Chronicle of the Middle East and North Africa

Gulf Countries Bank on Digital Currencies to Boost International Trade

Gulf countries plan to adopt digital currencies in the future, to enhance efficiency, speed up commercial and financial operations, and reduce costs.

Gulf Countries Digital Currencies
Bitcoin cryptocurrency. Martin BUREAU / AFP

Ali Noureddine

This article was translated from Arabic.

According to research conducted by the International Monetary Fund, more than half of central banks worldwide are currently engaged in studies to develop their own digital currencies or have already formulated strategic plans for such initiatives.

Throughout 2022, a substantial number of central banks issued more than 100 digital currencies, which are currently undergoing diverse stages of research and development in preparation for their eventual introduction into the market.

Among these projects, a notable subset of 15 digital currencies, issued by central banks, has successfully progressed to the experimental stage after completing the initial phases of research, concept development and preliminary issuance.

In practice, much like popular cryptocurrencies like Bitcoin, central bank digital currencies facilitate convenient and swift financial transactions online, bypassing the need for commercial banks. However, in contrast to Bitcoin and other cryptocurrencies, CBDCs maintain central regulation, ensuring stability in value and discouraging their misuse for illicit activities.

The reasons behind central banks creating their own digital currencies vary, encompassing a wide range of objectives, including countering non-state-controlled cryptocurrencies by offering secure alternatives. These digital currencies aim to provide electronic payment options for individuals without bank accounts, particularly in countries with limited banking services. Additionally, they seek to streamline and expedite foreign trade while minimizing the necessity to acquire foreign currency for electronic transactions.

In the Middle East and North Africa region, Gulf countries have emerged as prominent players in the digital currency market and have taken significant strides in testing and developing digital currencies.

Notably, the Kingdom of Saudi Arabia and the United Arab Emirates have been frontrunners in this field, surpassing the majority of Western countries with their well-established financial systems, having successfully advanced to the stage of experimenting with the use of digital currencies following thorough research.

This reality necessitates studying Gulf countries’ experiences in the field of digital currencies to examine the feasibility of their investments in this type of currency. Additionally, it raises questions about the economic purposes or objectives behind these experiments.

UAE: Completion of digital currency trading model

The UAE has emerged as the fastest and most advanced Arab country in developing the financial framework necessary for digital currency trading. In March 2023, the UAE announced its readiness to launch the “Digital Dirham” initiative, aiming to establish a virtual currency that can be utilized for all domestic and international commercial transactions.

To launch this project, the UAE entered into agreements with companies such as “G42 Cloud” and “R3” to facilitate the implementation of crucial steps involved in issuing this digital currency. These strategic partnerships mark the final milestone in the UAE’s journey toward establishing a comprehensive digital currency trading ecosystem.

However, prior to reaching this advanced stage, the UAE laid the groundwork by developing a robust payment and financial transfer system, which served as the foundation for the utilization of digital currencies.

Starting from 2021, the UAE Central Bank initiated the “Bridge” project in collaboration with the Innovation Center of the Bank for International Settlements in Hong Kong, the Hong Kong Monetary Authority, the Central Bank of Thailand, and the Digital Currency Institute of the People’s Bank of China.

The primary objective of the project has been to devise mechanisms for utilizing digital currencies to facilitate seamless cross-border trade operations, including payment systems that involve multiple central banks.

The “Bridge” project successfully conducted tests on real-value payments between participating central banks using digital currencies. While these were experimental in nature, aimed at assessing the feasibility of cross-border transactions with digital currencies, the results showcased the potential to significantly expedite fund transfers from several days to mere seconds. This experiment also verified these currencies’ ability to eliminate the expenses and fees associated with interbank correspondence.

It is important to highlight that the payments made through the “Bridge” project amounted to AED 80 million, approximately equivalent to $22 million, within a six-week timeframe. This project not only showcased the potential for establishing advanced security standards for transactions involving digital currencies but also demonstrated the commitment to combat money laundering and terrorism financing.

The UAE began its initial foray into this realm with the “Aber” project in 2019, conducted in collaboration with the Kingdom of Saudi Arabia. This project extensively explored the feasibility of utilizing digital currencies for cross-border transfers, bypassing the need for commercial banks as intermediaries.

Notably, the project successfully devised various options and methods for engaging in digital currency trading, and thoroughly tested and evaluated these alternatives, with the intention of leveraging these findings for future endeavors.

In conclusion, the UAE has successfully leveraged its experiences to launch its own digital currency. The country has long recognized the potential of digital currencies as a means to develop its international trade by reducing the costs and complexities associated with money transfers involving foreign financial systems.

