A look into UAE Central Bank’s AML guidance document for virtual assets and what it means for the future of VASPs in UAE

A look into UAE Central Bank’s AML guidance document for virtual assets and what it means for the future of VASPs in UAE

The UAE Central Bank has issued its long awaited virtual assets and virtual assets service provider framework under the umbrella of a new guidance on anti-money laundering and combating the financing of terrorism (AML/CFT) for licensed financial institutions (LFIs) with a focus on the risks of dealing with virtual assets.

The actual document is more telling than the initial press release. In reality the UAE Central Bank has clarified what is considers as virtual assets and who can offer services in this realm, as well as how banks and financial institutions will work with VASPs when it comes to opening accounts for them and meeting compliance requirements. It also makes clear that virtual assets are not considered a legal tender in the UAE.

Now a lot has been made clear. Earlier this month, there was a position for a Fintech virtual assets senior manager job at a UAE Bank who was required to be specialized in Fintech and virtual assets compliance from a finance crime perspective, which was eye catching because there wasn’t anything yet announced from the UAE Central Bank. Yet now one thing is for certain, banks in the UAE will be scrambling to hire talents who understand the virtual asset ecosystem so they will be able to comply with the recent guidance.

Definition of virtual assets and VASPs

First the UAE Central Bank has defined as they mention in alignment with FATF definitions, what virtual assets are, leaving out of the definition CBDCs and security tokens, as well as some NFTs. As per the guidance, “A virtual asset is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, excluding digital representations of fiat currencies, securities, and other funds (such as those separately regulated by the competent authorities of the UAE, including the CBUAE, SCA, VARA, FSRA, and the Dubai Financial Services Authority (“DFSA”).”

It goes on to explain, “Virtual assets, so defined, typically include assets commonly referred to as cryptocurrencies, cryptocoins, payment tokens, exchange tokens, and convertible virtual currencies. Without prejudice to the definitions in the laws and regulations referred to above, stablecoins may be considered either virtual assets or traditional financial assets depending on their exact nature. No asset should be considered a virtual asset and a traditional financial asset (e.g., a security) at the same time.”

The guidance also discusses payment tokens offered and licensed by payment token service providers. Payment Tokens are defined as a type of Crypto-Asset that is backed by one or more Fiat Currency, can be digitally traded, and functions as a medium of exchange and/or a unit of account and/or a store of value, but does not have legal tender status in any jurisdiction. A Payment Token is neither issued nor guaranteed by any jurisdiction and fulfills the above functions only by agreement within the community of users of the Payment Token. Payment Token Service Providers, in turn, are defined as persons engaged in Payment Token issuing, Payment Token buying, Payment Token selling, facilitating the exchange of Payment Tokens, enabling payments to Merchants and/or enabling peer-to-peer payments, and Custodian Services related to Payment Tokens.

What Virtual assets are not

As for NFTs, they are not considered virtual assets, but this does depend on the nature of the NFT and its function. As stated, “Some NFTs that on their face do not appear to constitute VAs may fall under the VA definition if they are used for payment or investment purposes in practice.”

The guidance makes it clear that the Central Bank of the UAE does not accept or acknowledge virtual assets as a legal tender/currency in the UAE; rather, the only legal tender in the UAE is the UAE dirham. As such, those accepting VAs as payment for goods and services or in exchange for other assets bear any risk associated with the future acceptance or recognition of VAs.

The guidance adds,  by definition VAs cannot be digital representations of fiat currencies, securities, or other separately regulated financial assets, a bank record maintained in digital format, for instance, that represents a person’s ownership of fiat currency is not a VA. However, a digital asset that is exchangeable for another asset, such as a stablecoin that is designed to be exchangeable for a fiat currency or a VA at a fixed rate, could still qualify as a VA, depending on the relevant features of such a stablecoin.

VASP activities overview

There are five basic activities that fall under VASPs as per the UAE Central Bank, but these are not considered as comprehensive only meant for illustrative purposes. They include virtual asset exchange, virtual asset brokers, who transfer ownership of VA from one user to another, virtual asset custodians, P2P exchanges, remittance payments, payment for nonfinancial g goods or services, or payment of wages. A provider offering such a service will likely be a VASP.

