The Central Bank reduces the impact of the digital dirham on bank profits

The Central Bank, in an analysis conducted by the bank’s employees, reduced the negative effects on banks’ profits and their role as intermediaries in the country’s financial system, as a result of issuing the “digital dirham” currency, in which the “Central Bank” achieved tangible achievements and great strides.

The Central Bank said in the financial stability report issued recently, “With regard to dispensing with financial intermediation of banks, the analysis indicates that (the digital dirham) may lead to the withdrawal of up to 5% of bank deposits in the over-reliance scenario, but in a conservative manner, and from “It is estimated that this will have only a slight negative impact on banks’ profits.”

The Central Bank added, “Given that banks in the UAE have excess liquidity, it is unlikely that it will shrink as a result of reducing their lending and investment activities.”

He continued: “According to the analysis, the bank’s employees estimate an increase in the real GDP by up to 0.4% as a result of the use of (the digital dirham) over a period of five years, in addition to significant impacts on the network and well-being, and a greater possibility of enhancing economic growth.”

The Central Bank stated that in 2023, it launched four experimental use cases in the digital economy for the “Digital Dirham” with selected banks, and also tested the integrated life cycle of the digital currency for central banks, to ensure the operational readiness of the technologies on which it is based.

The Central Bank explained that, following the successful completion of several pilot programs, during the years 2022-2023, it laid the technical foundations, policy foundations, and legal foundations for launching the “Digital Dirham” at the level of local and cross-border channels.

He stressed that, in the coming years, he will continue preparations to fully launch the “Digital Dirham” versions for retail and cross-border companies in various stages.

He said: “The process of launching the controlled (digital dirham) is consistent with the digital currency initiative of central banks in other countries, which enhances confidence in the safe issuance of the (digital dirham) on a large scale. This way of working also helps in continuously monitoring global CBDC developments, which ultimately leads to identifying emerging ideas and lessons learned.”

The Central Bank continued: “The digital currency for central banks is designed to be used like cash, but in a digital format, which facilitates instant electronic transactions, and takes advantage of technology, to improve the efficiency of payments, reduce transaction costs, and facilitate access to financial services. However, The transition to using digital currencies for central banks must be managed carefully, to address the risks associated with it regarding confidentiality, cybersecurity, illicit cash flows, monetary and financial stability, and the current financial system, specifically the banking system, given its role in the economy.

“Cash” and digital currencies

The Central Bank stated that the main differences between cash and central bank digital currencies are as follows:

■ CBDCs can be used directly for electronic payments.

■ No storage costs for central bank digital currencies.

■ Central bank digital currency data privacy must take into account anti-money laundering and counter-terrorism financing considerations.