China and UAE Central Banks Sign MoU on Digital Currencies

Recent at the third "Belt and Road" International Cooperation Summit Forum in Beijing, the Central Banks of China and the United Arab Emirates (UAE) inked memoranda of understanding (MoU) concerning digital currencies. The People's Bank of China (PBOC) solidified a digital currency cooperation agreement with the Central Bank of the United Arab Emirates, while the state-owned commercial Bank of China (BoC) entered into a similar agreement with the First Abu Dhabi Bank (FAB), the UAE's largest bank.

This development is an extension of the ongoing collaboration between the two central banks under the mBridge project, which primarily concentrates on cross-border payments. Additionally, the initiative involves the Bank for International Settlements (BIS), as well as the central banks of Thailand and Hong Kong.

During the Belt and Road announcement, indications surfaced regarding potential future cooperation with the Bank of Indonesia, although the scope of this collaboration in the context of digital currency remains ambiguous. Notably, Indonesia has actively been exploring its digital rupiah program.

Shu-Pui Li, the UAE's advisor on digital currency, highlighted the prospects for collaboration, particularly considering the preference of Chinese enterprises for utilizing the eCNY (digital yuan) for transactions, a currency widely accepted by UAE corporations. This synergy can be attributed to the significant presence of Chinese nationals in the UAE, with around 300,000 Chinese workers employed and nearly 60% of Chinese trade with the Middle East and North Africa passing through the UAE.

Li also emphasized the potential of Central Bank Digital Currencies (CBDCs) for infrastructure payments within the Belt and Road initiative, bypassing the necessity for intermediary banks. This approach not only cuts costs but also reduces delays, addressing concerns raised by the recent utilization of the Swift network for imposing sanctions.

The Bank of China stands out as one of the few commercial banks directly accessing the digital yuan CBDC, positioning itself at the forefront of digital currency innovation.

Moreover, the UAE has been actively advancing its digital currency ambitions, as highlighted by the First Abu Dhabi Bank's successful completion of a pilot for JPMorgan's Coin Systems solution. The UAE had previously revealed comprehensive plans for CBDC work covering retail, wholesale, and cross-border applications. The mBridge cross-border payment project holds a significant position in this expansive agenda, followed by a bilateral cross-border CBDC venture with India. Proofs of concept for both domestic and wholesale CBDCs are in progress and are slated for completion by mid-2024, with R3 acting as a key partner for the domestic CBDC work.