Regulation
UAE Central Bank Introduces New Stablecoin Regulations
- The Central Bank of the United Arab Emirates has approved a regulatory framework for stablecoins that allows only dirham-backed stablecoins to be used for payments.
- Cryptocurrencies like Bitcoin and Ethereum will be limited to trading, investment, and corporate treasury purposes, while foreign stablecoins will only be allowed to purchase specific virtual assets like NFTs.
- The new regulatory framework will enter into force in June 2025.
The recent regulation by the Central Bank of the United Arab Emirates on stablecoins is set to reshape the way cryptocurrencies work in the country by introducing a structured framework for the use of digital currencies. Set to come into force in June 2025, this regulation will limit the use of major cryptocurrencies such as Bitcoin and Ether for transactional purposes, instead only allowing dirham-backed stablecoins for payments within the Emirates.
The regulation aims to provide clarity and reduce legal uncertainty for businesses by encouraging secure interactions between FinTech companies and virtual asset service providers (VASPs) such as exchanges and payment processors. Financial free zones are exempt from this new rule, allowing for some flexibility for international business operations.
Impact on the market and stakeholders
The recognition of specific use cases for foreign payment tokens, including non-fungible tokens (NFTs), is expected to promote collaboration between FinTech companies and VASPs. This move will help eliminate compliance risks and legal ambiguities, promoting a safer and more diverse market environment.
A phased approach will allow time for the development of a dirham-backed stablecoin, ensuring a smooth transition for stakeholders. Amid these changes, Bitcoin and Ether will be relegated to investment and trading purposes, remaining an integral part of corporate treasuries and investment portfolios.
Stablecoin Market Trends
The global stablecoin market is expanding rapidly. Chainalysis data indicates that stablecoin purchases reached $40 billion as of March 2024, highlighting their growing importance within the cryptocurrency ecosystem. The UAE’s new regulation underscores the need for robust oversight, reflecting lessons learned from past market crashes, such as the $60 billion plunge following the collapse of TerraUSD and Luna in May 2022.
Dirham-backed stablecoins can be private entities backed by reserves or function as central bank digital currencies (CBDCs) if issued by the Central Bank of the United Arab Emirates. Unlike volatile cryptocurrencies, these stablecoins offer price stability, making them suitable for everyday transactions and cross-border payments, while leveraging the transparency and immutability of blockchain technology.
Regulatory Framework and Compliance
The new law requires that no entity can issue a payment token without submitting a white paper to the Central Bank for approval. This document must detail the technical specifications and operational data of the payment token, ensuring a thorough evaluation before market entry. Banks are not directly allowed to issue payment tokens, but can do so through subsidiaries or affiliates, provided they meet regulatory and licensing requirements.
Amir Tabch, CEO of the Middle East at Liminal Custody, emphasized that the transition to dirham-backed payment tokens is feasible, requiring only an adjustment in trading pairs. This change will solve existing issues such as the conversion of digital currencies into fiat currencies, improving the stability and compliance of crypto operations in the UAE.