched it. 

Countries that launched CBDCs

So far, 11 countries have launched CBDC successfully, and they are:

• Nigeria:  In October 2021, Nigeria launched eNaira for in-store contactless payments and money transfers.

• The Bahamas: Sand Dollar- the world’s first CBDC to cover an entire country was launched by the Central Bank of the Bahamas in October 2020.

• Jamaica:  Jam-Dex – the digital currency launched by Jamaica, was legalized in June 2022 by the Bank of Jamaica. The currency began its pilot stage in 2021.

• Eastern Caribbean Union: Dominica, St Kitts, Antigua and Barbuda, Grenada, Saint Lucia, Montserrat, Anguilla, Grenadines and St Vincent are amongst the 7 countries of the Eastern Caribbean Union to have developed their own CBDCs.

Countries where CBDCs are in the Development / Testing / Research stage

Below are countries that are still evaluating CBDCs:

• Russia: While the digital ruble’s domestic rollout began with a pilot program in August 2023, its international debut is set for a later date. Russia is targeting the second half of 2025 to conduct its first cross-border transactions using digital currency. Potential partners for these initial international payments include China and Belarus..

• Sweden: E-krona, a digital currency developed in Sweden, has reached its testing stage.

• Mexico: Mexico is in the development stage of the CBDC in 2024.

• Pakistan: The Pakistan administration has set a timeline till 2025 to issue a CBDC.

• Ukraine:  A two-month pilot run for e-hryvnia was successfully completed by the National Bank of Ukraine in February 2019.

• South Africa:  In February 2021, Project Khokha explored the use of blockchain at the wholesale level, and in May 2021, the South African Reserve Bank announced a study of digital currencies at the retail level.

• South Korea: South Korea plans to test digital currency with 100,000 citizens in late 2024, using a deposit token for purchases. The likely pilot locations are Jeju, Busan, or Incheon.  South Korea has already completed testing functions related to CBDC issuance and distribution in a simulated environment back in December 2021.

• Hong Kong: The Hong Kong Monetary Authority and the People’s Bank of China began testing digital yuan under the project name- e-CNY.

• Thailand: The Central Bank has launched a retail CBDC pilot in 2023.

• Malaysia:  Bank Negara Malaysia joined Project Dunbar led by BIS in September 2021 to test the use of CBDC in international settlements.

• Singapore: In 2019, Singapore and Canada conducted the first successful international transaction of CBDCs. In November 2022, the Monetary Authority of Singapore launched Ubin+- a cross-border foreign exchange settlement, in collaboration with international partners using wholesale CBDC. In 2024, the Monetary Authority of Singapore (MAS) will pilot the live issuance and use of wholesale central bank digital currencies (CBDCs) to support instant payments across commercial banks. The pilot, part of the Orchid Blueprint, will explore advanced digital currency infrastructure, including tokenised bank liabilities, regulated stablecoins etc.

• Canada: Timothy Lane, Deputy Governor of the Bank of Canada, in May 2021, said that they were researching the potential of CBDC including its environmental impact.

• Haiti:The Bank of the Republic of Haiti is planning to test the digital version of the Haitian Gourde in 2022. The project name is Digital Gourde.

• Venezuela:  In October 2018, Petro was launched – a digital currency, which is not active today. This was followed by Digital Bolivar, which was launched in October 2021. It has become inactive at present.

• Brazil: The Central Bank of Brazil is planning to conduct a closed pilot program for CBDC in 2023. Brazil’s Central Bank, Banco Central do Brasil (BCB), has named its digital currency “DREX,”. It is slated for launch in early 2024.

• Switzerland: Project Helvetia- a wholesale digital currency trial was successfully completed by the Swiss National Bank in December 2022. 

• Euro Area: The ECB launched an investigation into CBDC. The project name-Digital Euro (Retail) and Project Stella (wholesale).

• Turkey: Turkey’s central bank reported success in the first phase of its digital lira pilot program, including the first digital lira transaction in December 2022. They’ll conduct a second phase this year before deciding on a full launch.

• Lebanon: A debut of the digital currency was expected in 2021, however, no further updates have been provided. It is inactive at present.

• Israel: In June 2021, the Bank of Israel said that the preliminary pilot test of the digital shekel had been conducted.

• Bahrain: In May 2021, the Central Bank of Bahrain started a collaboration with JP Morgan and Bank ABC to develop a cross border digital currency settlement pilot program.

• Cambodia:  The National Bank of Cambodia launched Bakong, in October 2020. This is a DLT based interbank payment system that has received widespread acceptance.

• U.S.A: The Biden government signed an executive order on digital assets on Mar 9, 2022.

