Middle Eastern Central Bank Digital Currencies and the World

Also known as a CBDC, Central Bank Digital Currency is a new type of digital currency that is operated and regulated by a monetary authority of a country. Biggest change to come out of CBDC is to cut out local banks and like Bitcoin, CBDCs should function better on the internet compared to fiat currencies we use today.

CBDC will be different from decentralized currencies like Bitcoin because it will be controlled centrally by a central bank blockchain, albeit that blockchain has potential to grow more decentralized as adoption increases and if made more public.

CBDC are important because like other blockchain, they can be programmed and can make money actually work over the internet, this means less processing times and reduced costs with higher fidelity on every single transaction. In other words, a central banker’s wet dream.

While several governments worldwide are already experimenting with their viability, none have officially launched their own CBDC as yet. And while it may seem that CBDCs are still in the exploratory stage there seems to be some panic around being the country to have a functioning CBDC.

Sweden for example claims that they will have their central bank digital currency in 5 years, while China is said to be testing theirs today.

But is the first mover advantage important? Probably not, what is important is the country’s continued value and involvement in global trade in the future, on that matter, the Middle East is in a key position due to their role in powering the world through oil.

Of course the US can’t be ignored but this article isn’t to explore the obvious.

Demand for more energy isn’t likely to go away, in fact it will probably exponentially increase as we advance, which leads to the big question of where is the Middle East when it comes to CBDCs?

While Kuwait, Oman, Saudi Arabia, UAE, Iran and other Middle Eastern countries have long relied on energy resources for economic growth, the global demand for oil should reduce over the long term as global mandates for greener energy kick in and the newfound interest in nuclear power. Not to mention new oil wells being discovered in the US. This has led to increased diversification within the Middle East towards investments in alternative sectors like tourism, technology and finance.

The central banks from both Saudi Arabia and UAE have both been collaborating on blockchain technology projects in the financial sector and are dabbling in crypto applications.

Six commercial banks made up of three from each country participated in a joint CBDC project for 12 months called Project Aber, before releasing a report in 2020 with favourable results in regards to aspects of accuracy and settlement speeds.

The Saudi Central Bank and the Central Bank of UAE both agreed that the project tests for blockchain digital currencies were a success. Both countries reported that a dual-issued CBDC would be technically viable for cross border payments, as it would be an improvement over current centralised payment systems, like SWIFT, while significantly speeding up processing.

Because UAE is taking the lead as an international hub, they have the most to lose as other Middle Eastern countries will want to follow suit.

Central banks working on their own CBDCs will have plenty of competition from rising fintech businesses that are not afraid to use alternative digital assets like Bitcoin and Ethereum. And with the increasing number of open financial technologies on the rise, the pressure is on to roll out a CBDCs to compete not only with public blockchain in use today but with every other country on earth.

Despite the perceived rush to develop the first CBDC, a fully operational CBDC has yet to be launched on a large scale by any country. That being said, the People’s Bank of China has already tested their own digital Yuan currency across four major cities in early 2020 as part of a pilot program.

China is the favourite example to use when pitching CBDCs and is often used by officials to push their governments to move quickly on their own CBDC in fear of a Chinese CBDC global take over.

But is the threat of a Chinese CBDC taking over the world realistic?

The threat of the Chinese Yuan over taking foreign exchange, even with a CBDC is small due to its actual use today. Above data source from Bloomberg.

You only need to look at the data and you will see Chinese currency is barely in the game dispite all the noise. Coupling that with Chinese unpopular status globally right now then it will take major global values and cultural shift to use a CBDC controlled by China.

Instead the rapid development of a CBDC from China is likely motivated by fear of losing control over its position currently and over the populace with consistent threats by public cryptocurrencies which are already highly used by the populace in a P2P manner within the country despite news headlines saying it is a banned currency when infact it is not.