Unlike traditional bank transfers, digital currencies bypass banking administrative bureaucracies and correspondent bank transactions. Instead, they facilitate direct transactions between parties, with central banks settling payments afterward, thus enhancing the competitiveness and efficiency of cross-border trade exchanges.

The UAE’s interest in digital currencies aligns with its economic model based on an open market. The country is committed to diversifying its economy, reducing reliance on oil export revenues, and increasing non-oil trade income.

The UAE’s commitment to exploring the commercial prospects of digital currencies is evident in the agreements reached with India in early 2023 which focused on utilizing digital currencies in commercial transactions between the two countries.

They also encompassed the integration of fast payment platforms and collaborative efforts to develop applications utilizing digital currencies in order to lower the costs of financial transactions between India and the UAE. Notably, India is the UAE’s largest importer of non-oil exports, which explains the latter’s eagerness to implement payment mechanisms via digital currencies specifically with this country.

Saudi Arabia: Caution prior to launch of a digital currency

Much like the UAE, Saudi Arabia has been actively engaged in various projects since 2019, focusing on the study of digital currency payment mechanisms, particularly those involving cross-border transactions.

One notable project in this regard was the “Aber” initiative in collaboration with the UAE itself.

Building upon these experiences, the Saudi Central Bank embarked on testing a digital currency for Saudi Arabia in early 2023, partnering with fintech companies specialized in this field and coordinating with several foreign central banks currently conducting similar trials.

Consequently, it can be said that Saudi Arabia ranks as the second most flexible and open country in the Arab world and the Gulf, following the UAE, when it comes to digital currency adoption. After conducting tests on its digital currency in 2023, Saudi Arabia will be poised to proceed with the launch, mirroring the current efforts of the UAE.

Nevertheless, it should be noted that the Central Bank of Saudi Arabia is displaying a degree of caution and reservation compared to the UAE, refraining from hastening the introduction of a digital currency. Currently, the bank is meticulously assessing all the associated risks and studying the potential economic consequences before making any decisions regarding its future adoption.

This cautious approach can be attributed to Saudi Arabia’s concerns regarding the impact of a digital currency on the domestic banking system. There is apprehension that a significant shift of financial transactions from banks to the digital currency market could have adverse effects. The central bank also harbors fears about the currency’s influence on its control over the money market, particularly due to the ease of cross-border trade facilitated by digital currencies, in contrast to traditional bank transfers.

The discrepancy between the Saudi deliberation and the UAE enthusiasm likely stems from the latter’s long-standing embrace of a free and open market concept, whereas Saudi Arabia has only recently begun taking gradual steps in that direction.

Nonetheless, similar to the UAE, Saudi Arabia is undoubtedly expressing its desire to enter the digital currency market, albeit after careful consideration, in order to capitalize on the advantages offered by these currencies in foreign trade.

Other Gulf countries’ readiness

Today, while the UAE and Saudi Arabia are leading the way in experimenting with digital currencies in the Gulf region, other countries are also preparing to enter this market.

The Qatar Central Bank is currently in the exploratory stage, studying the potential of digital currencies and considering how to apply them in the future, although it has yet to develop and test payment models and mechanisms based on digital currencies. Like the UAE and Saudi Arabia, Qatar will need to go through a series of stages to experiment with payment systems and develop electronic transfer systems linked to the central bank.

In late April 2023, Bahrain began conducting preliminary studies to explore the possibility of launching a “digital Bahraini dinar” as part of a broader plan to develop electronic payment systems.

Similarly, the Central Bank of Kuwait formed a committee of monetary experts in early April 2023 to study the experiences of other central banks in the realm of digital currencies. The committee aims to research the feasibility of introducing a Kuwaiti digital currency.

As for the Sultanate of Oman, it started developing models and conducting studies for its own digital currency in 2022. This initiative stems from the Central Bank of Oman’s apprehension regarding the Omani youths’ growing interest in high-risk currencies like cryptocurrencies and Bitcoin.

It is evident that all Gulf countries have formulated plans to embrace digital currencies in the future, aiming to streamline and expedite commercial and financial operations while reducing associated costs.

The UAE and Saudi Arabia are expected to be the first Arab countries to launch their own digital currencies, with other Gulf nations leveraging their experiences before introducing their respective digital currencies.

The UAE’s experience in launching a digital currency will be particularly valuable to study and analyze, especially regarding its impact on cross-border trade operations given the significant volume of international trade conducted by the country.

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