• Belize: The National Bank of Belize has planned to launch an e-wallet on the bank’s mobile payment networks. The CBDC program is inactive at present.

• Honduras: Banco Central de Honduras announced research plans on digital currency in June 2021.

• Trinidad and Tobago: The Central Bank of Trinidad and Tobago (CBTT) has granted provisional registrations to two companies, including Telecommunication Services of Trinidad and Tobago (TSTT), to issue electronic money (e-money). This initial six-month registration period, also given to PESH Money Limited (PESH), authorises the companies to issue e-money from 1 March 2023, under CBTT’s supervision.

• Ukraine-The pilot phase of e-hryvnia will be launched in 2023.

• South Africa- In April 2023, the governor of the South African Reserve Bank announced that they are experimenting with digital currency and distributed ledger technology. The central bank also launched Project Khoka 2 which studied the use of tokenized money, digital currency, and blockchain.

• South Korea-The Bank Of Korea will move into real-world testing of digital currency. 10 commercial banks will be included in the testing stage.

• Malaysia– Bank Negara Malaysia joined Project Dunbar led by BIS in September 2021 to test the use of CBDC in international settlements. Along with Project Dunbar, BNM is also planning to explore wholesale domestic CBDC in 2022 and retail CBDC by 2024. 

• Singapore-In 2019, Singapore and Canada conducted the first successful international transaction of CBDCs. In November 2022, the Monetory Authority of Singapore launched Ubin+- a cross border foreign exchange settlement in collaboration with international partners using wholesale CBDC.

• Canada-  In 2023, the Bank of Canada, released a note which details the significance of offline payment functionality in CBDCs.

• Brazil-The Central Bank of Brazil is planning to conduct a closed pilot program for CBDC in 2023 and move on to its launch in 2024.

• Japan- The technical feasibility of digital yen was tested by the Bank of Japan in April 2023. It may move to the launching phase in 2026 based on the results.

• Kazakhstan–  During an event in Kazakhstan in 2023, a transaction using contactless card technology was demonstrated, marking the launch of the world’s newest central bank digital currency (CBDC), the digital tenge. Two schools in Almaty, the host city of the conference, will serve as test sites for the CBDC.

• Laos- Digital Lao Kip (DLak), a prototype CBDC, will begin its testing in 2023.

• Russia- The consumer pilot version of Digital Ruble was launched by the Bank of Russia in April 2023.

• Turkey- The Central Bank of the Republic of Turkiye was able to successfully execute its first payment transaction using digital Lira in December 2022. The country aims to launch a CBDC in 2023.

• Philippines- The Central Bank of Philippines started its pilot wholesale CBDC project in January 2023 which will continue till 2024.

• U.S.A- The Biden government signed an executive order on digital assets on Mar 9, 2022.

Let us further explore the development plans of CBDC in some other countries:

India Digital Rupee (e₹) 

In the Union Budget 2022 announcement, India’s finance minister Nirmala Sitharaman announced India’s plans for launching CBDC. India expects to launch its digital rupee in the 2022-23 fiscal year. With the introduction of CBDC, the currency management system is expected to become more efficient. CBDC will be issued by the Reserve Bank of India and will boost the country’s digital economy. 

With the introduction of CBDC, India aims to enhance access to digital payments. India is currently under the “Development Phase” category in the global CBDC race along with countries like Russia, Japan, Australia, etc.

Following the Union Budget 2022 announcement by India’s finance minister, Nirmala Sitharaman, to launch CBDC, the RBI launched the pilot version of e-rupee in December 2022. The retail CBDC has been launched in 15 cities and has witnessed the participation of more than 100,000 customers. To handle project CBDC, RBI has launched a separate department called the Fintech Department, which will take care of all things related to CBDC execution. 

China’s Digital Currency Roll Out

China will become the first major economy to launch a nationwide CBDC. At the 2022 Beijing Winter Olympics, China will roll out the digital yuan. China has been exploring digital currencies since 2014. Over the years, it has run several trials across several Chinese cities. In preparation for the CBDC launch, people from overseas are given the provision to convert foreign currencies to digital yuan starting from February 4. 

Since its launch at the Beijing Olympics, the  digital yuan or e-CNY has made major strides. As of April 2023, the CBDC has reached 26 different regions and 17 of 23 provinces. In a major move, Changshu city has decided to pay its public sector workers in e-CNY starting from May.

UAE’s Stake in CBDC

UAE has been encouraging digital currencies from early on with the support of cryptocurrencies and initiatives taken on CBDC development. “Besides seeking to develop advanced and secure cloud infrastructure to operate financial and insurance services, the strategy aims to support the UAE’s green economy efforts and continue work to develop more innovative financial infrastructure to boost the UAE’s competitiveness in this field,” says a statement released by the UAE Central Bank on CBDC development. 