The UAE Central Bank has even considered decentralized virtual assets Exchanges or decentralized finance (“DeFi”) application creators, owners, and operators as VASPs given they maintain control or sufficient influence in the DeFi arrangements, even if those arrangements seem decentralized, may fall under the definition of a VASP where they are providing or actively facilitating VASP services. For example, there may be control or sufficient influence over assets or over aspects of the service’s protocol, and the existence of an ongoing business relationship between themselves and users; even if this is exercised through a smart contract or in some cases voting protocols.

Even entities that provide related financial services to issuer’s who offer or sell virtual assets through participation in and provision of financial services related to an issuer’s offer or sale of a Virtual asset through activities such as initial coin offerings (“ICOs”) are considered as VASPs.

Licensed Financial Institutions AML CFT

Finally as per the AML-CFT Decision, every natural or legal person who carries out any VASP activities, provides VASP products or services, or carries out VASP operations from the state must be licensed, enrolled, or registered by a competent supervisory authority in the UAE.

LFIs are strictly prohibited from establishing relationships or processing transactions with individuals or entities that perform covered VASP activities and are not licensed to do so by UAE authorities. It is therefore essential that LFIs form an understanding of whether its customers perform covered VASP activities and, if so, whether they have fulfilled applicable UAE licensing requirements. LFIs are not permitted to establish relationships or process transactions with foreign VASPs that have not secured a license to operate as a VASP from UAE authorities, even if the foreign VASP is duly licensed or registered outside the UAE.

The guidance warns that LFIs may be indirectly exposed to VA or VASP activity through its customers that use their account or relationship with the LFI to provide downstream financial services to VASPs. In the case of VASP customers, this may include the provision of accounts or custodial wallets that can be used directly by customers of a third-party VASP to transact business on the customer’s own behalf.

The AML-CFT Law brings virtual assets and virtual asset service providers within the scope of the UAE’s AML/CFT legal, regulatory, and supervisory framework. Under Articles 9 and 15 of the AML-CFT Law, VASPs must report suspicious transactions and information relevant to such transactions to the UAE FIU, and under Articles 13 and 14, supervisory authorities are authorized to assess the risks of VASPs, conduct supervisory operations (including inspections) of VASPs, and impose administrative penalties on VASPs for violations of applicable laws and regulations.

Conclusion

In conclusion this is the first comprehensive framework that the UAE Central Bank has published which will allow a select number of VASPs to be able to deal with the licensed financial institutions in the UAE. It will not be easy for the financial sector as the AML and CFT requirements are exhaustive, but it will also not be easy for the VASPs.

Moreover, there is one gap that seems huge and over looked by the UAE Central Bank, and that is what if licensed financial institutions actually want to offer Virtual asset services. So what if a bank actually wants to offer VA custodial services, or VA payment services, or brokerage services, can they both be the provider and the client and what happens to AML and CFT requirements then.

In Bahrain for example the Central Bank is allowing crypto entities to move into the other financial arenas and has even allowed the first digital bank which deals in digital assets to make their base in the country.

Another question that can be raised, is that in a country which has called for more international cooperation and coordination when it comes to regulating virtual assets, then concurrently does not allow any of its financial institutions to deal with any VASP not regulated in the UAE even if they are regulated in other jurisdictions, what precedence is the UAE making in this regards and is reciprocity the new name of the game?

With regulations taking force in UAE especially when it comes to virtual assets, the country that once boasted of having 1800 blockchain and crypto entities might see that number dwindle as most of these companies will not be able to comply to the regulatory requirements rendering them unable to receive services from the banking sector. 

We can already see this decline in number on the new website for VARA, where there were once dozens of names listed as on the course of receiving licenses, today there is a handful.

Next to be published will definately be the payments rulebook under VARA which was missing before. Can’t wait to see what that will bring to the table. 

UAE Central Bank issues guidance defining business models for Virtual assets, and Virtual assets service providers

UAE Central Bank issues guidance defining business models for Virtual assets, and Virtual assets service providers

The Central Bank of the UAE (CBUAE) in a press release announced that it has issued a new guidance on anti-money laundering and combatting the financing of terrorism (AML/CFT) for Licensed Financial Institutions (LFIs),  banks, finance companies, exchange houses, payment service providers, registered hawala providers and insurance companies, agents and brokers as well as setting clear descriptions of virtual assets and Virtual asset service providers business models. 

