CBDCs Gaining Popularity in Middle East and Central Asia

Middle East and Central Asia Embrace Central Bank Digital Currencies

Central bank digital currencies (CBDCs) are gaining traction in the Middle East and Central Asia, with 19 central banks actively researching or developing them. The International Monetary Fund (IMF) highlights the potential for CBDCs to drive financial inclusion and improve cross-border payment efficiency in the region. Notably, countries such as Bahrain, Georgia, Saudi Arabia, and the UAE have advanced to the "proof-of-concept" stage, with Kazakhstan leading with two digital tenge pilot programs.

Key Takeaways

• CBDCs could significantly enhance financial inclusion and payment efficiency in the Middle East and Central Asia, as indicated by an IMF survey.
• Saudi Arabia's central bank participation in a cross-border CBDC experiment with the Bank for International Settlements (BIS) signals a strong regional interest in digital currencies.
• The IMF warns of potential competition between CBDCs and traditional bank deposits, which could impact financial stability by reducing bank profits and lending activities.
• Improved cross-border payment efficiency is a key motivating factor for the exploration of CBDCs, particularly for oil-exporting countries in the Gulf Cooperation Council (GCC).
• While CBDCs offer the potential to foster competition in financial services, the implementation requires meticulous consideration due to associated risks.

Analysis

The emergence of central bank digital currencies in the Middle East and Central Asia holds the promise of reshaping the financial landscape by promoting inclusion and streamlining cross-border transactions. Countries such as Saudi Arabia and the UAE, driven by the complexities of international financial activities, are at the forefront of CBDC developments. However, these digital currencies present challenges to traditional banking systems, potentially diminishing deposit volumes and influencing lending practices. Although the IMF acknowledges the potential of CBDCs, particularly in island economies, stringent regulatory oversight is essential to mitigate risks to financial stability. The future trajectory of CBDCs hinges on striking a delicate balance between innovation and the maintenance of a resilient financial system and regulatory framework.

Did You Know?

• Central Bank Digital Currencies (CBDCs): These represent digital currencies issued by central banks, serving as legal tender and function using blockchain or similar technologies, offering the advantages of digital transactions such as rapid processing and reduced costs.
• Proof-of-Concept (PoC): PoC stages entail early implementations of proposed solutions or technologies to demonstrate their feasibility and functionality, which in the context of CBDCs involves testing their technical and operational aspects to align with regulatory standards and user requirements.
• Project mBridge: A collaborative initiative led by the Bank for International Settlements (BIS) involving multiple central banks to explore the utilization of CBDCs for cross-border payments, aiming to enhance the efficiency and security of international transactions through digital currencies.