UAE Central Bank Approves Stablecoin Regulatory Framework
- The Central Bank of the United Arab Emirates has approved a stablecoin regulatory framework that will only allow payments with dirham-backed stablecoins.
- Cryptocurrencies such as Bitcoin and Ethereum will be limited to trading, investing and corporate finance purposes, while foreign stablecoins will only be allowed to be used to purchase specific virtual assets such as NFTs.
- The new framework will be implemented from June 2025.
The UAE Central Bank’s recent regulation of stablecoins is expected to reshape how cryptocurrencies operate in the country, bringing a structured framework to the use of digital currencies. The regulations, which will come into effect in June 2025, will restrict the use of major cryptocurrencies such as Bitcoin and Ethereum for transaction purposes, and only allow the use of dirham-backed stablecoins for payments within the UAE.
The regulation aims to provide transparency and reduce legal uncertainty for businesses, 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, providing some flexibility for international business operations.
Impact on the market and stakeholders
Recognition of specific use cases for foreign payment tokens, including non-fungible tokens (NFTs), is expected to foster collaboration between fintech companies and VASPs. This move will help eliminate compliance risks and legal ambiguities and promote a safer and more diverse market environment.
The phased approach will allow time for the development of a dirham-backed stablecoin, ensuring a smooth transition for stakeholders. Among the changes, Bitcoin and Ethereum will be relegated to investment and trading purposes and remain an integral part of corporate finance and investment portfolios.
Stablecoin market trends
The global stablecoin market is expanding rapidly. Data from Chainaanalysis shows that stablecoin purchases reached $40 billion in March 2024, highlighting the growing importance of stablecoins in the cryptocurrency ecosystem. The new UAE regulations emphasize the need for strong supervision and reflect lessons learned from past market crashes, such as the May 2022 collapse of TerraUSD and Luna that resulted in $60 billion in losses.
Dirham-backed stablecoins can be either private entities backed by reserves or as a central bank digital currency (CBDC) if issued by the Central Bank of the UAE. Unlike unstable cryptocurrencies, these stablecoins provide price stability, making them suitable for daily transactions and cross-border payments, while leveraging the transparency and immutability of blockchain technology.
Supervision framework and compliance
The new law stipulates that no entity may issue payment tokens without submitting a white paper to the central bank for approval. The document must detail the payment token’s technical specifications and operational data, ensuring 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 Tabch, CEO of Liminal Custody Middle East, emphasized that the transition to dirham-backed payment tokens is feasible and only requires adjustments to trading pairs. This change will solve existing problems such as the conversion of digital currencies to traditional currencies and enhance the stability and compliance of cryptocurrency operations in the UAE.