The UAE Central Bank's latest regulation on stablecoins is expected to establish a clear operational framework for cryptocurrencies when implemented next year, and usher in the mainstream acceptance of decentralised currencies within the country.
The new crypto regulation, issued last month, will only allow businesses and vendors in the Emirates to accept cryptocurrencies for goods and services if they are dirham-backed stablecoins, a type of virtual payment token.
This means other digital assets such as Bitcoin and Ether, the world’s biggest cryptocurrencies by market capitalisation in that order, and US dollar-backed stablecoins like Tether or Binance USD will not be allowed for those types of payments in the UAE. However, financial free zones are excluded from this regulation.
Foreign payment tokens will be permitted only for the purchase of specific virtual assets in the UAE such as non-fungible tokens (NFTs), said Irina Heaver, a crypto lawyer based in the UAE and Switzerland.
The recognition of specific use cases for foreign payment tokens will bring “more structure and cohesion … facilitating collaboration between FinTechs and VASPs [virtual asset service providers]”, said Kokila Alagh, chief executive of Dubai-based Karm Legal.
This will help companies avoid legal pitfalls as a result of unclear legislation, she added.
For example, without regulations, an NFT marketplace faces legal ambiguities when accepting foreign stablecoins leading to compliance risks. Yet by explicitly allowing the use of foreign coins for virtual asset purchases, the new law eliminates these uncertainties, encouraging secure interactions between FinTechs and VASPs such as cryptocurrency exchanges, wallet providers, and payment processors.
“It [a centralised system] will bring more order but does not make other coins obsolete … in fact, stablecoins should be seen as a glue which could bind the whole virtual asset ecosystem together,” Ms Alagh told The National.
Accepting foreign currency-backed stablecoins in the UAE will expand payment options for consumers and businesses and promote regulatory compliance, resulting in a “safer and more diverse market”, said Sonia Shaw, president of crypto trading platform CoinW.
The new provision is expected to come into force in June 2025, with the possibility of an extension at the discretion of the UAE Central Bank, the banking regulator announced in a 101-page circular titled Payment Token Services Regulation issued on June 14.
This is to allow time for a dirham-backed stablecoin to be created, noted Ms Heaver, and in a phased approach to provide stakeholders a smooth transition.
Amid these changes, the use of Bitcoin and Ether in the Emirates may be pivoted and restricted to investment and trading purposes, said Bundeep Singh Rangar, chief executive of Fineqia, a listed digital assets firm.
They will continue to play significant roles in investment portfolios, as evidenced by companies like MicroStrategy and Tesla, which hold them in their corporate treasuries, he added.
“If kept in treasuries, they [cryptos] can be subsequently converted into a given stablecoin for an actual payment when purchasing something in the UAE,” Mr Rangar told The National.
The worldwide stablecoin market is expanding quickly, which calls for robust regulations to govern it, experts said.
Total amount of stablecoins bought globally stood at $40 billion globally during March, highlighting the growing demand for stablecoins within the cryptocurrency ecosystem, according to data compiled by blockchain analysis firm Chainalysis.
However, experts emphasise that dirham-baked stablecoins will be different from Central Bank Digital Currencies (CBDCs) that many global economies, including the UAE, are working to introduce.
Dirham-backed stablecoins could either be private stablecoins, issued by private entities and backed by reserves, or function as CBDCs if issued by the UAE Central Bank. The distinction will lie in the issuer.
A CBDC is a digital form of a government-issued currency. They are similar to cryptocurrencies, except that their value is fixed by the monetary authority and equal to the country's fiat currency.
Why is the UAE Central Bank focusing on stablecoins?
The new crypto law aims to create an ecosystem where financial institutions, local businesses, and consumers can confidently use dirham-backed tokens for transactions.
This integration would combine the stability of the dirham with the efficiencies of crypto technology, fostering a “robust domestic market” of stablecoins in the Emirates, said Arushi Goel, policy lead for the Middle East and Africa at blockchain analysis firm Chainalysis.
The co-existence between centralised regulated stablecoins and decentralised crypto can “ultimately form an interdependent relationship which adds depth to the financial market without rendering the latter obsolete”, Ms Shaw said.
The symbiotic bond is possible because both types of assets serve different purposes, she added.