Timeline UAE Launch of CBDC

In 2019, CBUAE partnered with the Saudi Arabian Central Bank for Project Aber, a cross-border payment project that utilized blockchain technology. The successful completion of this project demonstrated that distributed ledger technology can be used effectively to facilitate cross-border transactions. Similarly, the UAE also launched its first real-value cross-border CBDC pilot under the ‘mBridge’ project 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 in 2022.  Saudi Arabia is the latest country to join this multi-country initiative for central bank digital currency (CBDC) in 2024.

In 2021, it was announced that the CBUAE was working with three central banks from China, Hongkong and Thailand to test cross-border transactions. The Bank of International Settlements was also reported to collaborate on the project. This “Multiple Central Bank Digital Currency (m-CBDC) Bridge” is expected to test the use of distributed ledger technology for foreign currency payments.

In the 2023-2026 roadmap, along with CBDC the UAE central bank aims to promote digital transformation in the entire finance sector. To foster financial inclusion, it plans to take measures such as the use of digital IDs, AI and ML to improve inspection and monitoring. 

As part of its CBDC strategy, the Central Bank of UAE (CBUAE) launched the Digital Dirham in 2023. G42 and R3 have been appointed as the infrastructure and technology providers for the initiative, which is one of the nine initiatives under the FIT (Financial Initiative) Programme planned by CBUAE. 

The first phase of the CBDC strategy, expected to begin within the next 12-15 months, will include a soft launch of mBridge, proof-of-concept work for bilateral CBDC bridges with India, and proof-of-concept work for domestic CBDC issuance covering wholesale and retail usage. 

The main objective of the CBDC implementation is to promote financial inclusion and facilitate the transition towards a cashless society, thereby reinforcing the UAE’s position as a leading financial hub.

What is The Future of CBDC?

By 2024, 11 countries have already launched CBDCs, 18 are in the pilot stage, and approximately 78 are in the development and research phases. Although CBDCs are still evolving, they offer a wide range of opportunities to the finance sector. Has the UAE adopted CBDC?

Yes, in fact, The Central Bank of the United Arab Emirates has stated that the issuance of this digital currency is a part of its roadmap for 2023-2026. 

The Bank of International Settlements predicts that there will be 15 retail CBDCs by 2030. Additionally, SWIFT, the global bank messaging network, announced plans to launch a CBDC platform within the next two years, connecting independent CBDCs from different countries. 

According to a report from Juniper Research, by 2030, the total value of payments through CBDC will reach $213 billion annually. The growth will be supported by the support of different governments, who will use CBDCs to strengthen financial inclusion and gain more control over how digital payments are made, which will fuel growth. While challenges remain, the benefits of CBDCs are becoming increasingly apparent, and their adoption is expected to shape the future of digital finance worldwide.

Frequently Asked Questions (FAQ’s)

1. Is CBDC a cryptocurrency? 

CBDCs are digital currencies similar to cryptocurrencies but issued by a central bank. 

2. How are CBDCs different from other forms of digital payment?

CBDC is a direct liability of the Central Banks and unlike other forms of digital payment, a person need not have a bank account to make digital payments with CBDCs.

3. How are CBDCs different from fiat money?

CBDCs are a digital form of fiat money. They are not different from hard cash except in their form. 

4. How would a CBDC transaction work?

Central banks can use three operating models for CBDCs:

• Unilateral CBDC: Central bank issues money as well as carry out all functions. 

• Intermediate CBDC: Central bank issues money but the functions are carried out by non-central media intermediaries.

• Synthetic CBDC: Non-central banks issue money backed by central bank assets.  

5. How many countries have launched CBDC?

To date, 11 countries have launched CBDCs. It is in the pilot phase in 14 countries.

6. Has the UAE launched CBDC?

The CBUAE has launched the digital dirham with the support of infrastructure and technology providers G42 Cloud and R3.

7. What is the mCBDC Bridge?

The multiple CBDC bridge (aka mCDBC bridge or mbridge) is a project aimed to facilitate payments across borders. It is a joint initiative by the BIS Innovation Hub, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates.

8. What is Project Aber?

Project Aber is a joint effort that started in 2019, between SAMA (Saudi Arabia Monetary Authority), CBUAE (Central Bank of United Arab Emirates) and six commercial banks, three from each country. The project made use of real money and studied the effect of a single cross-border dual-issued currency. The research revealed that Central banks can use DLT (Distributed Ledger Technology) for domestic and cross-border transactions in new ways.

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