New UAE Regulations could potentially Ban Crypto Payments

The UAE has often been regarded as a safe haven for crypto and Web3 entrepreneurs facilitating the development of emerging technologies such as distributed ledger technology (DLT). The future of cryptocurrencies in one of the most crypto-currency friendly destinations has been the subject of concern as a result of the recent regulatory changes. The Financial Infrastructure Transformation (FIT) programme is designed to influence the future issuance of Central Bank Digital Currencies (CBDCs) and the development of the Emirates’ digital economy as it advances. This regulatory change has garnered substantial negative attention, despite UAE’s numerous positive advancements in digital payments and cryptocurrencies. Industry specialists, including crypto and blockchain lawyer Irina Heaver, have expressed apprehension regarding the regulations that CBUAE issued on June 5, 2024.

New Rulebook for Stablecoins and Prohibition on Cryptocurrency Payments:

The CBUAE has formulated a new rulebook specifically for stablecoins. The scope and objectives of the rulebook sets out a prohibition of the issuance, promotion and performance of certain services in relation to Algorithmic Stablecoins, Privacy Tokens or other Means of Payment which are not Dirham Payment Tokens or Foreign Payment Tokens.

A Dirham Payment Token or DPT means a Payment Token whose value is denominated in Dirham (AED) or denominated by reference to the value of another Payment Token whose value is denominated in Dirham (AED), and which is issued by a Dirham Payment Token Issuer. A Foreign Payment Token means a Payment Token whose value is denominated in a Foreign Currency, or denominated by reference to the value of another Payment Token whose value is denominated in a Foreign Currency. No Merchant or any other person in the UAE selling goods or services during the course of business may accept a Virtual Asset towards payment for that sale unless that Virtual Asset is a DPT issued by a Licensed Payment Token Issuer being used as a Means of Payment ; or a FPT issued by a Registered Foreign Payment Token Issuer being used as a Means of Payment for purchase of a Virtual Asset or Virtual Asset derivative. Similarly, a Licensee or Registree must not knowingly initiate, facilitate, effect or direct a Payment Token Transfer as part of its Payment Token Service unless the transfer is of a Dirham Payment Token or a Foreign Payment Token. Both DPT and FPT are currently non-existent. Market experts are anticipating the UAE to launch AED-backed stablecoins in the near future.

Concerns Raised:

Irina Heaver cautions that this policy change could result in a less favourable environment for the crypto industry, which could potentially harm the UAE’s image and its aspirations in the digital economy. The UAE’s conventionally pro-commerce and pro-investment stance maybe at odds with the new regulations. Highlighting the crucial role of Tether in Web3 and crypto transactions, she argued that the UAE’s new rules might hinder progress in the sector by prohibiting the use of stablecoins in transactions. The UAE has historically prospered from foreign direct investment as a result of its liberal policies, which include absence of capital controls and protection of freedom of contract under commercial law. This autonomy has permitted the parties to reach an agreement regarding their transaction terms, which encompasses currencies and payment methods.

Lack of Industry Representation:

Furthermore, Heaver underlined the absence of substantial industry associations in the UAE, such as Switzerland’s Crypto Valley Association, which effectively advocated against unfavourable regulations by FINMA regarding staking. She observed that the absence of a unified voice in the UAE’S Web3 and crypto industry is a considerable disadvantage. The current associations are fragmented and frequently function as platforms for business development and deal flow, rather than as advocates for the industry’s interests. The absence of representation in the UAE may have a detrimental impact on the growth of Web3 and crypto, as policies are left unchallenged.

Implications of the New Regulations:

Alla Melnichenko, a legal expert in MENA, Web3 and Blockchain, observed that the enforcement of these regulations could temporarily impede the integration of cryptocurrency into the operational framework of businesses in the UAE and potentially decrease migration of businesses to the region. The UAE’s viability in the crypto market may be considerably impacted by the prohibition of payments in virtual assets other than AED-backed payment tokens. She remarked that the stringent regulatory requirements may make it difficult or time-consuming to satisfy the prerequisites for issuing this payment instrument, despite a one year grace period.

Future Prospects:

Melnichenko proposed that the UAE could compete for leadership in this innovative filed by adopting a strategy similar to Switzerland, which has embraced the use of BTC (Trade bitcoin) and USDT(Tether) for paying taxes and other government fees. In the event that no DPT is introduced within a year, UAE businesses will be unable to receive payments in crypto, despite the grace period of one year. This could potentially oblige them to consider relocating to more favourable jurisdictions for their crypto operations.

ABS Partners Legal Consultants is a leading law firm in UAE equipped with experienced professionals having expertise in Cryptocurrency and Blockchain Companies Licensing, ⁠Technology Advisory & Web3.