Quicktake: How would a UAE-Saudi digital currency work?

Central banks of the two countries have been exploring a shared virtual currency for cross-border transactions

ABU DHABI, UNITED ARAB EMIRATES - November 27, 2019: HH Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces (not shown) and HRH Prince Mohamed bin Salman bin Abdulaziz, Crown Prince, Deputy Prime Minister and Minister of Defence of Saudi Arabia (2nd R), chair a meeting of the Saudi-Emirati Coordination Council during a state visit reception, at Qasr Al Watan.

( Eissa Al Hammadi for Ministry of Presidential Affairs )
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During Saudi Crown Prince Mohammed bin Salman's official visit to the UAE this week, the Saudi-Emirati Coordination Council met to discuss ways to drive further co-operation between the two countries. The initiatives agreed upon include a joint tourism visa, a mega oil refinery in India — and a less defined "digital currency" that has been in a "proof-of-concept" phase from at least the start of the year.

The digital currency project called Aber “is for use in financial settlements between the kingdom of Saudi Arabia and the UAE through blockchains and distributed ledgers technologies,” said a joint statement in January from the Saudi Arabian Monetary Authority (Sama) and the UAE Central Bank. The announcement followed the first meeting of the Saudi-Emirati Coordination Council on January 17.

It is still unclear if the central banks will proceed with the digital currency and whether they have begun the “pilot phase”, which is limited to a few selected banks. The January statement said the initial stages would concentrate on the “technical aspects”, followed by the “economic and legal requirements” if no technical obstacles are encountered.

Here we break down what this means and how a joint UAE-Saudi digital currency would work.

What is a digital currency?

A digital currency is a type of currency that is only available in electronic form, rather than in physical form. Cryptocurrencies are digital currencies, but not necessarily the other way around.

What is a cryptocurrency?

A cryptocurrency is a digital currency that uses cryptography, an encryption technique that tracks transactions. Blockchain is the database technology that creates an open ledger in a disparate network of computers. Everyone in the chain can see the details of each record, but every block is encrypted and can only be edited by its owner with a private key.

The first blockchain-based cryptocurrency was Bitcoin, which began circulating in 2009. Numerous cryptocurrencies have since emerged, such as Ethereum, Ripple and Litecoin.

What is the difference between a digital currency and a cryptocurrency?

Arshad Khan is co-founder and chief executive of Arabian Bourse, which has obtained initial regulatory approval to operate a crypto asset exchange at Abu Dhabi Global Market. He says there are a few key differences between a cryptocurrency and a digital currency.

“Digital currency backed by a central bank does not work on the concept of mining,” he says. To add a block of transactions to the blockchain, “miners” must solve a complex computational math problem.

“Cryptocurrencies are normally not backed by any agency,” says Mr Khan. That would not be the case with what is called a “Central Bank Digital Currency”.

What is a Central Bank Digital Currency?

Several central banks are looking at creating their own digital currencies. China is aiming to be the first country in the world to launch a digital currency, after five years of research by a team in its central bank, the Financial Times reported this week.  
The US Federal Reserve, the European Central Bank and others have indicated that central bank digital currencies may be the future.

What would the UAE-Saudi digital currency be used for?

At least in its initial stages, it would most likely be used between government institutions and banks. The goal is to make trade and remittances between the two countries more seamless, cost-effective and secure.

Saudi Arabia is the UAE’s fourth largest trading partner globally and the first in the Gulf, according to a statement Sunday on Sama’s website. The remittances issued to the UAE during the first six months of this year amounted to about 71 billion Saudi riyals (Dh69.5bn), while the value of remittances received amounted to 21bn Saudi riyals, the statement said.

What are the main advantages of a digital currency?

The main advantages include combating fraud and lowering costs. “Because it’s electronic, everything is trailed very nicely and very clearly,” says Mr Khan.

What are the potential challenges?

There is still a challenge of making sure transactions are secure, Mr Khan notes. There may also be privacy concerns, especially if a central bank is able to view everyone’s transactions.

What does this mean for FinTech in the region?

Mr Khan says the UAE has “been a thought leader” in the digital payments space for a while now. Last year, Abu Dhabi Global Market, the emirate's financial free zone, was the first in the region to launch a framework to regulate crypto asset activities. Such moves can help the market become “more transparent and more liquid”, he says.