His Excellency Khaled Mohamed Balama, Governor of the CBUAE, stated, “The new guidance related to the virtual assets sector contribute to strengthening the supervisory and regulatory frameworks of the Central Bank to combat money laundering and the financing of terrorism. We are constantly working to enhance efforts and strengthen the awareness of licensed financial institutions to prevent all kinds of financial crime activities, and reduce potential risks to protect the financial and monetary system and maintain its soundness and stability, in line with the Financial Action Task Force standards.”

The new guidance will assist LFIs’ understanding of risks and effective implementation of their statutory AML/CFT obligations, and takes Financial Action Task Force (FATF) standards into account. It will come into effect within one month.

The new guidance discusses the risks arising from dealing with virtual assets (VA) and virtual asset service providers (VASP) and sets out clear descriptions of VAs, VASPs and VASP business models. The guidance describes various channels and mechanisms of interaction between LFIs and VASPs.

The guidance outlines the customer due diligence (CDD) and enhanced due diligence (EDD) for LFIs towards potential VASP customers and counterparties, with the aim of de- risking, supporting them with training programmes, a governance system and record- keeping mechanisms.

This comes after MENA FATF adopted several recommendations proposed by Abu Dhabi including those pertaining to virtual assets.  

Central Bank of Saudi Arabia and UAE choose R3 Corda for CBDC sandbox pilots

Central Bank of Saudi Arabia and UAE choose R3 Corda for CBDC sandbox pilots

During Corda Day Middle East held on May 11th 2023 in Dubai UAE, speakers from the Central Bank of Saudi Arabia (SAMA) as well as the Central Bank of UAE discussed their CBDC strategies and pilots. Both Central Banks are working with R3 Corda on their CBDC pilot programs, SAMA in its sandbox and UAE Central Bank in their research and development center.

The event as per R3, brought together financial service leaders, technologists and Corda enthusiasts from around the region and the globe. Of the prominent speakers included H.E. Saif Humaid Hamad Al Dhaheri, Assistant Governor – Strategy, Financial Infrastructure and Digital Transformation, Central Bank of UAE and Mr. Mohsen AlZahrani, Virtual Assets (VA) and CBDC program Lead, Saudi Central Bank – SAMA as well as Richard G Brown, Chief Technology Officer, R3.

Al Dhaheri made a keynote address on “Future of Money, CBDC and the Digital Dirham” while AlZahrani carried out the closing Keynote, on the topic of “Wholesale CBDC”

Mohsin AlZahrani told Lara on the Block, “Currently we are working with R3 Corda only for the sandbox experimentation, we have not yet decided on the next phase platform or implementation.”

Farhan Khan, Chief Technology Officer Consultant and advisor in Fintech and Blockchain, who attended the event representing Cykube, spoke to Lara on the Block explaining what he learned about CBDC implementation in UAE and KSA.

Khan explained, “It was an excellent event and very eye opening on how R3 is properly working in the region. What I learned about the CBDC implementation in KSA and UAE is that both are working with R3 but each country has a different approach. Saudi Arabia is working on a wholesale CBDC project for its domestic payment system, while UAE Central Bank is working on CBDC for cross border payments.”

Khan adds, “For example the ABER cross border payment project which was paused might be reutilized in the future as per AlZahrani’s statements at the event. AlZahrani stated that SAMA is utilizing the experience of ABER during the implementation of the CBDC wholesale payment system concept, and there is a chance in the future to use ABER again between KSA and UAE after the experimentation of CBDC wholesale in KSA is completed.”

According to Khan the UAE is working on a prototype with R3 Corda for the digital dirham which is currently under testing in their R&D facility.  

Khan concludes to Lara on the Block saying that R3 Corda has seen a lot of interest because it has very powerful features such as interoperability between blockchain platforms even public ones. He explains, “Fintech entities in both Saudi Arabi and UAE are waiting for the network gates to open, and with the VARA crypto regulations cooking every day we feel the same will be happening in KSA. Corda is the right framework from a technology perspective with its tremendous security, protection, especially when it comes to digitization and tokenization.”

