Central banks of Saudi Arabia and the United Arab Emirates (UAE) have concluded a digital currency (CBDC) pilot project, finding that distributed ledger technology can improve cross-border transactions and meet financial privacy needs in a purely context digital.
In a 93-page overview of the “Aber” project, the two central banks outlined the lessons learned from a year-long proof-of-concept designed to test the viability of a shared digital currency between nations. They found that a distributed payment system offers “a significant improvement over centralized payment systems” for domestic and cross-border commercial banking regulations.
“The name Aber was chosen because, as the Arabic word, for ‘crossing borders’, it captures both the cross-border nature of the project and our hope that it will also cross borders in terms of technology use,” the report reads. The project was announced in 2019 as part of Saudi Arabia and the UAE’s “Azzam” strategy, an agreement to promote bilateral cooperation.
Although central banks say more research is needed, the Aber pilot project contributes to the “body of knowledge in CBDC and DLT technologies”. Notably, the report builds on previous CBDC trials in Canada, Japan and Singapore, which were typically limited to the single currency, rather than double CBDC issuance.
In addition to the two central banks, six local commercial banks operated nodes and contributed “real money” from reserves deposited with central banks. The pilot project was built on Hyperledger Fabric, an authorized open-source distributed ledger linked to the Linux Foundation and IBM. However, JPMorgan’s Quorum, a private version of Ethereum and R3’s Corda DTL system were also considered.
“Note that public blockchain protocols like Ripple and Stellar, which are often positioned for cross-border remittance use cases, have been excluded due to the obvious need for permissions and privacy for an interbank payment use case (which these protocols did not support) “, the report reads.
Although the Aber project achieved “high levels of performance without compromising security or privacy,” the researchers note that there were teething problems in coordinating nodes between jurisdictions. Further questions about the purpose of the regulation and the performance of the blockchain, potential legal or political issues, and operational risks were raised and partially addressed in the report.
The Aber researchers note that further experimentation could see the introduction of additional fiat-backed currencies, geographic expansion and the deployment of financial instruments such as bonds.
Perhaps the biggest question left unanswered? How distributed systems will affect monetary policy.