On June 3, 2024, the Board of Directors of the Central Bank of the UAE (CBUAE) approved the issuance of a regulation for licensing and overseeing stablecoins.
On the same day, the Dubai Financial Services Authority (DFSA), the financial regulator of the Dubai International Financial Centre (DIFC), amended its Crypto Token Regime introducing stricter recognition requirements for Fiat Crypto Tokens.
Some other key developments which took place around this time were the authorisation of Paxos Issuance MENA Ltd. by the Financial Services Regulatory Authority (FSRA), the financial regulator of the Abu Dhabi Global Market (ADGM), to issue its Lift Dollar (USDL) to professional clients under a Providing Money Service license; and the CBUAE launching a Minimum Viable Product (MVP) platform for wholesale cross-border payments under Project mBridge, aimed at enhancing cross-border transaction efficiency and demonstrating the growing importance of Central Bank Digital Currencies (CBDCs).
All of these developments crystallise the UAE’s position as a regional and global hub for stablecoin regulation and uptake, and demonstrate its commitment to fostering a safe, secure, and progressive environment for stablecoin activity.
Regulatory developments
The newly-announced CBUAE’s framework will focus on stablecoins pegged to the AED. This is likely because it is crucial for any central bank to maintain control over its national currency to ensure financial stability and conduct effective monetary policy.
Last year, the Monetary Authority of Singapore (MAS) became one of the first countries to issue a regulatory framework governing the issuance of single currency stablecoins pegged to the Singaporean Dollar following the same principle.
That said, other regulatory bodies, specifically the Dubai Virtual Assets Regulatory Authority (VARA) will likely regulate activities with non-AED stablecoins within the Emirate of Dubai, but more clarity is awaited on this front.
It would be particularly interesting to see how this framework impacts the existing Retail Payment Services and Card Schemes Regulation 2021, which regulates ‘Payment Tokens’ which are akin to fiat backed stablecoins as well. More details on licensing and ongoing requirements will be clearer once the framework is made public.
The DFSA’s update to the Crypto Token Regime imposed stricter reserve requirements for stablecoins seeking recognition from the DFSA. The earlier option to include up to 20% in high quality liquid assets other than cash as reserves has been removed. Further, the DFSA now directs daily reconciliation of reserves and public disclosures in reference to reserves every month, as opposed to the earlier requirement to publish these quarterly.
The FSRA’s expectations in terms of stablecoin recognition are largely similar to the DFSA’s position. The FSRA treats stablecoins as a mechanism for storing value (for example, e-money) and permits only those stablecoins which constitute a fully backed 1:1 fiat token, backed only by the same fiat currency it purports to be tokenising, with weekly reconciliation requirements. However, there are some deviations, such as the FSRA only allowing stablecoins which meet the requirements as those of Accepted Virtual Assets.
The global position
Pertinently, these developments align with recommendations from global standard setting organisations in the virtual assets space.
For instance, the Financial Action Task Force (FATF) emphasises comprehensive regulations with respect to Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) compliance to manage potential risks associated with stablecoins along with addressing risks from anonymous peer-to-peer transactions undertaken via self-custody wallets.
Similarly, the International Organisation of Securities Commissions (IOSCO) published recommendations on crypto, digital assets, and decentralised finance (DeFi) which focus on developing regulatory standards and emphasises on clear, accurate, and comprehensive disclosures with respect to decentralised products and services.
Further, the Basel Committee proposed amendments to the standards for banks’ exposures to crypto assets, focusing on the appropriate composition of a stablecoin’s reserve assets along with developing statistical tests which can identify low risk stablecoins.
Meeting these global expectations is a key objective of financial regulators in the UAE as it endeavours to meet the FATF’s expectations in relation to anti-money laundering and countering of terrorism financing to increase investor confidence and spur investment into the country.
The release and refinement of regulatory frameworks for stablecoin issuance and other related activities in and from the UAE evidences the country’s commitment to foster innovation and to attract global talent, while ensuring that regulatory oversight and supervision is not compromised.
Conclusion
The UAE’s proactive approach to stablecoin regulation holds promise not just for its own financial sector, but also for the global conversation on virtual assets. By establishing a clear and well-coordinated framework and spearheading innovative projects, the UAE can serve as a model for other countries navigating this new and evolving technology.
As stablecoins continue to gain traction worldwide, the UAE’s experience can inform the development of effective regulations that foster innovation while mitigating risks. This, in turn, can pave the way for a more stable and inclusive global financial system.
By Kokila Alagh, chief executive officer, and Ratul Roshan, principal associate, at Karm Legal, UAE.