This is reflected in a post by R3’s Chief Technology Officer Richard Brown who states, “Composability and interoperability are critical cogs in the architecture of Corda. With the next generation of Corda, there’s no need to decide on your network model at the outset of a project. Start with a centralized, private network and gradually decentralize over time!”

Brown believes that the success of Corda is because it is a cross-firm shared ledger enabling collaborating parties to transact based on high quality data, without exposing internal data or systems, and with far fewer reconciliation errors. A ledger that could even become the industry’s system of record for some key questions such as ownership of assets (the terms ‘Digital Assets’ and ‘Tokenization’

It is also a permissioning system that provides high identity assurance and gives confidence to regulated entities that they can comply with their legal obligations to know with whom they are transacting. In addition is a  privacy-first design, allowing competitors to trade without revealing sensitive data publicly – only participants in a transaction get to see the details – unlike other blockchain-inspired approaches.

He even goes so far to say that, “We’ve been delighted by how successful Corda has been, far beyond the narrow banking scenarios we originally designed it for. Broadly speaking, we’re seeing it being used to solve four main problems in ‘Regulated DeFi’:”

R3 to design and Build UAE’s CBDC as well as tokenize financial and non financial activities

R3 to design and Build UAE’s CBDC as well as tokenize financial and non financial activities

R3 was chosen by UAE Central Bank as its technology partner to design and build a CBDC for the first phase of the central bank’s CBDC project because it is a permissioned based DLT (Distributed Ledger Technology) that decentralize assets privately and works well in regulated industries, but more importantly is its interoperability and asset fluidity. R3 will not only assist UAE’s Central Bank in developing a CBDC but also in tokenizing financial and non-financial activities, in addition to the digitalization of other financial services. 

R3 offers interoperable CBDC solution

LaraontheBlock interviewed R3 to learn more about their role in UAE’s CBDC project.  Alisa DiCaprio, Chief Economist at R3 when asked why R3 was chosen and not another Blockchain technology provider replied, “R3’s Corda is the world’s leading permissioned distributed application platform and is specifically designed to work in highly regulated environments with today’s financial services industry. Corda powers solutions that decentralize assets while maintaining privacy and regulatory oversight, making it a favored technology for central banks looking to issue CBDCs.”

She added, “Its interoperability and asset fluidity means that central banks can move digital currencies openly and freely across network boundaries, using well-defined trusted exchange protocols that meet regulatory demands for privacy and security.” 

This is not the first CBDC project that R3 has participated in. DiCaprio explains, “ R3 has been chosen as the technology partner for numerous CBDC projects, including: Digital Tenge, where the National Bank of Kazakhstan is currently leveraging R3’s Corda for Digital Tenge CBDC project, to test the concept’s feasibility and determine the main parameters of the digital currency model. The Digital Tenge platform recently underwent successful testing with real consumers and merchants in cooperation with market participants. The DT’s entire life cycle (including the programmability and demonstration of the offline transactions chain) was tested.” 

Another project being worked on by R3 is Project Icebreaker, The Bank for International Settlements and the central banks of Israel, Norway and Sweden concluded Project Icebreaker this month, which studied the potential benefits and challenges of using retail CBDCs in international payments. 

According to DiCaprio CBDCs can strengthen financial market infrastructures in several ways. She explains, “CDBCs offer more efficient cross-border payments, faster settlement time periods and the streamlining of multi-party processes, so we’re excited to continue supporting central banks as their respective CBDC journeys.” 

As for why R3 was chosen, one of the most important reasons was the ability to facilitate interoperability and the exchange of data and assets across networks. As per DiCaprio, the platform is exploring ways to act as a bridge to various other platforms outside of the Corda ecosystem. This enables assets to move freely across networks while still maintaining privacy in the decentralization process. 

For Dicaprio interoperability is a critical development and a core focus at R3 to increase reach for users’ assets, minimizing friction with no sacrifice to safety. She adds, “By achieving this, we will be able to connect with other DLT players to provide the most seamless experience for our customers.” 

DiCaprio adds that R3 has seen a growing interest in CBDCs in the region given the region’s rising stature as a global fintech hub. This was appreciated during their partnership with UAE Central Bank. She stated to LaraontheBlock, “We look forward to seeing central banks across the world continue to explore and develop CBDCs and realizing the benefits they can bring to our financial ecosystem.”

