UAE’s digital dirham and push for de-dollarization: The key economic and geopolitical takeaways

Introduction

Sheikh Mansour Bin Zayed Al Nahyan, Vice President, Deputy Prime Minister, Chairman of the Presidential Court, and Chairman of the Board of the Central Bank of the UAE, initiated the first cross-border payment of Dh50 million ($13.6 million) using the UAE Central Bank’s digital currency, ‘Digital Dirham’.

The transaction was made through MBridge platform – which had been launched in 2021. It is a collaborative effort of four countries – UAE, Thailand, Hong Kong and China.  

Mbridge seeks to use a multiple-central bank digital currency (multi-CBDC) common platform – which has been opposed by prominent US politicians including former US President and Republican Presidential Candidate Donald Trump.

Significance of the transaction

The cross-border payment of $13.6 million -- using the Digital Dirham -- is significant for several reasons. First, it shows how the UAE in sync with its economic vision for the future has made significant progress towards achieving its objective of building a robust digital economy. While commenting on the ‘Digital Dirham strategy’ in March 2023, UAE central bank Governor Khaled Balama had said that the Digital Dirham will further cement the position of UAE as an international economic hub. He also said:

“The launch of our CBDC strategy marks a key step in the evolution of money and payments in the country. The CBDC will accelerate our digitalisation journey and promote financial inclusion,”

Second, like several other countries UAE – which entered BRICS in January 2024 – has been pushing for de-dollarization or reduction of dependence upon the US Dollar for trade specifically in oil.  UAE has been in talks with several countries – other than China – for trade in local currencies. In July 2023, India and UAE had signed an agreement for promotion of local currencies for cross border transactions and for linking India’s UPI with the instant payment platform (IPP) of UAE. In December 2023, India made it's first payment in Rupees for the purchase of crude oil from the Gulf nation.

Third, the recent cross border payment is a reiteration of the multi-dimensional nature of UAE-China relations in recent years -- much to the discomfort of the US. UAE has categorically stated that it will follow a foreign policy driven by its national interest. It would be pertinent to point out here that the UAE has entered BRICS, it is also a pro-active member of the I2U2 which consists of -- US, India, UAE and Israel –also referred to as West Asian Quad.

While several US policymakers have acknowledged that the expansion of BRICS could impact the global significance of the US dollar, others have begun to articulate their concerns that steps like the digital dirham could prove to be a tool for evading US sanctions.

 It would be pertinent to point out that several UAE based firms have faced US sanctions in recent months. In November 2023, US had sanctioned UAE based firms for selling Iranian oil to Europe and Asia.

US sanctions on UAE based firms

Three UAE based firms had also been sanctioned in November 2023, for selling Russian oil at prices beyond the oil cap set by G7. In January 2024, US Department of Treasury again imposed sanctions on a UAE based shipping firm for exceeding the oil cap.

The recent transaction between UAE and China is important for more than one reason as has been mentioned earlier. First, the UAE’s increasing emphasis on innovation, digital technology and moving towards a more digitalised economy has begun to show results. Second, the evolution in UAE’s foreign policy -- which has been focusing on striking a fine balance between US and China – is evident. Third, the growing thrust on de-dollarization not just in UAE, but several other countries, in the aftermath of US sanctions on Russia, Iran and other countries is here to stay. While it may be an exaggeration to write of the US Dollar, trade in commodities is likely to rise in local currencies and the rise of digital currencies – like the digital dirham – is likely to be watched very closely by the US.