The Central Bank of the UAE (CBUAE) is preparing to roll out the digital AED before year’s end, a government official said earlier this year at a summit. It recently completed the first government financial transaction using the CBUAE-regulated digital currency.

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Uh, Enterprise, what’s a digital AED? The central bank digital currency (CBDC), first revealed (pdf) in March 2023, is a digital form of the AED that is issued and backed by the CBUAE, but operates on blockchain technology, allowing it to be exchanged without intermediaries like banks. This means users can settle payments instantly and at a lower cost, while the currency maintains a peg to the AED and remains state-controlled and stable.

The UAE is among over 100 countries exploring CBDCs but is moving ahead of most. The CBUAE’s rollout plan includes three phases, beginning with international trade settlements:

  • In January 2024, a pilot cross-border transaction using the digital AED saw AED 50 mn sent to China via mBridge, a blockchain-powered platform facilitating real-time transfers between central banks in China, Hong Kong, and Thailand;
  • The UAE also conducted proof-of-concept trials with countries like India;
  • The final phase — which we’re about to enter — focuses on domestic usage, expanding the digital AED’s use in retail and wholesale transactions.

The CBUAE says it has already tested the full cycle of issuance, redemption, payments, and transfers across several retail use cases, including:

  • Food subsidies distributed by the Community Development Ministry, which could be programmed to control where and how the funds are spent;
  • Tourist wallets that offer VAT refunds and programmable incentives;
  • Parent-child wallets with programmable spending rules for children;
  • Fractional ownership of tokenized assets, including real estate.

How is it different from a stablecoin? While stablecoins — which are also regulated and can be backed by the AED, among other fiat currencies — can be used like a currency, they are not legal tender. The key difference is a digital AED is the digital equivalent of physical banknotes — it’s money in its purest form. A stablecoin, on the other hand, is issued by private companies, and only reflects the fact that you have private money held in a bank account somewhere.

It will also not carry interest and will likely be subject to holding limits, which the CBUAE says in a policy paper (pdf) will be “essential for managing [bank] deposit withdrawals during stress periods.” This is meant to discourage hoarding and reduce risks of bank disintermediation, particularly during times of stress.

It’s not yet clear what the limits will be, but the paper mentions some literature identifying an optimal holding limit for the Eurozone of around EUR 1.5-2.5k.

Worried about privacy issues onchain? Wallet balances will be pseudonymous and encrypted, with no personal data stored on the ledger, while wallet providers will manage user data, and KYC/AML compliance will be built into the system to meet regulatory requirements.

Why this matters

For the government, the currency aims to address pain points in both domestic and cross-border payments, and looks to reduce dependence on banknotes and boost financial inclusion. It also helps upgrade payment infrastructure to prepare for the future tokenization of both financial and non-financial activities.

On the other hand, the UAE’s large expat population will benefit from lower fees and faster remittance transfers, as well as real-time tracking and enhanced transparency, industry expert and marketing manager at Bitget Exchange Raghda Abutair told EnterpriseAM UAE.

Tourists will also have an easier time getting money in and out. “We will enable tourists that come to the UAE to top up their CBDC [Central bank digital currency] wallet with any account or any wallet they may have, convert any currency to digital, spend the Digital [AED] in the UAE, and then on the way back, convert it to whichever currency they want by the click of a button,” Paul Kayrouz, chief fintech officer at the CBUAE, was quoted as saying at Abu Dhabi Finance Week.

Crucially, the goal of the digital AED is for it to become a transactional currency, as opposed to a substitute for savings, the CBUAE explained.

Our take

The main concern has been how the digital AED will impact the banking sector, and whether it will erode profitability and trigger outflows and bank runs.

The CBUAE has already crunched the numbers, and it knows what money supply could look like. In a high-adoption scenario, the CBUAE said the digital AED is expected to make up around 5% of the UAE’s broad money supply — largely substituting bank deposits rather than physical banknotes.

But it’s not worried. The CBUAE says the presence of structural excess reserves in the UAE banking sector “mitigates the risk of disintermediation.”

Plus: A big portion of adoption will be accounted for by segments like migrant workers and tourists, a lot of whom have no formal bank accounts in the UAE, meaning their adoption won’t trigger significant deposit outflows or banking system stress.

Generally speaking, adoption itself will not come easy, Abutair said. It will depend on overcoming key hurdles, including user education.

Cybersecurity concerns are also a risk. Programmable money features — while useful for compliance and financial control — raise concerns about privacy, as they allow for real-time monitoring of transactions and potential restrictions on fund usage, Deniz Erhan, currently the director for Turkey and the Middle East at Ripple, wrote previously.

What to look out for next

How do we get our hands on it? Look for wallet-based apps linked to banks and exchange houses, including an app developed by the CBUAE (which allows users to choose between wallet providers, top-up or redeem balances, and complete payments) sometime before the end of the year.

The CBUAE also plans to launch a national financial literacy campaign to make for a smoother transition and ensure accessibility, according to the policy paper. The central bank has already begun surveying households, SMEs, financial institutions, and tourists to better understand what would drive or hinder real-world adoption.

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