For example, centralised stablecoins like dirham-backed tokens can still leverage blockchain's transparency and immutability, providing the benefits of crypto technology while ensuring price stability through the backing of a fiat currency. They are well-suited for everyday transactions, savings, cross-border payments and compliance with regulatory standards.
On the other hand, decentralised cryptocurrencies drive innovation, enable decentralised finance applications, peer-to-peer transactions, and new financial products that operate without intermediaries.
This diversity in applications allows users to choose the best tool for their specific needs, experts said.
While regulation and decentralisation might seem to be at odds, it's a much more nuanced discussion. Today, crypto applications “span a spectrum, ranging from centralised to decentralised systems”, Ms Goel said.
“Regulations bring clarity for businesses that want to leverage stablecoins for various purposes and protect consumers, ensuring a safer and much more trustworthy environment.”
How are stablecoins safer?
Stablecoins, like USDT, TerraUSD, and Dai, are pegged to the value of traditionally stable assets such as the US dollar, and provide a safer haven compared to other cryptocurrencies. However, not all stablecoins are equally safe.
The stability of a stablecoin relies on the quality and transparency of the assets held in the issuer’s reserve to back its value. For example, some stablecoins are fully backed by fiat currencies held in bank accounts, which can be easily audited and verified. While others use a mix of assets - including cryptocurrencies or algorithmic mechanisms, which can be less stable and more vulnerable to market fluctuations.
The risk management strategies, along with the ability and reputation of the issuer to maintain the peg under different market conditions, also play key roles in ensuring the stablecoin's reliability.
Industry analysts said that regulating the stablecoin industry is essential to prevent incidents like past market collapses. One notable example is the downfall of stablecoin TerraUSD and its sister token Luna.
“I am all for regulating stablecoins … this is the right thing to do. We don’t want another Luna collapse that wiped out nearly $60 billion from the crypto markets some years ago,” Ms Heaver explained.
In May 2022, the Singapore-based Luna Foundation Guard attempted to maintain the value of TerraUSD at its peg of $1. Despite spending billions of dollars' worth of Bitcoin and other cryptocurrencies to support this value, their efforts failed, leading to the collapse of TerraUSD. The debacle was attributed to insufficient funds held by the issuer to support the stablecoin’s value and flawed regulations, such as relying on volatile assets or complex algorithms that did not endure market pressures, highlighting the need for stronger laws.
In the case of TerraUSD, the issuer used Bitcoin and other cryptocurrencies to maintain its value, but these assets themselves were volatile and could not sustain the stablecoin's $1 peg during market downturns. This instability led to a loss of confidence and the subsequent failure of both TerraUSD and Luna.
Clear regulatory frameworks can help thwart such failures by ensuring that stablecoin issuers have adequate funds and risk management policies to protect investors and maintain market stability. UAE’s latest regulation is a firm step in that direction, Ms Heaver said.
Implications for UAE crypto companies
The new law mandating dirham-backed stablecoins for transactions will significantly impact crypto businesses in the UAE, experts said.
“One aspect will be the increased scrutiny on compliance … although it might seem restrictive, these are steps that can help build a healthy level of public conversation and regulatory confidence in the crypto sector,” Igor Bershadsky, a Web3 entrepreneur and co-founder of Dubai-based PhronAI, told The National.
As per the regulation, no entity can issue a payment token without producing a white paper, submitting it to the Central Bank, receiving its acceptance and subsequently publishing it.
A white paper in this context serves as a document that details the technical specifications and operational data of the payment token. It provides critical details to the Central Bank to assess the viability and security of the token before granting approval.
The regulation adds that banks might not be permitted to directly act as a payment token issuer - an entity that converts fiat money into stablecoin. However, a bank can create a subsidiary, affiliate, or another related entity to perform the activities of a payment token issuer, provided that this new entity meets the licensing and regulatory requirements.
Transitioning to using the dirham payment token or an approved foreign payment token is “not a major obstacle, it merely requires adjusting the definition of trading pairs”, said Amir Tabch, chief executive for the Middle East at the UAE-headquartered Liminal Custody, a digital asset custody and wallet infrastructure provider.
Trading pairs are a fundamental concept in cryptocurrency exchanges that refer to the comparison of the value of two different assets being traded against each other.
UAE’s new regulation will resolve many existing issues such as difficulties in converting digital currencies to traditional currencies and enhance a stable and compliant operational environment for cryptos, Mr Tabch said.
