Key Topics in the Kingdom of Bahrain

Interest in Central Bank Digital Currencies (CBDC) is increasing worldwide, including in Bahrain. Bahrain has made significant progress in digitizing payment services and fintech. While CBDCs offer various benefits, they also come with potential risks. This analysis paper aims to evaluate the advantages and risks associated with CBDC implementation in Bahrain. It utilizes a model specifically calibrated and estimated for Bahrain to quantify the potential impact on the financial system and monetary policy transmission. The study emphasizes that the perceived usefulness of a CBDC by the population is crucial for its widespread adoption. Although high adoption and remuneration can improve monetary policy transmission, they may also negatively affect the profitability of the banking system. To ensure financial stability, it is essential to design a CBDC carefully and based on analytical insights, which can enhance adoption while mitigating risks.

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