UAE Central Bank Approves Plan for Stablecoin Registration Framework

In a meeting in Abu Dhabi on June 3, the Board of the UAE Central Bank approved the issuance of regulations for licensing and overseeing stablecoin arrangements, which cleared the door for the country to establish a regulatory framework for the stablecoin issue.

This regulation will only allow dirham-backed stablecoins to be used for payments, while cryptocurrencies such as Bitcoin and Ethereum will be limited to trading, investment, and corporate treasury purposes, and international stablecoins will only be allowed to purchase certain virtual assets such as NFTs.The new framework is scheduled to begin in June 2025.

How will this regulation affect the market and stakeholders? The new rule is intended to clarify and eliminate legal difficulties for businesses by fostering 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 legislation, allowing greater flexibility in international corporate activities.

In general, the global stablecoin market has recently been on the rise. Its purchases reached $40 billion in March 2024, as shown in data from Chainalysis. Over the last two years, the UAE has made it plain that it wants to become a hub for well-regulated blockchain and crypto-asset activity, allowing the country to be a global and regional leader in financial innovation.

This new regulation has proven that they are trying to meet their plan and goal, which is to become a hub for well-regulated blockchain and cryptoasset. It also emphasizes the need for robust oversight.

The Dirham-backed stablecoins might be private entities backed by reserves or central bank digital currencies (CBDCs) issued by the UAE Central Bank. Unlike volatile cryptocurrencies, stablecoins provide price stability, making them suited for everyday transactions and cross-border payments while using blockchain technology’s transparency and immutability.

Certain important questions remain about the Central Bank’s plan, such as what requirements payment service providers already licensed by the Central Bank would face if they chose to issue or handle stablecoins and whether licensing requirements would overlap with those already overseen by the Virtual Assets Regulatory Authority (VARA) in Dubai.

The new rule requires that no entity release a payment token without first submitting a white paper to the Central Bank for approval. This document that the company is providing must include the payment token’s technical specifications and operational data, ensuring a thorough evaluation prior to market launch. Banks are not able to issue payment tokens directly, but they can do so through subsidiaries or affiliates that meet licensing and regulatory requirements.

The Central Bank’s proposed regulations for a dirham-backed stablecoin are an important step toward developing a comprehensive regulatory structure that will give market participants confidence in the rules of the road ahead.