Are CBDCs (Central Bank Digital Currencies) the Future of Money?

Are CBDCs (Central Bank Digital Currencies) the Future of Money?

What is on the plate for the future of money? We will be a cashless society, some say. We are, indeed, in a transition to that point, as Central Banks around the world are exploring CBDCs (Central Bank Digital Currencies). There are 11 countries so far that have launched a nationwide CBDC. These countries are The Bahamas, Nigeria, Jamaica, and 8 Eastern Caribbeans countries (Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines).
Several Central Banks in the world, such as China and Sweden, are exploring the possibility of issuing CBDCs – China has a large-scale pilot in progress. More and more countries are beginning to experiment with this new form factor of money.

What is a CBDC?


A CBDC is a type of digital currency issued by a country's central bank. CBDCs are similar to traditional fiat currencies, such as the US dollar or the Euro, but they exist solely in digital form.
Blockchain technology is often used to underpin CBDCs, as it provides a secure and efficient way to record transactions. CBDCs are different from other digital currencies because they are backed by the government and can be used to make purchases from Central Bank-authorized retailers. A CBDC can be exchanged from traditional fiat currency. They can also be used to pay for goods and services online.
Some of the potential benefits of CBDCs include:

Increased efficiency: CBDCs can be used to make instant, peer-to-peer payments 24/7. This would eliminate the need for intermediaries such as local banks and payment processors, which can slow down transactions.
Greater security: CBDC transactions would be recorded on a blockchain based ledger, making them more secure and transparent than traditional banking systems.
Reduced costs: By eliminating intermediaries, CBDC could help to reduce transaction costs. The cost of physical currency also goes down. 

CBDCs have the potential to revolutionize the way we think about money and payments. They are still in their initial stage of development, but they hold great promise for the future of money and payments. Central Banks will continue to explore the use of CBDCs in the coming years, and it will be interesting to see how this innovative technology develops.

CBDCs in MENA (Middle East and North Africa)


Many countries are experimenting with the use of CBDCs, but so far, no country in MENA has fully launched a digital currency nationwide. The development of CBDCs is complex, and there are many technical and legal challenges that need to be addressed before a country can launch a digital currency.
In the Middle East, there is a heavy reliance on oil. Economic growth focuses extensively on energy resources. However, there is a new trend: global oil demand may reduce drastically following the introduction of electric cars and the wider adoption of other energy sources like wind and solar energy to foster a more sustainable ecosystem. Hence, the need to devise a proper economic structure that does not rely only on oil for growth and stability.
Furthermore, the need to facilitate cross border transactions grows widely every day, but that does not mean CBDCs do not serve a better purpose in their country of origin.
To respond to this, several countries in the Middle East have created more diversified alternatives like tourism, finance, and technology. To test the feasibility of CBDC, the Central Bank of Saudi Arabia and UAE (United Arab Emirates) worked collaboratively on several tech projects, including digital currencies and other sectors.
The Central Bank worked with six commercial banks to complete Project Aber, and the report was made available in 2020. Following Project Aber, the two banks conclude that the introduction of blockchain digital currencies will be a success. Central Bank of UAE and Saudi Central Bank reported that the issuance of CBDC for wholesale and retail purposes will be a tech improvement to facilitate a centralised payment system, cross-border payments, and speeding up financial transactions.

State of CBDC in the Middle East and North Africa

Country

Status

Purpose

Egypt

Inactive

Undecided

Israel

Development

Retail

Iran

Development

Retail

Kuwait

Research

Retail

Lebanon

Development

Retail

Oman

Development

Undecided

Qatar

Development

Undecided

Saudi Arabia

Pilot

Wholesale

Turkey

Development

Retail

UAE

Pilot

Wholesale


Why the Middle East Needs CBDCs


The requirement for a flourishing financial system that does not depend on oil and energy is one of the most prominent reasons the Middle East needs to develop CBDCs. Despite government activities in countries like UAE (Dubai), Turkey, Lebanon, and Saudi Arabia to create a framework for digital currency usage for financial transactions, more and more people are still using digital currencies.
As reported by Chainalysis, the Middle East transacted $271.7 billion worth of digital currencies between July 2020 and June 2021. This is a yearly estimation of Middle East participation in digital currencies, and the above report shows that the Middle East takes up to 6.6% of global activity in digital currencies. Turkey, Lebanon, and UAE transact with over $100 billion worth of digital currencies in 2021.

WadzPay and CBDCs


With over 250-years of cumulative traditional payment rails experience from leading global financial institutions, as well as a talented blockchain technology team, WadzPay is well positioned to provide modern infrastructure to support wholesale and retail central bank digital currency (CBDC) and stable coin solutions for central banks, financial service providers, payment processors, and their merchant network ecosystems worldwide.

Sources:

1. Marcus Lu. (2022) “Visualized: The State of Central Bank Digital Currencies”

2.  Jack Schickler. (2022) “New Global CBDC Platform Could Cut Payment Costs, IMF Says. The International Monetary Fund remains skeptical about a private system, but is pushing for new
ideas on state-backed digital currencies.”

3. BIS “Innovation Hub work on central bank digital currency (CBDC)”

4. Consensys “Blockchain Solutions for Central Bank Digital Currency (CBDC)”

5. Adrian Pollard (May 2021) “Middle Eastern Central Bank Digital Currencies and the World”

6. PWC. (2022) “The race to digital money is on: Global Index shows which central banks are in
the lead.”

7. Kristalina Georgieva. (2022) “The Future of Money: Gearing up for Central Bank Digital Currency”

Disclaimer:

*WadzPay is a B2B technology provider. All regulated activities featured in WadzPay 2.0 are conducted by licensed entities in applicable jurisdictions.