Central Bank Digital Currency (CBDC) is a kind of digital currency, similar to cryptocurrencies like Bitcoin and Ether, but issued by Central Banks. CBDCs are an extension of a country’s sovereign fiat currency in digital form. The central banks, instead of printing money the old-fashioned way, will issue electronic or digital tokens that are backed and secured by the government.
Most digital currencies make use of DLT (Distributed Ledger Technology), which means there is no central hub, and they are issued in a decentralised way with no single authority controlling them. But in the case of CBDC, this is a centralised issued currency, so it is controlled by the government and is safe as it is supervised by law.
In the United Arab Emirates, the Central Bank of the UAE is going to introduce “DIGITAL DIRHAM” as its digital currency very soon to increase the efficiency and transparency in monetary transactions. This implementation of Digital Dirham will enable easy cross-border transactions, fast-forwarding the UAE as a leader in digital assets and the global fintech space. The Digital Dirham CBDC will be a golden feather in the crown for the UAE’s virtual asset development initiatives.
Global Evolution of CBDC
The initial discussions of CBDC are from the early 1980s to the 2000s, when economists proposed the idea of “electronic money”, which is issued by a central authority. But this idea didn’t come into force as most countries stuck with the traditional method of financial transactions, like cash and bank deposits.
By the mid-2000s, the emergence of digital payment applications like Google Pay, PhonePe, and the usage of credit/debit cards grew very fast. As it is easy to use and reduces the unnecessary costs too
In 2009, the first cryptocurrency, Bitcoin, was launched, which showed that decentralized financial assets with peer-to-peer transaction capabilities are possible. This emergence of the cryptographic ledger made central banks concerned, as its widespread use could potentially have a very bad effect on the monetary and financial stability. Because of this, around 2014, the central banks of China and England started researching CBDC.
Between 2016 and 2020, many central banks, including those of Canada, Singapore, the UAE and others, piloted the use of CBDCs for interbank payments. Sweden developed “e krona” and China implemented “Digital Yuan (e-CNY)” within these controlled pilots.
The initial launch of CBDCs for public use happened between 2020 and 2022. The world’s first CBDC was used by the Bahamas as “Sand Dollar” in 2020, where it was used in its retail form. In 2021, Africa’s first CBDC, “eNaira,” was introduced. Jamaica’s first CBDC was launched in 2022 as jam-DEX and Dcash (Eastern Caribbean), which is for public use.
From 2022 to now, more countries and large economies have joined in CBDC pilots, with millions of users already involved in China’s Digital Yuan pilot, while the Indian CBDC — “Digital Rupee” commands over 4 million users.
Why CBDC?
A country may explore the implementation of CBDCs to achieve various goals, which range from improving a country’s economic stability to discouraging the use of other stablecoins and enabling transparent transactions through a central system.
The important reason is to improve the country’s monetary system with more efficiency and security. CBDC will reduce operational costs and keep the flow of funds steady in the country. It could also make peer-to-peer payments/transactions possible without the need for a bank account.
The US Dollar has been the reserve currency for trade and international payments for a long time now. The implementation of multiple CBDC platforms can bring changes, reducing the global reliance on the US Dollar and promoting the implementation of a multiple-currency system.
Types of CBDC
Generally, CBDCs are of two types
- Retail CBDC
- Wholesale CBDC
1. Retail CBDC
Retail CBDC is used by the public for individual and business transactions, which can be directly used through e-wallets or mobile apps. The retail CBDCs can be used for everyday payments like peer-to-peer transactions, shopping bills, etc. It is faster, easier, and more secure than the traditional method, and cheaper too. It reduces the dependency on the fiat currency, and CBDC is easy to store, too.
2. Wholesale CBDC
While Retail CBDCs are used by the public, Wholesale CBDCs are meant for banks and financial institutions only. It is used for large transactions, cross-border payments, and the settlement of securities. This enables quick interbank settlement without waste of time, money, and effort. As the cost of cross-border payment is high, using Wholesale CBDC results in cost reduction, making transactions more efficient, safe, secure, and transparent.
Some of the examples for Wholesale CBDC are:
- Project Aber: Utilized for cross-border transactions between the UAE and Saudi Arabia
- Project Ubin: Singapore
- Project Jasper: Canada
CBDC in the United Arab Emirates
The “Digital Dirham” was introduced by the Central Bank of the UAE in 2019, which is an alternative form of traditional currencies. In January 2024, the chairman of CBUAE made the first cross-border payment (Wholesale CBDC) through Project mBridge with the BIS innovation hub, Hong Kong Monetary Authority, Bank of Thailand, and Bank of China. Now, CBUAE has introduced the model for the Digital Dirham Application and Wallet. In the future, CBUAE will expand from two types to CBDCs, by making additions in retail digital dirham peer to peer (P2P), online transactions, business to consumer (B2C), business to business (B2B), government to consumer (G2C). This expansion of CBDC will create a major shift in the monetary framework of the nation.
Evolution Of Digital Dirham
In 2023, as a part of the FIT program (Financial Infrastructure Program), CBUAE introduced Digital Dirham, and the policy paper was made between 2023 and 2025. This created a structured introduction about the new form of digital currency, its classification, challenges, legal considerations, and risks.
