Stablecoins set to gain further currency in the UAE

As a part of its mandate to regulate digital payment services, the Central Bank of the UAE (CBUAE) recently announced a new licensing regime for stablecoins.

Chainalysis data reveals that globally, fiat purchases of stablecoins reached $40 billion in March 2024 alone. “The CBUAE is once again demonstrating its ability to keep a finger on the pulse of the market, and roll out relevant and effective regulations to ensure emerging trends can thrive in a controlled and secured environment,” Arushi Goel, Policy Lead for Middle East & Africa at Chainalysis, told Khaleej Times in an interview.

By providing regulatory clarity for their use as payment instruments, the CBUAE is creating a conducive environment for businesses to set up operations and develop the crypto ecosystem, as has been done by VARA in Dubai and the ADGM in the nation’s capital, for the crypto asset ecosystem. “The regulations pave the way for high-quality, dirham-backed stablecoins to be licensed, fostering the development of a robust domestic market,” Goel said.

Unlike Bitcoin and Ethereum, stablecoins are cryptocurrencies that maintain a value equal to that of another asset or assets. This addresses a concern many consumers and businesses have with using traditional cryptocurrencies for everyday payments – their volatility. The most common and widely used stablecoins are backed by fiat currency, and in this case, it would be the UAE dirhams. Having stablecoins backed by fiat currency provides stability for the token.

“Now that the CBUAE has provided regulatory clarity, consumers will likely soon benefit from the offerings of regulated players who innovate responsibly. And as a result, dirham-backed stablecoins could spur the development of a robust domestic market for cryptocurrency. It will also serve as a catalyst for engagement from established financial players, such as banks, meeting the demands from both retail and institutional customers. Larger players, including banks and major financial institutions, will find it easier to integrate and accept stablecoins as part of their payment systems, fostering a more seamless financial system,” Goel said.

As the regulations roll out and evolve, there will be a need to enhance the monitoring and supervisory architecture used to enforce these new rules. “Regulators can benefit from utilising blockchain analytics to monitor risks in the market and apply a graduated approach to supervisory oversight. Stablecoin issuers, on the other hand, could also effectively utilise blockchain analytics to monitor tokens in their secondary market, to understand how they are being used within the ecosystem,” Goel said.