R3 readies UAE for Tokenization

The Central Bank of UAE announced on March 23rd 2023 that it had commenced the implementation of its CBDC strategy in partnership with technology entities, UAE based G42 Cloud and Blockchain global solution provider R3. R3 then followed this with its own press release on April 4th 2023 explaining on the UAE Central Bank CBDC project including as well Clifford Chance who will be providing critical legal oversight for the strategy.

R3 in their press release stated that R3’s technological support will enable the Central Bank of UAE to ensure the readiness of the UAE for the potential future tokenization of financial and non-financial activities, in addition to the digitalization of other financial services.

Digitization in UAE

Parties that will be working with the UAE Central Bank CBDC project all agree that the project is part of a wider strategy for digitization in the UAE.

David E. Rutter, CEO at R3, commented, “This is another landmark moment in bringing CBDCs even closer to production and issuance. CBDCs can strengthen our financial market infrastructure in several ways, including more efficient cross-border payments, faster settlement time periods and the streamlining of multi-party processes. The CBUAE has made a significant step forward in realizing these benefits. We are honored and excited that R3 has been selected to design and build CBUAE’s CBDC ecosystem in this innovative move towards building a more open, trusted, and enduring digital economy. We look forward to supporting the CBUAE in the next stage of its CBDC journey.” 

While Talal Al Kaissi, CEO at G42 Cloud, stated, “We’re thrilled to be supporting the CBUAE in the development of its digital dirham. This collaboration represents an important milestone in the digitalization of the UAE’s monetary and payments framework and ensuring that the country remains at the forefront of financial services innovation. As a company founded in the UAE, we have seen first-hand the country’s rapidly advancing status as a global fintech hub and are excited to be working with the CBUAE in leading its digital transformation. We look forward to working with the Central Bank and R3 to deliver a cutting-edge CBDC infrastructure that meets the highest standards of efficiency, security, and innovation.”

While Jack Hardman, Partner at Clifford Chance and Head of Fintech in the Middle East added, “As CBDC development moves from research to real-life building, it is vital that central banks are aware of the legal implications of any chosen design feature or strategy, in addition to how this emerging technology interacts with existing regulations. Clifford Chance has an established track record as a leading advisor in the fields of financial services and technology, and we look forward to working with the CBUAE on its CBDC implementation strategy.”

As per UAE Central Bank, the first phase of the CBDC strategy will be completed within the next 15 months. It will include a soft launch of MBridge to facilitate real value cross border CBDC transactions for international trade settlement, proof-of- concept work for bilateral CBDC bridges with India, one of the UAE’s top trading partners and finally, proof-of-concept work for domestic CBDC issuance covering wholesale and retail usage.

The UAE Central Bank views the UAE CBDC as able to address the pain points of domestic and cross-border payments enhance financial inclusion and the move towards a cashless society. It will further strengthen the UAE’s payment infrastructure, providing additional robust payment channels, ensuring a resilient and reliable financial system. More importantly, the CBUAE aims to ensure the readiness of the UAE to integrate the payment infrastructures with the future potential tokenization world, the tokenization of the financial and non-financial activities. 

H.E. Khaled Mohamed Balama, the Governor of the CBUAE, stated at the time, “CBDC is one of the initiatives as part of the CBUAE’s FIT program, which will further position and solidify the UAE as a leading global financial hub. The launch of our CBDC strategy marks a key step in the evolution of money and payments in the country. CBDC will accelerate our digitalization journey and promote financial inclusion. We look forward to exploring the opportunities that CBDC will bring to the wider economy and society.” 

The Central Bank of UAE stated that it was now ready to enter into the next major milestone of its CBDC journey after several successful CBDC initiatives including project Aber with Saudi Central Bank in 2020, and the accomplishment of the 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.

UAE Securities and Commodities Authority publishes UAE Virtual asset regulation resolution

UAE Securities and Commodities Authority publishes UAE Virtual asset regulation resolution

UAE Securities and Commodities Authority (SCA ) publishes the Cabinet Resolution No. (111)of 2022 regarding the regulation of virtual assets and their service providers and has noted which entities it will regulate and the penalties that can reach $2.7 million. 

