Dr. Laura Voda July 29, 2024 Over the past years, UAE’s resolve to be a leader in the virtual assets space has continued to strengthen. The latest development is the enactment of the Payment Token Services Regulation (the Regulations) issued by the Central Bank of UAE (CBUAE) by way of Circular No. 2/2024, to be effective in June 2025. Corresponding to the Regulations, amendments are made to the existing Retail Payment Services and Card Schemes (RPSCS) Regulation and Stored Value Facilities (SVF) Regulation which will no longer apply to Crypto-Assets, Virtual Asset Tokens, Virtual Assets Service Providers or Virtual Asset Token Services (each as defined in the respective Regulation). Any person licensed under these Regulations with respect to Crypto-Asset, Virtual Asset Token or Virtual Asset Activities shall cease to be licensed under these Regulations. Hence, the licensing is streamlined within the current Regulations. Payment Tokens or Stablecoins The new framework now provides the CBUAE with power to regulate stablecoins pegged to the AED. Towards the end of last year, the Dubai Virtual Assets Regulatory Authority (VARA) issued regulations on stablecoins, albeit these specifically exempted AED backed stablecoins being in the domain of the UAE Central Bank. Payment Token is defined in the Regulations to mean a virtual asset which purports to maintain a stable value by referencing the value of (a) the same fiat currency the Payment Token is denominated in; or (b) another Payment Token also denominated in the same fiat currency. A Designated Payment Token shall be deemed to be a Payment Token. These Payment Tokens are commonly referred to as stablecoins. Simply put, stablecoins are cryptocurrencies that are pegged to the value of other assets, such as fiat currency or gold, to maintain stability. Compared to other forms of cryptocurrencies, stablecoins provide stability, depending on the reliability of the underlying assets. Given that the current Regulations peg the value of the stablecoin to the AED, this would offer enhanced stability and reliability as compared to being pegged to a volatile asset. Further, the UAECB also has the power to designate any virtual asset to be a Payment Token and may impose restrictions in relation to such Designated Payment Token. Particularly, the UAECB has restricted the issuance, promotion and services related to algorithmic stablecoins and privacy tokens, unless specifically approved. A clear distinction is drawn between dirham-backed stablecoins and foreign currency-backed stablecoins. UAE businesses and vendors are permitted to accept Dirham Payment Tokens from entities licensed by CBUAE, whereas Foreign Payment Tokens are accepted only for the purchase of specific virtual assets. As such, the Regulations restrict payment for goods and services in foreign currency-backed stablecoins (USDT, USDC). Foreign stablecoins are recognized, with specific restrictions on their usage. They will continue to be used in the trade of virtual assets. The Dirham-backed stablecoins can be issued both by the UAECB and private entities, subject to the conditions laid down in the Regulations. In 2023, the UAECB introduced a Central Bank Digital Currency (CBDC)[1], the Digital Dirham. The definition of virtual assets in these Regulations specifically excludes CBDC. CBDC’s are similar to stablecoins, although CBDC’s can only be issued by the government while stablecoins can be issued privately as well. Licensing Categories Payment Token Service has been defined as the performance of any of the following: Payment Token Issuance Payment Token Conversion Payment Token Custody and Transfer Accordingly, the licenses are issued by the CBUAE under the above categories. Individuals or entities seeking to provide or promote any of the services need to obtain a license from the CBUAE. It is important to note that under Category A, the license is provided only for issuance of Dirham Payment Token. A license can be obtained by any person, located or incorporated in the UAE including freezones (excluding DIFC and ADGM). A person not located or incorporated in the UAE (which includes companies in the DIFC and ADGM) may apply for a Foreign Payment Token Issuer registration. Additionally, for token conversion under Category B and custody and transfer under Category C, entities already regulated by the Securities and Commodities Authority (SCA), the Virtual Assets Regulatory Authority (VARA) or any local licensing authority can apply for a Non-Objection Registration (NOR). For example, a virtual assets exchange platform operator may apply for a NOR to perform token conversion. Specific conditions for licensing are provided in the Regulations, including minimum capital requirements, mandatory appointments, compliance with ad-hoc reporting requirements, publication of a white paper etc. Impact and Way Ahead The Regulations provide much needed assurance and encourage secure transactions in the market. The Dirham-backed stablecoin now paves the way for tokenizing traditional assets priced in AED. The Regulations are definitely a step in the right direction and will resolve existing issues, especially the difficulties in conversion of cryptocurrency to fiat currency and vice versa. With clear regulations, it is expected that banks and financial institutions, which were reluctant to engage in the crypto space, now take positive steps to engage in this sphere. The regulatory framework in relation to virtual assets does seem to be divided between multiple regulators, however, a clear demarcation of the capacity of each regulator is provided, thus enabling development of the virtual assets space as well as protection of consumers in this market. If you require further information, please do not hesitate to reach us at info@fichtelegal.com or call +971 4 435 7577. [1] CBUAE Central Bank Digital Currency strategy launched, 23rd March 2023, available at https://wam.ae/en/details/1395303141785 (last accessed 24th July 2024 at 9.20 AM)
