Stablecoin issuance and use is rising around the world, with the market projected to reach $3 trillion within the next five years. Key to this continued growth are crypto regulations that will help advance the use of stablecoins and usher in a new era of financial innovation. Governments are recognizing this opportunity and working hard to launch frameworks that provide further clarity.
New regulations from the Central Bank of the United Arab Emirates (CBUAE) designed to integrate dirham-backed stablecoins and as well as non-AED backed stablecoins into its financial systems are emblematic of this shift. They not only help cement the UAE’s position as a global leader in the digital asset space, but also reflect a broader trend of progressive crypto regulation in the country. By embracing stablecoins, the UAE is laying the groundwork for safer, more efficient financial systems.
UAE Stablecoin Regulation
The UAE has made no secret of its ambition to be a global hub for well-regulated blockchain activities. It is already one of the most advanced jurisdictions when it comes to offering clear regulations for digital asset services, with Dubai’s Virtual Assets Regulatory Authority (VARA), the Abu Dhabi Global Market and the DIFC all contributing to a robust regulatory ecosystem.
The CBUAE’s new framework for stablecoins adds a critical layer of clarity, allowing market participants to issue AED-backed stablecoins that can be used for payments and register non-AED stablecoins that can be used for virtual asset payments. This fosters the development of stablecoin use cases within a safe, structured environment. It is expected that the framework will focus on enabling payments through AED-backed stablecoins, and bar businesses and vendors from accepting tokens that do not offer the same guarantees. Combined with the registration approach for foreign currency-backed stablecoins, this measured approach would also manage risks around liquidity, market volatility, compliance and operational challenges.
Regulators around the world all dictate that a stablecoin must be licensed for use within a jurisdiction, but the UAE’s approach is different from many other frameworks. For example, the proposed Clarity of Payment Stablecoins Act in the U.S. focuses more on requirements and enforcement versus the currency to which a coin is pegged. And while MiCA in the European Union caps stablecoins backed by non-EU currencies to one million transactions per day, it does not ban them outright. The UAE’s approach aims to allow the use of both dirham-backed and non-dirham backed stablecoins without any caps, but limits the use of non-dirham backed stablecoins to payments for virtual assets and their derivatives. The CBUAE hopes that this will foster innovation and collaboration between different providers.
Blockchain and Digital Finance in the UAE
With a tech-forward citizenry and a government eager to foster innovation, the UAE is fertile ground for the integration of digital banking and blockchain into its financial sector. At the heart of this transformation is the Dubai International Finance Centre (DIFC), home to the largest innovation community in the region. From growth-stage tech firms to digital labs and venture capital firms, the DIFC is a thriving hub for blockchain and digital asset development.
This potent mix of the DIFC, the UAE’s status as a global home for expatriates and the obvious benefits of blockchain for payments, have spurred banks and financial institutions across the region to rapidly deploy the technology to modernize remittances and cross-border payments. In part, it’s why the MENA region now ranks as the sixth largest crypto economy globally, processing nearly $400 billion in on-chain value between July 2022 and June 2023.
Ripple has also been a prominent player in the region. The National Bank of Abu Dhabi was the first Middle Eastern bank to use Ripple Payments to provide immediate, secure and cost-effective remittance solutions—a key advantage in a country that sent close to $80 million in outbound remittances in 2022. And the digital asset XRP was approved late last year under the Dubai Financial Services Authority (DFSA) for use within the DIFC.
Dirham-Backed Innovation
The CBUAE’s aim is to proactively promote a well-regulated stablecoin ecosystem, specifically dirham-backed stablecoins, to offset more volatile cryptocurrencies and better protect investors. It also seeks to make the country an attractive option for providers and businesses, opening the door to innovations that could revolutionize cross-border payments, enhance financial inclusion and streamline digital transactions. As evidence, Tether has already announced plans to launch a UAE stablecoin, tapping into the dirham as an alternative to the U.S. dollar.
More broadly, this development offers clear advantages for UAE businesses. Stablecoin payments are fast and cost-effective, while also reducing the risks associated with currency fluctuations, allowing for smoother financial planning and operations. Moreover, their integration into blockchain platforms can simplify supply chain management through smart contracts, automating payments and reducing human error.
Shaping the Future of Digital Finance
The UAE’s forward-looking stablecoin regulations help cement the country’s role as a global leader in crypto frameworks and digital financial innovation. By establishing clear, progressive rules, regulators are fostering an environment where innovation thrives, while ensuring that consumers and businesses are protected.
Stablecoins are now set to play a crucial role in the country’s economic diversification alongside its broader plans to launch a Central Bank Digital Currency (CBDC) through its Financial Infrastructure Transformation program. Together, these digital assets can help digitize the UAE’s economy, expand financial inclusion, enhance cross-border payments and provide a secure alternative to traditional financial systems.
Learn more about the potential impact of stablecoins in Ripple’s latest whitepaper.