How about other countries? Most other countries are still in the R & D stage, but a few have already started trials and some smaller ambitious countries have gone beyond the stages of development like the Sand Dollar which is looked upon by other nations as the most practical example of what can be done with CBDCs.

The UK has begun proposing research and drafting regulations for their own possible CBDC, while the economy minister of Brazil has announced definitively that the South American country will be creating their own CBDC. And the Turkish government has announced a pilot for their own sovereign digital currency, creatively called ‘Lira’, which includes software platform development for instant payments.

Unsurprisingly, some countries are also trying to use CBDCs as just another way to better keep tabs on their citizens which has brought big privacy concerns around CBDCs.China’s experimental CBDC for example was said to be a “totalitarian measuring device” by PayPal founder Peter Thiel.

Whereas Sweden’s coming e-Krona digital currency may have more privacy respecting mechanisms built into the protocol reflecting the country’s values there still hasn’t been much evidence that privacy is a concern, rather it seems to be a common afterthought in every countries pursuit of the world first CBDC.

The main takeaway is that CBDC can be programmed to best fit the country’s values and needs for bad or good. For example with the likes of Iran and Venezuela their digital currency needs may stem more from a need to circumvent US sanctions and ironically could be more private.

The CBDC race is a canary in the coal mine that is a fierce global digital battle for the best global money is emerging behind the scene with every central bank right now.

While the exact implementation details are currently unknown, there are rough frameworks for how the concept of CBDC systems could work. That’s why some commentators have said in the past that CBDC issuance will ultimately destroy other cryptocurrencies, but this is actually a pretty naïve view because when CBDCs are eventually rolled out they will be sold to the general public as a more convenient alternative to cash, credit and not alternative to crypto. They will complement other legal forms of tender, rather than replace them entirely.

With plenty of brand name companies like PayPal, Square, and Revolut already adopting open native crypto assets their mainstream adoption is already well on its way, ahead of CBDCs and while the introduction of CBDCs may increase competition, it is safe to say that the crypto boat has long sailed.

No matter how you slice it, it’s highly unlikely that CBDC will become any kind of competitive threat to cryptos. In fact, quite the opposite, if CBDCs start eroding privacy, which is the biggest technological problem of CBDCs, it could accelerate adoption into Bitcoin and other more privacy focused crypto like Monero.

Going back to the Middle East, the last anyone thinks of when they think of the Middle East is technology, sure the biggest tower is there and other incredible infrastructure feats but much of the advancement was outsourced and did not originate there. Save for one area.

Financial services sector remains one of strong and largely independently developed part of the region with connected but also highly complex structures around how money moves around.

That is why the region has begun investing in this new emerging financial technology and is trying to find new ways to source the talent to keep ahead which has been an ongoing issue within the region.

Typically sourcing talent involves mass outsourcing of the high tech work to forigen workers, a successful strategy Dubai deployed to build its oasis city in the desert.

More tech workers will need to be mobilized globally in order to upgrade the financial system towards crypto and CBDC infrastructure but with critical skill shortage constraints shortcuts will likely have to be taken in order to compete for tech talent and to get ahead with crypto and CBDCs.

As blockchain technology is inherently open-source much of the technology is already freely available to use, but connecting blockchain to the traditional financial systems is proving overly complex due to inherent technological differences.

By using open-source blockchain software and pre-setup (white-label) digital assets exchange technology, a lot of the complex blockchain integration is automatically managed, which is good news for countries that want to upgrade their financial system quickly.

A great example of rapid technological integration can be referenced is the South Korean case. The small country managed to provide broadband internet access to almost everyone, propelling the country into an Asian powerhouse.

A similar scenario could play out again in the next decade with the CBDC race in the Middle East and the ever increasing amount of open-source digital money systems already out there today.

It is hard to predict exactly how CBDCs and crypto tech will affect commerce, but one thing is sure, those operating on a native cryptocurrency system will have a huge head start in the next digital world economy.