As per the resolution, the regulation of virtual assets and their providers will be overseen in the UAE by the Securities and Commodities Authority, as well as the Central Bank of the UAE. It will also include local licensing authorities that include free zones, and financial free zones. 

As per the resolution virtual assets are defined as a digital representation of the value that can be traded or transferred digitally, can be used for investment purposes, and does not include digital representations of paper currencies, securities or other funds.

The activities that fall under virtual assets include the provision of virtual asset services in the UAE. 

As for virtual assets service providers , they are any legal person practicing one or more activities related to virtual assets or the related processes for the benefit or on behalf of a person, such as the operator of the virtual assets platform, the broker of virtual assets and the custodian of virtual assets, and any other activities in accordance with the provisions of this Resolution.

The resolution defined Virtual Assets Platform as a digital platform for listing, trading and transferring ownership of virtual assets, conducting related clearing and settlement processes, and storing and saving information and data through distributed ledger technology or any other similar technology.

According to the resolution it aims to develop the legislative system of the virtual assets sector in the State, its related activities and service providers in a way that defines and guarantees the rights and duties of all related parties. 

The resolution will also regulate the virtual assets sector in the State and its related activities and service providers and will be compliant with all all provisions of the Federal Decree-Law No. (20) of 2018 concerning Combating Money Laundering Crimes, Combating Financing of Terrorism and Financing of Illegal Organizations, as amended, and its executive regulations and applicable legislations related to the sector.

The resolution also seeks to protect investors in virtual assets from illegal practices.

The virtual asset regulation will cover all entities within the UAE including free zones, except for those within financial free zones such as ADGM and DIFC, which work with entities offering digital securities and digital commodity contracts. 

There is an exception for entities working in the virtual assets for payment purposes, and stored value facilities. They will fall under the jurisdiction of the Central Bank of UAE. However virtual asset platforms are not included under Central Bank jurisdiction.

As per the decision no one can engage in virtual asset activities unless they are licensed. The UAE Securities and Commodities Authority will offer licenses for the following activities:

a. provision of Virtual Asset Platform operation and management services;

b. provision of exchange services between one or more forms of virtual assets;

c. provision of Virtual Asset transfer services;

d. provision of brokerage services in trading operations in Virtual Assets;

e. provision of Virtual Asset custody, management, and control services; and

f. provision of financial services related to offering and/or selling by the issuer to the Virtual assets, or participating in providing those services.

Licensed entities must meet minimum requirements such as not being a sanctioned or on terrorism lists especially those concerned with combating money laundering and combating the financing of terrorism and illegal organizations, and not be subject to any criminal investigations within or outside the State during the submission or study of the application for registration, and that no final judicial judgment has been rendered against him in the crime of money laundering, financing terrorism, or financing illegal organizations;

In addition the entities seeking license need to implement technical systems that are able to protect investor data in accordance with international best practices, current technology and/or cybersecurity standards. 

These entities also need to meet the capital requirements and conditions, credit guarantees, insurances, compliance management systems and other rules in accordance with the executive resolutions issued by the Authority.

Finally the UAE SCA has the authority to suspend listing or trading virtual assets, or the technologies used by these services providers, or the operation of virtual asset platforms. 

The authority can impose financial fines not exceeding AED (10,000,000) ten million AED equivalent to $2.7 million.

This is the first time that the UAE has endorsed its onshore virtual asset regulations, it will now be time to see who can meet these regulations and who will not. 

Is the UAE Central Bank close to launching its own CBDC?

Is the UAE Central Bank close to launching its own CBDC?

There are 112 countries that are — in one way or another — exploring central bank digital currency (CBDC). Of this number, 11 countries have launched their own CBDCs, 15 are piloting, 26 are developing and 46 are researching. This trend appears to have reached the UAE, with the country’s central bank collaborating with various international agencies.

In 2019, the Central Bank of the UAE (CBUAE) piloted a wholesale CBDC project with Saudi Central Bank named of “ABER.” A final report was published in 2020, which showed that “the distributed ledger technology would enable central banks to develop payments systems at both local and cross-border levels.”

More recently, the CBUAE — along with the BIS Innovation Hub Hong Kong Centre and the central banks of Hong Kong, Thailand and China — implemented Project mBridge, a joint initiative experimenting with cross-border payments using a custom-built common platform based on distributed ledger technology (DLT) upon which multiple central banks can issue and exchange their respective central bank digital currencies.

