Central Bank Digital Currencies (CBDCs) are gaining traction in the GCC countries, including the UAE, Saudi Arabia, Bahrain, Kuwait, Oman, and Qatar. The IMF believes that adopting CBDCs can enhance financial inclusion and improve the efficiency of cross-border payment services in the region. At least 19 countries in the Middle East and Central Asia are working towards issuing CBDCs, with some, like the UAE and Saudi Arabia, already at the proof-of-concept stage.
In January 2024, the UAE made a landmark cross-border payment using the Digital Dirham, the country’s central bank digital currency. The payment of Dh50 million was sent to China through the mBridge cross-border CBDC platform, which includes both countries and Hong Kong as participants. This move highlights the growing importance of digital currency payments between countries and the potential benefits they offer in terms of cost reduction and efficiency improvement.
The Central Bank of the UAE is actively promoting the adoption of Digital Dirham by all commercial banks and payments processors in the country. The regulator aims to integrate these institutions with the CBUAE node for issuing Digital Dirham and has set a deadline for Digital Dirham adoption by all UAE licensed financial institutions by 2026. This initiative is part of the UAE’s efforts to modernize its financial infrastructure and stay ahead in the digital currency space.
One of the key advantages of CBDCs highlighted by the IMF is their potential to promote financial inclusion by reducing transaction costs and making financial services more accessible. By streamlining payments and settlements processes, CBDCs can lower the barriers to entry for underserved populations and foster competition in the payments market. This can lead to a more efficient and inclusive financial system in the region.
However, the adoption of CBDCs also comes with risks, such as the potential competition with bank deposits, which are a primary source of funding for banks in the region. This could impact banks’ profitability and financial stability, although most banks in the GCC maintain adequate capital levels and liquidity buffers. Central banks may also face challenges in implementing monetary policy effectively with the introduction of CBDCs, as their impact on deposit rates and bank lending channels remains uncertain.
In Qatar, the Central Bank has been working on developing the infrastructure for its CBDC project, which is set to enter its first experimental phase until October 2024. This development reflects the growing interest among GCC countries in exploring the potential benefits of CBDCs and modernizing their financial systems to adapt to the digital economy. As more countries in the region move towards adopting CBDCs, it is crucial for regulators and financial institutions to collaborate and address the challenges and opportunities that arise with these digital currencies.
