In ambitions to shape the application of distributed ledger technology to prevail over existing pain points in cross-border transfers, the central banks of Saudi Arabia and the United Arab Emirates (UAE) collaborated on a project set to test the viability of a shared digital currency between nations.
Reflecting their key objective to experiment with the status quo of cross-border payments and use technology to cross boundaries, the nations stickered their project with the name ‘Aber’, an Arabic word meaning “crossing boundaries”.
What did this experiment have to say?
As the year-long pilot recently reached its conclusion, the two central banks of Saudi Arabia and the United Arab Emirates (UAE) released a 93-page overview which outlined the lessons they’d learnt from their “first of its kind” approach.
Describing the project as as an innovative driven initiative, the report prefaces that:
The initiative sought to explore whether distributed ledger technology could enable cross-border payments between the two countries to be reimagined: using a new, dual-issued digital currency as a unit of settlement between commercial banks in the two countries and domestically.
With its last pages the report confirms this proposition, concluding that a distributed payment system offers “significant improvement over centralized payment systems” for domestic and cross-border commercial bank settlements.
What does that mean?
While the central banks comment that further research is still needed, the Aber pilot reports that it “represents a significant contribution to the body of knowledge in CBDC and DLT technologies and lays the foundation for future work that we plan to explore in the future.”
The report certainly does build on earlier CBDC experimentation in Canada, Japan and Singapore, which were typically limited to single currency, rather than dual-issued CBDC. It also paints its results as more promising by providing insight as to why public blockchain protocols were not used:
Note that public blockchain protocols such as Ripple and Stellar, which are often positioned for cross-border remittance use cases, were ruled out because of the obvious need for permissioning and privacy for an interbank payment use case (which these protocols didn’t support).
It continues:
The project proves that DLT technologies could offer high levels of performance whilst not compromising safety or privacy. As such, the project has confirmed the viability of DLT as a mechanism for both domestic and cross-border settlement and confirmed the technical viability of a single digital currency issued by both central banks.
Researchers are careful to note that there were early issues in coordinating nodes across jurisdictions, indicating there is still room for improvement and further areas that need to be explored in the future if the approach of a single digital currency is to be implemented
Ways to go or not, this project proposes that Distributed Ledger Technology (DLT) can provide central banks with the ability to reimagine both domestic and cross-border payment systems in new ways - yet another exciting development towards realising the potential of this new technology to transform the financial industry.