• The Central Bank of UAE (CBUAE) formulated a new rulebook for stablecoins.
• The rulebook says that “No Merchant or other Person in the UAE selling goods or services may accept a Virtual Asset towards payment for that sale unless that Virtual Asset is a Dirham Payment Token issued by a Licensed Payment Token Issuer being used as a Means of Payment.”
• Market experts are anticipating UAE to launch AED-backed stablecoins.

UAE is often deemed a safe haven for crypto and web3 entrepreneurs and a breeding ground for emerging tech like DLT. However, the larger narrative around cryptocurrencies might be in trouble as one of the most crypto loving destinations for entrepreneurs threw a bomb over regulatory freedom.

In a recent meeting of the Central Bank of UAE (CBUAE) held on June 3, they formulated a new rulebook for stablecoins. As UAE’s Financial Infrastructure Transformation (FIT) program takes shape, it is set to govern the future of CBDCs issuance as well as the development of the Emirates’ digital economy.

Well, unlike all the other bright developments happening in the UAE around digital payments including cryptos, this one brought a lot of negative attention to the geography. In this article we decode what it means for enterprises in the UAE. 

Crypto in UAE: Still a Dream?

Over the years, Dubai and Abu Dhabi have consistently facilitated the development of the crypto and blockchain sectors. 

However, in the recent Rulebook published by the CBUAE it says that, “No Merchant or other Person in the UAE selling goods or services… may accept a Virtual Asset towards payment for that sale unless that Virtual Asset is a Dirham Payment Token issued by a Licensed Payment Token Issuer being used as a Means of Payment.”

Market experts are anticipating UAE to launch an AED-backed stablecoin, which could ease the scene for crypto entrepreneurs. Nonetheless, for now, other stablecoins like USDT and USDC can lose out on the market if there’s a wholesale ban. 

The TCR team got in touch with a UAE-based web3 & digital assets lawyer, Alla Melnichenko, to get an insider perspective of the story. Melnichenko highlighted that the Payment Token Services Regulation, issued on June 14, 2024, outlined the framework for licensing and supervising Payment Token Services, including Payment Token Issuance, Conversion, Custody, and Transfer. 

Melnichenko further added that advanced crypto-friendly jurisdictions are currently developing regulations for payment tokens or stablecoins. She believes that this is a positive step, as regulations normally establish clear rules and protect the market.

However, regulations should aim to support the industry rather than create rules that drive businesses away from the country. The industry is highly competitive, and governments must consider that overly strict rules could push the industry to seek more attractive regulatory environments.

Here’s What Experts are Saying About Payment Token Services Regulation

Melnichenko went on to say that the regulations recognize the following payment tokens -
Dirham Payment Token and Foreign Payment Token issued by a foreign entity duly registered under the Regulations.

This regulatory framework shares notable similarities to the EU MiCA Stablecoin Regime, which became effective on June 30th. In this context, there is also a strong preference for the local currency. Companies issuing tokens with a value denominated in a currency other than the Dirham may encounter restrictions in the range of services they can offer.

Moreover, the potential prohibition on payment of staking rewards presents a substantial challenge for stablecoin issuers utilizing Proof-of-Stake blockchains, necessitating exploration of alternative jurisdictions, given the fundamental role of staking in securing the underlying protocol.

It is evident that the CBUAE aspires to establish a secure, efficient, and innovative digital payment ecosystem. However, the new regulations are anticipated to prove counterproductive. The regulation’s current wording has prompted inquiries from stakeholders. We expect that the regulator will provide further clarification and guidance.

How Will this Impact Enterprises in the UAE?

Melnichenko emphasized that the most alarming provision of the new regulations is the prohibition of selling goods or services for virtual assets unless they are Dirham Payment Tokens issued by a licensed UAE entity. This could significantly impact business operations in the UAE. 

Before these regulations were introduced, there were no restrictions on using crypto for payments for goods and services. Companies could choose to accept payment in fiat or in cryptocurrencies, including USDT or USDC, which are stablecoins, but also BTC and ETH. As a result, these limitations give rise to uncertainties regarding the UAE’s status as a global crypto hub.

One positive development in this regard is that the UAE entities will have a one-year transition period to prepare for the regulations or contemplate relocating to a more favorable jurisdiction for their crypto operations.

What are the Short-term Implications of this?

Melnichenko reflected that the enforcement of these regulations could pose a temporary obstacle to the integration of cryptocurrency within the operational framework of businesses in the UAE. It may also lead to a reduction in the influx of businesses to the region. The prohibition of payments in virtual assets other than AED-backed payment tokens might significantly affect the UAE’s competitiveness in the crypto market. 

Currently, there is no AED-backed payment token issued. Although there is a one-year grace period, it is unlikely that meeting the prerequisites for issuing this payment token will be a straightforward or quick process, especially given the stringent regulatory requirements. Consequently, if this provision remains and there is no Dirham Payment Token introduced in a one-year period, UAE businesses will not be able to receive payments in crypto.

Alla also mentioned that just like Switzerland had embraced the use of BTC and USDT for paying taxes and other government fees, the UAE could benefit from doingthe same. The UAE can certainly follow a similar path to compete for leadership in this innovative field.