In March 2023, the Central Bank of UAE (CBUAE) announced that it had begun its journey into the world of digital currencies. The project, which they coined the ‘Digital Dirham’, was to tackle the typical pain points of cross-border payments — an activity that is particularly important to the UAE, where over 85% of the population are expat residents.

Much like the Bank of England’s announcement of its own digital currency plans, it has spurred a lot of debate. When it comes to impact on investors, it begs the question of what is forex trading, because we do not know how freely available it will be to trade or which platforms will trade it. Will it be treated as a fiat currency, a cryptocurrency, or its own thing?

However, what we do know is that its first intentions are with trade and international relations. Phase 1 shows that this is intended to be a currency of utility, not just speculation.

Phase 1 of the Digital Dirham is now underway

Phase 1 of the CBUAE plan has now drawn to a conclusion. The plan consisted of three main stages:

• Soft launch mBridge for real cross-border Digital Dirham transactions for international trade
• Bilateral central bank currency with India as a proof-of-concept
• Proof-of-concept for central bank domestic issuance for retail use

Phase 1 is intended to conclude in around a year’s time. So far, it has already executed its first cross-border payment in January 2024. It was by no means a small transaction, either, totalling a value of 50 million dirhams (over 13 million USD). The transaction was initiated by CBUAE Chair, Sheikh Mansour Bin Zayed Al Nahyan, which was settled with China.

It was the mBridge platform that facilitated the payment, which is somewhat akin to a central bank currency version of SWIFT. The successful transaction showed that it is possible to eliminate the need for correspondent banking systems, meaning costs and delays are reduced. The transaction took seven seconds and cut costs by 50%.

mBridge isn’t live just yet, but there are plans to launch a minimum viable product in as soon as a few months’ time. Until then, more central banks will likely be onboarded as it approaches commercialisation.

Intended benefits of the CBDC

The CBUAE claims that the digital currency will be risk-free, as it is guaranteed by the central bank. While they didn’t explicitly say this, it is implied that this refers to the implicit risk in having money deposited in banks, which are private enterprises, and carry risks of default.

The CBUAE also claimed it to be cost-effective, likely highlighting that some private bank accounts cost money. Not just because it’s a central coin, but because it’s on the blockchain. Smart contracts are intended to be used to mediate. The move, as they state, is towards a “cashless society”, a term that has been the cause of resistance in the West.

However, there are many benefits to going cashless, not least for the environment. Payments are typically faster, as they need to interact with fewer intermediaries, whilst the central bank will retain better control of monetary policy.

This is because their policies will have a more direct impact — they do not need to wait for the market to react, or a trickle-down to happen. They will also have more data, which should improve their decision-making strategy.

Featured image credit: Edited from freepik