Should the UAE Issue Sovereign Cryptocurrency?

After years of battling the advent of cryptocurrencies and their use in the mainstream market, the central banks of some countries are looking into creating sovereign digital currencies. This is a stark contrast to the ethos of cryptocurrencies, which seek to undermine the traditional and conventional financial authority of money.

Most countries that worry about whether Facebook’s Libra has the potential to overturn their economic stability and impair their currency value globally have begun to push their central banks to draft policies for the use of sovereign cryptocurrencies. The USA and the EU are among them, while China has been carrying the Olympic torch in this sprint. China has formally implemented a law governing cryptographic password management, which is part of the pre-release plans for its sovereign digital currency or central bank digital currency (CBDC). Let’s first look into the concept of CBDC.

What is CBDC?

In simple terms, CBDC is traditional fiat money in digital form, issued, governed, regulated, and circulated by the country’s central bank and/or government.

How is CBDC different from cryptocurrency?

The differences between CBDC and cryptocurrencies are:

  1. CBDC is issued and governed by the central bank, whereas cryptocurrencies are privately mined and approved by numerous online coders distributed across the globe.
  2. CBDC is not just a store of value but a complete substitute for physical fiat currencies, whereas cryptocurrencies may be a store of value without any legitimate underlying backing.
  3. CBDC will be recognized as a legal negotiable instrument (mode of payment), whereas cryptocurrencies may or may not be traded as a legally acceptable mode of payment.
  4. The value of CBDC is firmly dependent on the country’s monetary policies, whereas cryptocurrency is based purely on utility and market conditions.

Is Facebook’s Libra a CBDC?

 No! Facebook’s cryptocurrency, Libra, is founded by Facebook and will be overseen and regulated by the Libra Association. The Libra Association is a consortium of 28 founding members including payment, technology, telecommunications, venture capital, and blockchain companies, as well as nonprofit organizations such as PayPal, Lyft, Coinbase, and Mercy Corps, among others.

Facebook claims that Libra will make sending money online cheaper and faster and that it will improve access to financial services, especially for people without bank accounts or who have limited access to banking. Libra is mined or built upon a blockchain platform called the Libra Network – a blockchain made up of a series of servers that record and validate every transaction that takes place on the network. Unlike with many other cryptocurrency networks that allow any server to join the chain, the Libra Network is a ‘permissioned’ blockchain, meaning that only certain servers will be able to connect to the chain.

It is claimed that Libra is stable and non-volatile, unlike other cryptocurrencies, as it will be backed by a basket of fiat currencies such as the US Dollar, Euro, Yen, etc. Despite being backed by fiat currencies, Libra is not CBDC, as it is issued, overseen, regulated, and circulated by a private consortium without any backing from the central bank.

How is China leading the way in CBDC?

After Libra was launched, various reports speculated that China feared the US Government would back Libra, which would cause the US Dollar to significantly increase in value and, thereby, result in a decrease in the value of the Chinese Yuan. As a precautionary measure, and to take the lead in setting a global example, China decided to launch its CBDC through Chinese-approved and licensed crypto exchanges including Alibaba’s crypto exchange platform, BABA.

China has formally implemented a law governing cryptographic password management, which is part of the pre-release plans for its CBDC. Public and private keys or passwords are necessary tools for encrypting crypto data and providing the necessary security against being tampered with. Through this law, China has developed national, common, and commercial crypto password management systems to engineer and develop a world-class national blockchain platform for its CBDC.

With the launch of its CBDC, China aims to put the US Dollar at risk.

What makes CBDC a better option than cryptocurrencies?

To explain this, let me draw your attention to the analogy presented by Mr. Subhash Chandra Garg, Ex-Finance Secretary of India, who is popularly known for the much-criticized draft bill, ‘Banning of Cryptocurrency and Regulation of Official Digital Currency’ in 2019. This bill was aimed at banning cryptocurrency in India.

This bill has its roots in the major risks that cryptocurrencies pose. Some of the major reasons are outlined hereinbelow:

  1. Cryptocurrencies have no government backing;
  2. Such ‘private cryptocurrencies’ have no intrinsic or commonly acceptable value;
  3. It lacks any intrinsic or commonly acceptable value, and has no attributes of currency, thereby making it extremely volatile and risky for any economy;
  4. The cryptocurrencies are run by private entities lacking the ability to control and maintain the value of the cryptocurrency. Most cryptocurrencies are entirely based on the promise of utility.

Unlike the above, CBDC is a stable store of value governed and monitored by the government/central bank. It has all the attributes of a currency and is, in fact, money in digital form. Unlike some traders or investors who are brave enough to invest in barren cryptocurrencies, most traders rely on currencies which are regulated and have the backing of the central bank. Therefore, it is evident why the concept of CBDC or a sovereign cryptocurrency is gaining in popularity amongst the major developed and/or developing countries in the world.

Why should the UAE consider issuing its own CBDC?

Apart from competing with the rest of the world, following are the major reasons why the UAE should consider launching its own CBDC:

  1. Increase the value of UAE Dirhams globally;
  2. More rapid and secure mode of cross-border financial transaction;
  3. No intermediary and/or hidden handling charges to exchange CBDC;
  4. Stable value due to a lack of inflation rate buffers or monetary policies of subsidies, etc.;
  5. Secure store of value;
  6. Greater reliance and trust of customers and investors;
  7. Interest-bearing CBDC could have a rate of return in line with risk-free assets such as short-term government bonds and other securities;
  8. Cost-less medium of exchange;
  9. Greater ease of exchanging money for investors;
  10. Can be stored directly with the central bank, which provides more cushioning for investors in the event of an economic downturn.

Above all, the widespread use of CBDC, and the obsolescence of paper currency, would discourage tax evasion, money laundering, and other illegal activities that are made easier by paper currency, especially large-denomination bills. This may be the most reliable mode of conducting financial transactions and it remains in compliance with anti-money laundering laws and counter terror financing laws (AML).

Conclusion

CBDC could transform all aspects of the monetary system and facilitate the systematic and transparent conduct of monetary policy. In particular, a central bank digital currency can serve as a practically costless medium of exchange, a secure store of value, and a stable unit of account. To achieve this, the currency would be account-based and interest-bearing, and the monetary policy framework would target true price stability. Therefore, as one of the leading countries in the Middle East with respect to blockchain, fintech, and crypto laws, the UAE government should definitely consider launching its own CBDC for the benefit of the public at large.

Author:

Adv. Shayan Dasgupta
Corporate & Commercial Law | M&A | FinTech, Blockchain & AI
shayan.dasgupta@bestwinslaw.com