CENTRAL BANK DIGITAL CURRENCIES: A PRACTICAL GUIDE FOR ARAB CENTRAL BANKS

23-02-2022 Increasing interest in retail CBDC within the Arab region

Defining CBDCs in law, clearly specifying CBDC legal tender status, assigning CBDC as cash finality, are all major legal challenges

58% of respondent central banks are considering the permissioned DLT/ blockchain as a technology for applying the CBDCs, and 88% of them consider other payment modernization alternatives such as instant payments, or APIs

Dedicated committees, exploring use cases, experimentation are among initiatives taken by Arab central banks to assess the adoption and operation of CBDC

Accelerate the rate of end-user access to financial services, and the adoption of diverse end-user solutions at affordable prices to mitigate financial exclusion risk

The two-tier design for retail CBDC can mitigate the risk of financial disintermediation if commercial banks are not included in the CBDC

Adoption of Digital Identity and its integration with payments schemes, balancing personal data privacy and combating illicit financial activities, applying limits on balances and transaction amounts to control CBDC in circulation, are among the proposed policies

The Arab Monetary Fund (AMF) issued today Monday, 21 February 2022, a guide titled “Central Bank Digital Currencies: A Practical Guide for Arab Central Banks”, produced by members of the Arab Regional Fintech Working Group (WG). The guide is issued under the framework of the Fund's endeavours to support Arab central banks in their journey exploring CBDCs that matches best for each jurisdiction, and are well suited for the central bank objectives, available resources, targeted implications, taking into consideration country-specific conditions, infrastructure and as well as respective legal and regulatory frameworks. The guide refers to developments in the Arab region stem from the recent AMF survey, having 17 respondent Arab central banks, which reveals a common interest across the region to explore CBDCs without a decision taken yet. While11 respondent central banks did not decide yet the type of CBDC that may be considered, the six remaining central banks pointed wholesale and diverse types for retail CBDCs, namely hybrid, direct retail, and synthetic CBDCs; which reflect the attention given to retail CBDCs within the region and is related closely to the motivations that authorities have reported.

Main drivers that motivate Arab central banks to engage in a CBDC project, indicate initially the importance of (i) promoting a cashless economy, (ii) improving traceability of transactions, (iii) enhancing remittances for migrant workers, and (iv) accelerating financial inclusion. Arab central banks perceived legal challenges that may hinder the initiation of CBDCs, with the most important ones are respectively: defining CBDCs in law, clearly specifying CBDC legal tender status, assigning CBDC as cash finality and ensuring adjustments to existing texts, as well as the legal certainty in the transfer of value and the clear distribution of roles, responsibilities, costs, and liabilities of third parties.

Moreover, the survey shows that 58% of respondent central banks are considering the permissioned DLT/ blockchain as a technology for applying the CBDCs, while 11% go for employing the public blockchain. The remaining 31% are considering modernizing their payment systems by using a traditional data base.

Many of the Arab central banks took various initiatives such as (i) establishing dedicated committees to assess a prospective introduction of CBDC, (ii) exploring use cases and assessing different approaches for adoption and operation (iii) arranging for experimentation. In addition, the guide illustrates other CBDCs payment modernisation alternatives, such as but not limited to, improvements to messaging protocols, coordination of existing Real-Time Payment systems (RTP) for interoperability, as well as tokenization of assets (fungible and non-fungible).

AMF survey showed that 88% of Arab countries are considering or already engaged in other payment modernization alternatives such as APIs or instant payments projects. Also, the guide highlights the notion of Regulated Liability Network (RLN), which is going beyond CBDCs, to reframes CBDC in a broader context including tokenized central bank money, commercial bank money, and electronic money, using distributed ledger technology and making them exchangeable on financial networks.

In the meantime, the guide deep dived into various countries’ recent CBDCs projects highlighting different designs architecture, technology options, diverse risks mitigations initiatives, and main policy decisions.

Furthermore, the guide shed lights on a set of policies that could be formulated while designing CBDC according to each country specific circumstances: (i) many CBDCs pilots and experiments are based on the two tier design for retail CBDC, to mitigate the risk of financial disintermediation if commercial banks are not included in the CBDC, (ii) introduce limits on balances and transaction amounts for transfer into accounts/ wallets under various scenarios, to control CBDC in circulation, (iii) adopt Digital Identity and integrate it with payment schemes, (iv) balancing between preserving personal data privacy and combating illicit financial activities, even with anonymous CBDC, namely token-based CBDC, (v) broaden the entities allowed to onboard customers and ensure their KYC measures, (vi) mitigate the financial exclusion risk by accelerating the rate of end user access to financial services and employ diverse end-user solutions, in particular vulnerable segments, as well as (vii) strengthening the cyber security framework as a corner stone in a CBDC system. In addition, the guide elaborates on the notion of experimentation as a way not only to reach an appropriate selection of design, technical features, technology options for the CBDC architecture, as well as assessing and mitigating the associated risks. But also, to identify the needed legal and regulatory amendments related to CBDCs’ issuance and the best way to apply them while preserving cost and time. Finally, the guide ends by a decision tree that aims to support Arab central banks in the decision-making process, allowing them to go step by step into the CBDC journey, from the identification of their drivers for launching CBDCs, and the risks regulators are trying to mitigate, going through set of questions addressing various aspects of the CBDCs; with the aim of selecting the CBDC best suited for their objectives, goals, available resources and infrastructure of the country. Noting that, the paper was prepared by members of the Arab Regional Fintech WG including experts from the Arab central banks. Also, it has been reviewed by Arab Central Banks and Monetary Authorities.

Commenting on the CBDCs guide, His Excellency Dr. Abdulrahman Al-Hamidy, Director General Chairman of the Board of Arab Monetary Fund, praised the initiatives of the Arab Reginal Fintech WG in issuing policy notes and providing advice to the relevant authorities in the areas of Fintech, strengthening digital financial services, and supporting innovations and access to formal financial services. H.E wishes that this guide would contribute to raise awareness on requirements and challenges of initiating CBDCs. Finally, H.E stressed on the importance of the ongoing cooperation of the Arab Reginal Fintech Working Group with all relevant stakeholders.

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