Legal and Regulatory Framework for Stablecoin Issuance and Use in the UAE

The United Arab Emirates (UAE) has positioned itself as a global leader in financial innovation while maintaining a strict regulatory framework for digital assets. The CBUAE Payment Token Services Regulation (2024) marks a significant step towards defining the legal landscape for stablecoins, ensuring compliance, consumer protection, and financial stability. 

The regulation provides clear guidelines on who can issue stablecoins, how they can be used, and the necessary licensing, compliance, and AML/CFT obligations. This article analyses the legal framework governing stablecoins in the UAE, offering insights into the regulatory stance and its potential implications. 

 

1. The Legal Definition and Classification of Stablecoins 

Unlike many jurisdictions where stablecoin regulation remains unclear, the CBUAE has explicitly classified stablecoins as “Payment Tokens” under Article 51. A Payment Token is a virtual asset that maintains a stable value by being pegged to: 

1. A fiat currency, or 

2. Another Payment Token denominated in the same fiat currency. 

This classification sets the foundation for stablecoins as regulated financial instruments, subject to licensing and compliance requirements. The UAE’s approach reflects a measured regulatory stance, ensuring that only well-backed stablecoins can be issued and used within the country. 

Unlike traditional cryptocurrencies, which operate in a largely decentralized manner, stablecoins in the UAE are subject to strict oversight by the CBUAE. This signals a strong regulatory preference for centralized control over digital financial assets, preventing the risks associated with unregulated or volatile cryptocurrencies. 

2. Licensing and Registration: Who Can Issue Stablecoins? 

The regulation differentiates between local issuers of Dirham-backed stablecoins and foreign issuers offering stablecoins pegged to other currencies. 

2.1 Licensed Payment Token Issuers (Dirham-Backed Stablecoins) 

Entities that wish to issue Dirham-backed stablecoins must obtain a Payment Token Issuer License from the CBUAE. This requirement ensures that only financially stable and compliant entities can operate in this space. 

Key conditions include: 

1. The entity must be incorporated in the UAE under Federal Law No. 2 of 2015 on Commercial Companies. 

2. The issued stablecoins must be fully backed by segregated reserve assets. 

3. Independent audits and financial disclosures are mandatory to ensure transparency. 

This requirement reflects the CBUAE’s strong regulatory control, ensuring that only well-capitalized and compliant entities can issue stablecoins in the UAE. This contrasts with decentralized and lightly regulated stablecoin models seen in other jurisdictions. 

2.2 Registered Foreign Payment Token Issuers (Foreign Stablecoins) 

Foreign entities issuing stablecoins pegged to non-AED currencies must register with the CBUAE as Foreign Payment Token Issuers. However, there is a critical distinction: 

1. Foreign stablecoins cannot be used for payments within the UAE. 

2. They are only permitted for virtual asset trading, not for transactions involving goods and services. 

This restriction is a key policy decision by the UAE, ensuring that foreign-backed stablecoins do not undermine monetary sovereignty. The CBUAE prioritizes Dirham-backed stablecoins for payment use, preventing a dollarized stablecoin economy from emerging within the country. 

2.3 Payment Token Custodians and Transferors 

Entities providing custody and transfer services for stablecoins must obtain a separate license under the regulation. These entities ensure that stablecoins are securely held and transferred, preventing fraud, mismanagement, or illicit use. 

3. Prohibited Stablecoins and Payment Methods 

One of the most significant regulatory measures in the UAE is the outright ban on algorithmic stablecoins and privacy tokens. 

3.1 Algorithmic Stablecoins: A Risk Too High 

The CBUAE has explicitly banned algorithmic stablecoins—a category of stablecoins that maintain value through automated supply adjustments rather than being fully backed by reserves. 

This prohibition is a proactive regulatory stance, recognizing the risks of algorithmic stablecoins, including: 

1. Loss of peg stability, as seen in high-profile collapses such as TerraUSD. 

2. Systemic risk to the financial system, if such assets become widely adopted. 

3. Increased exposure to speculative attacks, given their reliance on demand-supply mechanics rather than fully collateralized reserves. 

3.2 Restrictions on Foreign Stablecoins for Local Payments 

The regulation makes a critical distinction between stablecoins that can be used for payments and those that cannot. 

1. Dirham-backed stablecoins are permitted for domestic transactions. 

2. Foreign stablecoins (e.g., USDT, USDC) cannot be used for local payments—they are restricted to virtual asset trading. 

This reflects the CBUAE’s commitment to monetary sovereignty, ensuring that AED remains the primary medium of exchange within the UAE. 

4. Compliance and AML/CFT Safeguards 

A key focus of the regulation is ensuring that stablecoins do not facilitate financial crime. 

4.1 AML and CFT Compliance 

All stablecoin issuers and custodians must comply with UAE’s AML and CFT laws, as mandated under Federal Decree Law No. 20 of 2018. This includes: 

1. Full KYC (Know Your Customer) compliance. 

2. Transaction monitoring and suspicious activity reporting. 

3. Stringent reserve backing to prevent illicit fund flows. 

The UAE’s strict AML/CFT policies align with global financial regulations, ensuring that stablecoins do not become a vehicle for money laundering or terrorism financing. 

4.2 Reserve and Asset Backing Requirements 

A stablecoin must be fully backed by high-quality liquid assets, ensuring that: 

1. Every issued stablecoin is redeemable for its underlying reserve. 

2. Regular audits verify asset backing and financial integrity. 

This approach mitigates liquidity risks, preventing market instability or bank-run scenarios. 

5. Restrictions on Promotions and Merchant Use 

The CBUAE enforces strict promotional regulations to prevent misleading marketing of stablecoins. 

• Only licensed entities can promote stablecoins—any unauthorized marketing is prohibited. 

• Algorithmic stablecoins and privacy tokens cannot be promoted under any circumstances. 

Merchants must also adhere to regulatory constraints: 

• Only Dirham-backed stablecoins issued by licensed entities can be accepted for payments. 

• Foreign stablecoins are not permitted for goods and services transactions. 

This ensures that the UAE’s payment ecosystem remains under regulatory control, preventing unregulated or risky digital asset transactions. 

6. Future Outlook: The Role of UAE’s Digital Dirham (CBDC) 

The CBUAE is actively developing a Central Bank Digital Currency (CBDC), which could further redefine stablecoin use in the UAE. The Digital Dirham is expected to: 

1. Offer a state-backed digital payment solution. 

2. Compete with private stablecoins in domestic transactions. 

3. Ensure complete regulatory oversight of digital payments. 

Given the UAE’s proactive regulatory stance, the future of stablecoins in the country will likely be shaped by the introduction of a Digital Dirham, further tightening controls over private stablecoin issuance and use. 

7. Conclusion 

The CBUAE’s regulatory approach strikes a delicate balance between fostering innovation and maintaining financial stability. The emphasis on fully-backed stablecoins, prohibition of algorithmic models, and restrictions on foreign stablecoins for payments reflects a carefully controlled strategy. 

As the Digital Dirham emerges, the UAE’s stablecoin regulations are expected to evolve, ensuring that monetary policy remains intact while enabling digital financial growth. The CBUAE’s framework stands as a model for global regulators, illustrating how to integrate stablecoins into a modern financial system while mitigating systemic risks.