H.E. Khaled Mohamed Balama, governor of the CBUAE, commented on the mBridge successful pilot by saying, “We will continue to establish the right governance framework for interoperable CBDCs to deliver tangible benefits to UAE companies and consumers.”

The CBUAE and its work on the digital currency could mean that a CBDC may be issued in the near future, but how close in the future is still unknown. The launch of a UAE CBDC will depend on various factors, including the ability of CBDCs to resolve issues of privacy, blockchain interoperability as well as economic monetary concerns.

Will the UAE launch a CBDC?

Stanislav Madorski, the senior vice president of blockchain strategy at WadzPay, told Cointelegraph MENA that given the cost and complexity of executing CBDC pilots, he expects the CBUAE would launch a CBDC.

“UAE has been making strides towards developing a cashless society and is in the top 10 in the world for the most cashless societies with ambitions to be fully cashless within this decade.”

Meanwhile, IBM MENA’s Chief Technology Officer, Anthony Butler, an expert on blockchain and digital assets, saw renewed interest in CBDCs in the region over the last few years, and the mBridge project is reflective of this.

This comes as governments worldwide show renewed interest in launching CBDC projects. In December, Pakistan signed two new laws to expedite the launch of its CBDC. Meanwhile, Spain’s central bank has stated its plans to start a wholesale CBDC project and asked financial institutions and tech providers to submit proposals for the initiative.

Challenges to CBDC launch in UAE

Both Butler and Madorski confirm some challenges that await the CBUAE and other central banks globally in their bid to launch CBDCs.

Madorski sees that while CBDCs have advantages because they are issued by central banks, which have a greater influence on monetary policy and can drive regulatory changes, the biggest challenge will be cross-border acceptance. He explains, “Each country’s blockchain might not be compatible with the other, so interoperability is an issue that we at WadzPay are trying to resolve.” 

Meanwhile, Butler sees much friction in launching retail CBDCs (rCBDCs), most notably the technical and economic challenges. He explains that if CBDCs are to replace cash, they would need to have the privacy that cash experiences offer.

“This is not only relevant within the boundaries of a country but also in cross-border payments,” Butler says. “There was a lot of consideration given in the UAE Saudi ABER CBDC design to this particular point because other countries could have visibility into transactions of counterparties.”

He also notes there are obstacles in moving past the “zero bounds” and toward the introduction of negative interest rates.

In addition, Butler emphasizes there are also structural implications of rCBDCs because if the general public has access to central bank money they no longer need to work with the commercial banking sector.

He emphasizes, “If you replace cash with rCBDC, then there are questions of how to ensure the ability to perform offline payments when someone isn’t connected to the network.”

The future is hybrid

It is plausible that the CBUAE could follow suit and issue stablecoins and a CBDC. Butler believes that several countries are exploring the different aspects of CBDC, like retail and stablecoins. He said these assets have been made available by the commercial banking sector. As he explains, “This will mitigate some of the well-known risks facing CBDCs.”

Madorski confirms that central banks, including Hong Kong, are looking at a hybrid model that would include both stablecoins and CBDCs. He states, “The hybrid model is allowing easy digital currency acquisition both locally and abroad, as stablecoins are readily available on many global exchanges. This model is definitely feasible in the UAE.”

UAE could follow in the footsteps of Singapore and launch something similar to Ubin, which is exploring the use of CBDCs for cross-border currency transactions, the Bank of Japan, which is rolling out a pilot program for its CBDC project to three major Japanese banks in spring 2023, or even India.

But out of the central banks experimenting with CBDCs, the People’s Bank of China leads the race. The Bank will expand the rollout of digital wallets for its e-CNY digital currency to several developed provinces by the end of 2022. It has already recorded $13.9 billion in e-CNY digital transactions and 260 million app downloads.

Whatever the use case, the CBUAE appears to be one the most promising countries in the MENA region when it comes to a CBDC launch, followed by Saudi Arabia, which recently hired a virtual assets and CBDC program lead.

While it’s still unclear when this will happen and what type of CBDC will be launched, the UAE inevitably will have to embrace CBDCs in its effort to build its crypto economy.