In 2025, CBUAE revealed the symbol for the new digital dirham and a policy paper with regulations of legal and operational for Digital Dirham in cooperation with Federal Decree Law, which states about the Central bank’s power regarding the Digital Dirham was published.
As an update to this, the UAE participated in a cross-border transaction as an experiment, with China, Hong Kong, and Thailand, using the mBridge network.
In 2025, CBUAE announced the launch of retail central bank digital currency by the end of this year. While launching the retail digital dirham, CBUAE will continue the deployment for wholesale and cross-border functions.
How Digital Dirham Could Affect Dubai’s Economy
The implementation of Digital Dirham will affect the whole economy of Dubai in different sectors:
Financial and Banking Sector
Wholesale CBDC will reduce the risks, mainly the settlement latency risk and counterparty settlement risk for interbank transactions and market repo. The new type of currency will create curiosity in depositors, and more deposits will be added. It improves settlement efficiency and liquidity, shortening the settlement cycle of securities and digital assets in the UAE’s monetary system.
SME’s, Retail, and Payment
Retail CBDC will reduce the merchant fees, and the digital dirham is faster than the traditional cash payment system, so this one will make instant and speed settlement, which will reduce the receivable cycle, and the cash flow will be improved.
Cross-border trade
In cross-border transactions, there will be lots of costs which is unbearable, but with the emergence of digital dirham, they can be reduced to a large extent.
Real estate
In this sector, the speedy transaction process of digital dirham will make the settlement instant, and can reduce the money loss due to fraudulent brokers and third-party fees. More safe and secure than a traditional payment system, as there will be a proof of payment.
Crypto and stablecoins
Compared to other sectors, the crypto and stablecoins won’t have a positive impact with the emergence of digital dirhams. As CBDC is a government-approved digital coin, it is percieved to be safer, secure, and managed by a central authority, so there will be a reduction in demand for these privately issued coins like crypto and bitcoin.
Practical Suggestions
As it is new to the UAE’s economy, there are some suggestions to make it more impactful. The central authority CBUAE can publish rulebooks on Digital Dirham to make it easier and more compact to understand and to know every aspect of it, and people can act according to it. By collaborating with more currencies, Digital Dirham would bring more growth globally and attract more investors, too.
Case Study
Digital dirham was used as a trial for cross-border transactions on the ‘mBridge’ platform, which was successful, and this is proof that it reduced the settlement frictions in foreign exchange, reducing the waiting period for payment, and eliminating technical collusion.
Pilot operations and testing were successful, which included wholesale tests (tested with other banks) and an AML/CFT test, which ensures secure transactions, and gradual commercialization. This was published in their policy papers and public reporting document by CBUAE.
Long-Term Implications
When the digital dirham comes to market, it will reduce settlement friction and payment, create a gateway for an increase in productive gains, and increase the nation’s GDP rate. This supports new business models, reduces working capital needs, and promotes productivity growth.
This exposure of new digital money could attract more to Dubai as a region for tokenisation and will create a hub for virtual assets by adding more exchange activities and custody providers.
Risk And Limitations
While implementing the AML/CFT regulations for CBDCs like the digital dirham, the central bank should strike a balance between regulatory requirements and individual privacy. The unprecedented transparency offered by the CBDCs will make surveillance easy, allowing the government to trace the path of each token through layers of transactions, resulting in a perceived invasion of privacy. The fear of government tracking every penny spent makes people apprehensive about using it, thereby impacting adoption.
Meanwhile, if users aren’t well-versed in following the best practices when it comes to handling the wallet or executing transactions, they may become easy targets for hackers. An increased exposure to cybersecurity threats could cause widespread disruption of payment systems across the network. To avoid such a scenario from playing out, the authorities should strengthen cybersecurity protocols and implement incident response plans.
Increasing reliance on CBDC wallets due to ease of use may potentially shrink the deposit base, pushing the banks into crisis. If this occurs, then the credit creation rate will be lower, and banks won’t be able to provide loans. To avoid such a scenario from playing out, the UAE intends to route all CBDC transactions through bank accounts only, thereby keeping these institutions relevant.
CBDCs as a legal tender come under the purview of the issuer nation’s central banks. However, their effects are global in nature as they may be used for cross-border trades and transactions. If the underlying principles of the CBDC are faulty, it may end up having far-reaching implications. Hence, there is a need for international cooperation and globally recognized laws and regulations governing the functioning of CBDCs to ensure the integrity of the global economy.
Future Of CBDC
In the initial rollout phase, the CBDCs will be utilized in limited retail pilots involving small transactions. Based on the learnings gathered from the pilot program, CBUAE is expected to update the licensing requirements and tokenization standards to improve the offering. The developments are expected to be made public through circulars and policy papers in the near future.
The instant transaction and settlement features of CBDC can be attractive to SMEs operating with tight budgets, as they will result in increased cash flow and liquidity to continue operations. As a result, there is a huge probability that UAE-based entities and their international trading partners may prefer to conduct cross-border transactions with CBDCs, creating an ideal environment to foster innovation and adoption of these digital currencies.
Conclusion
Digital dirham is a transformation of the monetary infrastructure from the traditional transaction methods to a much faster, seamless digital one without compromising the monetary stability. It will make a positive impact on the economy by reducing payment frictions and boosting tokenisation.
