Due to their intrinsic volatility, cryptocurrencies are mainly used as a store of value or for speculative investment. For instance, Bitcoin is more often known as "digital gold," as its owners choose to keep it as an investment rather than spend it on everyday costs. However, the true potential of digital currencies, like cryptocurrencies, for daily usage might be unlocked by the emergence of CBDCs.

CBDCs are engineered to work with conventional and digital currencies to facilitate trade across various monetary systems. By incorporating CBDCs into the financial ecosystem, central banks may address the instability of cryptocurrencies and the stability of fiat money. Customers can purchase using their cryptocurrency assets without worrying about their value changing or converting them to fiat money.

For example, in a world where CBDCs are the norm, you can pay with Bitcoin or Ethereum at the register. Thanks to CBDCs, merchants could accept cryptocurrency payments with less risk of price fluctuation, while consumers would still have access to the advantages of decentralised digital assets. One of the most exciting things about CBDCs is how they can seamlessly integrate Bitcoin into ordinary transactions.

Understanding digital currencies: Cryptocurrency, Altcoins, Stablecoins, and CBDCs

To grasp the significance of CBDCs, it’s essential to differentiate between the three major types of digital currencies: cryptocurrencies, altcoins, stablecoins, and CBDCs.

1. Cryptocurrencies like Bitcoin and Ethereum are decentralized and operate on blockchain technology. They offer an alternative to traditional finance by allowing individuals to transfer value without intermediaries like banks. However, this decentralization also introduces challenges, including high volatility and regulatory concerns. While cryptocurrencies have proven effective as stores of value and speculative investments, their volatility makes them less practical for everyday transactions.
2. Altcoins: These are alternative cryptocurrencies launched after Bitcoin's success. They generally project themselves as better substitutes for Bitcoin with improvements in transaction speeds, energy efficiency, privacy, or added functionality such as smart contracts. Examples include Ethereum, Ripple (XRP), Litecoin, and many others.
3. Stablecoins, such as USDT (Tether) and USDC, aim to solve the volatility issue by pegging their value to fiat currencies. These digital assets provide a more stable alternative to cryptocurrencies, making them popular for transactions and trading. Stablecoins comprise around 7% of the cryptocurrency market cap, but they dominate in transaction volume, accounting for nearly 60% of daily crypto trading volume. Their liquidity and stability have made them indispensable for traders and businesses, but stablecoins are still mainly limited to specific use cases within the crypto ecosystem.
4. CBDCs are the next evolution in digital finance. Issued and regulated by central banks, CBDCs represent a direct digital version of a nation’s fiat currency. Unlike cryptocurrencies, CBDCs are fully centralized and operate within existing financial frameworks. They aim to enhance the efficiency of payment systems, reduce transaction costs, and promote financial inclusion. As such, they are poised to reshape the global financial system in ways neither cryptocurrencies nor stablecoins can fully achieve.

CBDC: A new era in finance

As more and more transactions occur online, CBDCs are the next logical step in developing money. Although physical currency is still in circulation, its use is declining due to the rise of digital payment systems. This pattern is much more noticeable in developed economies such as the UAE.  Digital wallets and contactless payments have become the standard, especially in metropolitan areas like Abu Dhabi and Dubai, due to digital transactions’ ease, speed, and security.

CBDCs represent the next logical step in this development by combining the best features of digital payments with the security and stability provided by central bank regulation. Instant, low-cost, and decentralised (CBDC) local and international transactions are possible without banks or payment processors. This improves efficiency and cuts costs, especially for international transactions, which sometimes take days to settle and frequently incur hefty fees.

In addition, CBDCs may significantly improve access to financial services. The UAE is just one of several countries where vast swaths of the population cannot access formal financial services. CBDCs might provide people with direct access to the financial system via digital wallets, allowing them to participate in the economy even if they don't have bank accounts. This becomes even more crucial in emerging markets, where people often lack the means to access traditional financial services.

The UAE' market environment

Regarding new regulations for digital currencies, the UAE has been cutting edge. In determining the course of digital money in the nation, several important regulatory agencies are taking the lead:

• Virtual asset services are supervised by the Securities and Commodities Authority (SCA), which guarantees that digital currencies operate within a safe legal framework.
• Payment token services are regulated by the Central Bank of the UAE (CBUAE), which aims to integrate digital currencies into the broader financial system stably and innovatively.
• The two financial free zones, Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), each have their regulatory regime for virtual assets, creating a diverse and competitive environment for businesses to thrive. Attracting worldwide attention and investment in the UAE's digital finance ecosystem, Dubai's Virtual Assets Regulatory Authority (VARA) is at the forefront. VARA is the first autonomous regulator for virtual assets in the world.

Rather than just responding to international trends, these regulatory agencies are actively working to shape them. The UAE is at the forefront of financial technology because of its dedication to developing a robust regulatory framework for digital currencies; moreover, its persistent attempts to include CBDCs in the monetary system demonstrate its innovative mindset.

In the MENA area, the United Arab Emirates (UAE) is quickly becoming a centre for cryptocurrency innovation and acceptance. Institutional and individual investors are drawn to the UAE's well-structured regulatory environment, according to Chainalysis's 2024 Geography of Crypto Report. Government backing for blockchain technology, dedication to technical innovation, and an inviting investment environment are all critical growth factors. The UAE is well-positioned to lead the crypto infrastructure sector because of its transparent regulations, especially those about digital asset frameworks and stablecoins. Businesses now have more faith in the regulatory climate that encourages innovation, leading to the widespread use of cryptocurrency for payment processing, international money transfers, and other decentralised finance (DeFi) uses. The increased interest in DeFi, which provides quicker and more accessible financial services to institutional and retail users, and the increasing transaction volumes via centralised services are indicators of the UAE's thriving crypto ecosystem.

Embracing CBDCs for the future

The UAE government has a strategy for digital transformation, and CBDCs will be an integral element of that plan. With its forward-thinking legislative structure, the UAE guarantees the security and scalability of CBDC technologies, and its position as a global leader in fintech and blockchain provides it an advantage in the adoption race.

The proliferation of CBDCs will bring about problems but will be manageable. These problems include worries about privacy and cybersecurity and the possible disintermediation of conventional banks. CBDCs' potential to transform the financial system for the benefit of consumers and companies depends on the availability of suitable regulatory frameworks and supporting technology infrastructure.

Finally, CBDCs are the currency of the future. The UAE's adoption of CBDCs will enhance financial inclusion, transaction efficiency, and the full potential of cryptocurrencies for daily usage as it maintains its lead in digital banking. The UAE is on the cusp of a digital financial revolution and will lead the pack.

References:

• https://www.chainalysis.com/blog/middle-east-north-africa-crypto-adoption-2024/
• Jegerson, D., Khan, M. and Mertzanis, C. (2024), "Adoption of cryptocurrencies for remittances in the UAE: the mediation effect of consumer innovation", European Journal of Innovation Management, Vol. 27 No. 6, pp. 1837-1863. https://doi.org/10.1108/EJIM-09-2022-0538
• Jegerson, D., Mertzanis, C. and Khan, M. (2023), "Investigating the unexpected determinants of cryptocurrency adoption in the UAE", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-06-2023-0924
• Jegerson, D. and Mertzanis, C. (2024), "Deciphering the role of cryptocurrencies in global remittances: a comprehensive literature review", Management & Sustainability: An Arab Review