Why Tether's UAE move could be a breakthrough moment for stablecoin

The digital asset is expected to streamline cross-border cryptocurrency transactions

Tether is the world's biggest stablecoin, with a market capitalisation of about $117.4 billion as of Thursday. Reuters

Tether's announcement that it plans to launch a dirham-pegged stablecoin in the UAE shows confidence in the country's cryptocurrency regulatory landscape, which can serve as a model for other countries seeking to tap into one of the components of the future of finance.

The stablecoin, which is expected to take months to be licensed, will be launched in partnership with Abu Dhabi-based Phoenix Group and Green Acorn Investments.

It is expected to streamline international trade and remittances, reduce transaction fees and provide a hedge against currency fluctuations, Tether said.

“The diverse and responsive regulatory environment in the UAE is highly conducive to innovation and will accelerate maturity in the space,” Arushi Goel, policy lead for the Middle East and Africa at blockchain company Chainalysis, told The National.

“As a result, the UAE could also serve as a model for other regions, showcasing how to effectively regulate stablecoins and other crypto assets.”

What is a stablecoin?

A stablecoin is a type of cryptocurrency that is pegged to a fiat currency – Tether has been designed to be always equivalent to $1 – and tends to be less volatile unlike Bitcoin, where wild swings are influenced by simple factors such as tweets.

They aim to address cryptocurrencies' shortcomings by pegging their value to a unit of an underlying asset, are often issued on faster blockchains and backed by state-issued tenders such as the dollar, pound, euro and highly liquid reserves including government treasuries or commodities such as precious metals.

Also, a stablecoin is different from a central bank digital currency: the former is privately issued, while the latter is government-backed. Both, however, aim to make transactions faster, cheaper and more secure.

About $2.2 trillion worth of stablecoin transactions were reported in April alone, according to a recent Visa study.

How big is Tether?

Tether is, without a doubt, the biggest stablecoin in the world, commanding about two thirds of the market, CoinMarketCap data shows.

As of Thursday, Tether has a market capitalisation of about $117.4 billion – more than the combined values of every other stablecoin, which total 182, according to the cryptocurrency tracking website.

Tether also has stablecoins pegged to the euro, yuan, Mexican peso and gold.

What does the UAE say about stablecoins?

The UAE Central Bank's latest regulation on stablecoins is expected to establish a clear operational framework for cryptocurrencies when introduced 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.

How close are stablecoins becoming mainstream?

The central bank's payment token services regulations provide for a licensing regime for offering payment token services for dirham-backed tokens, as well as a registration regime for a foreign currency-backed payment token.

By offering clear regulations for using stablecoins as payment instruments, the UAE is creating a conducive atmosphere for businesses to establish themselves and contribute to the growth of the crypto ecosystem, Ms Goel said.

The push is also being driven by several other factors, which include demand and the actual supply for stable digital assets, which can be used every day, said Rudy Shoushany, founder of DxTalks and CryptoTalks.

This is the reason why stablecoins, especially Tether, are famous and are preferable to much more volatile cryptocurrencies, most notably Bitcoin, Mr Shoushany, who is also a top thought leader and adviser, told The National.

“Bitcoin, one day it's $60,000, another day it's $40,000; transaction-wise, this is unbearable. So if you want to do any business [with it], it's going to be very hard. So [businesses] need a stable [digital] currency.”

What would stablecoins mean for cross-border transactions?

Digital assets, such as cryptos and stablecoins, have long been touted to be able to transfer value across borders, bypassing traditional banking systems and eliminating many associated risks and middlemen.

For consumers, this is more advantageous and “revolutionary”: with minimal or sometimes zero fees, almost instantaneous processing and faster settlement, the use of stablecoins for cross-border transactions can hasten their critical needs, Mr Shoushany said.

It also reduces currency volatility since stablecoins are pegged to a fixed asset and make it, as its name implies, stable, he added, which can assist people whose livelihood depends on important transactions such as remittances.

The UAE is one of the top sources of remittances globally, ranking second behind the US in 2020, according to the World Bank. The Washington-based global lender's 2022 list did not include the Emirates as its data was not updated.

The gradual adoption of stablecoins issued by traditional institutions could bring increased liquidity, stability and faster integration of tokenised assets into the mainstream financial system, a 2024 white paper from US blockchain company Ripple shows.

They would also promote financial inclusion, as sending money home “could be significantly [more] efficient … and we are talking about billions and billions of homes”, Mr Shoushany said.

Can the UAE become a model for stablecoin implementation?

The short answer is yes, considering all the efforts placed into creating frameworks and regulations to build and support the sector.

“The UAE has a unique crypto landscape, with a focus on regulatory clarity and ecosystem enablement … showcasing how to effectively regulate stablecoins and other crypto assets,” Ms Goel said.

However, there remain challenges in the adoption of cryptocurrencies in general, especially when there is a lack of clarity within the rules.

Mr Shoushany, as an example, cited El Salvador, which in 2021 became the first country to legally adopt Bitcoin as a legal tender. This drew criticism and protest over the lack of transparency over its management.

“We've seen different stablecoins being implemented left and right and they all failed; we have not seen one that's really successful,” … he said.

Arguably the biggest challenge for stablecoins would be pegging it to a volatile currency; the UAE, with its dirham pegged to the dollar, would have an advantage. In addition, the Emirates is heavily promoting the use of blockchain, the underlying technology of cryptocurrencies, in several vital industries.