The UAE Central Bank has approved a stablecoin regulatory framework that will allow only dirham-backed stablecoins to be used for payments. Cryptocurrencies such as Bitcoin and Ethereum will be restricted to trading, investment and corporate treasury purposes, and foreign stablecoins will only be allowed to purchase certain virtual assets such as NFTs. The new framework is expected to launch in June 2025.
The UAE Central Bank’s recent stablecoin regulation is set to overhaul cryptocurrency in the country, bringing a structured framework to the use of digital currencies. The regulation, which is set to come into effect in June 2025, will restrict the use of major cryptocurrencies such as Bitcoin and Ethereum for transactional purposes, and instead will only allow dirham-backed stablecoins for payments within the UAE.
The regulation aims to provide clarity for businesses, reduce legal uncertainty, and facilitate safe interactions between fintech companies and virtual asset service providers (VASPs), such as exchanges and payment processors. Financial free zones are exempt from the new rules, allowing them some flexibility in operating internationally.
Market and stakeholder impact
The recognition of certain use cases for overseas payment tokens, including non-fungible tokens (NFTs), is expected to foster collaboration between fintech companies and VASPs. The move will help eliminate compliance risks and legal ambiguity, fostering a safer and more diverse market environment.
A phased approach will take time to develop the dirham-backed stablecoin and ensure a smooth transition for all involved. Among these changes, Bitcoin and Ether will be restricted to investment and trading purposes and will remain integral to corporate treasuries and investment portfolios.
Trends in the stablecoin market
The global stablecoin market is expanding rapidly. According to Chainalysis data, stablecoin purchases reached $40 billion in March 2024, highlighting their growing importance in the cryptocurrency ecosystem. The UAE’s new regulations reflect lessons learned from previous market collapses, such as the $60 billion loss from the TerraUSD and Luna crash in May 2022, and highlight the need for strong oversight.
Dirham-backed stablecoins could be privately backed by reserves, or act as a Central Bank Digital Currency (CBDC) if issued by the UAE Central Bank. Unlike volatile cryptocurrencies, these stablecoins offer price stability and are suitable for everyday transactions and cross-border payments, while leveraging the transparency and immutability of blockchain technology.
Regulatory Framework and Compliance
The new law stipulates that no organization may issue a payment token unless it submits a white paper to the Central Bank for approval. This document must detail the technical specifications and operational data of the payment token and undergo a thorough evaluation before entering the market. Banks cannot issue payment tokens directly, but can do so through subsidiaries or affiliates, provided they meet licensing and regulatory requirements.
Amir Tabchi, CEO of Liminal Custody for the Middle East, stressed that the transition to a dirham-backed settlement token is possible and only requires an adjustment to the trading pair. The change would solve existing issues such as converting digital currencies into traditional currencies, enhancing the stability and compliance of cryptocurrency operations in the UAE.
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