UAE Central Bank Releases Official Payment Token (Stablecoin) Services Regulation

The Central Bank of the UAE (CBUAE) has officially published the UAE Payment Token Services Regulation, a comprehensive framework for licensing and supervising digital payment services, including stablecoins, in the UAE. This regulation outlines the rules and conditions for providing payment token services, ensuring a secure and efficient digital payment ecosystem. This follows our initial report on June 4, 2024, published on Unlock Blockchain.

Licensing and Registration

The Payment Token Services Regulation stipulates the conditions for granting and maintaining licenses or registrations for Payment Token Service Providers. This includes:

• Payment Token Issuance (Stablecoin Issuance)
• Payment Token Conversion
• Payment Token Custody and Transfer

Licensed entities must comply with the Central Bank’s ongoing supervision and reporting requirements.

Scope and Objectives

The regulation aims to:

• Ensure the safety, soundness, and efficiency of payment token services, particularly stablecoins.
• Protect customers and prevent the misappropriation of assets.
• Promote consumer protection and innovation in the digital payment sector.

Exclusions

The regulation does not apply to services covered by the Retail Payment Services and Card Schemes Regulation or the Stored Value Facilities (SVF) Regulation. Additionally, it excludes IT security services, communication network services, and certain internal transfers within payment systems.

Specific Provisions

• Algorithmic Stablecoins and Privacy Tokens: The regulation prohibits the issuance, promotion, and performance of services related to algorithmic stablecoins and privacy tokens unless they are recognized as Dirham Payment Tokens or Foreign Payment Tokens.
• Foreign Payment Tokens: Limitations are placed on the promotion and acceptance of foreign payment tokens as a means of payment, ensuring they meet specific regulatory criteria.

Ongoing Supervision and Reporting Requirements

Licensed entities under the Payment Token Services Regulation must adhere to several ongoing supervision and reporting requirements set by the Central Bank:

• Business Reporting: Payment Token Conversion Providers and Custodians must report the volume and value of their business concerning virtual assets not classified as payment tokens. The Central Bank will specify the exact reporting requirements periodically​ ​.
• Complaints Management: Licensees must maintain a complaints management program and regularly report to the Central Bank. Reports should include the number of complaints received, their topics, and the status (open or closed) along with the duration taken to resolve each complaint​ .
• Ad-hoc Reporting: Licensees and registrants must comply with any additional regular or ad-hoc reporting requirements as determined by the Central Bank. This can include specific events or operational changes that need to be communicated to the regulatory authority​ ​.
• Regulatory Capital Requirements: Licensees must meet regulatory capital requirements as outlined in Articles 13 to 15. The Central Bank may impose additional requirements or increase existing ones to ensure financial stability​ ​.

Differences Between Payment Token Services as per UAE Central Bank Criteria

Payment Token Issuance (Stablecoin Issuance)

Payment Token Issuance involves the first occasion a Payment Token is sold or transferred. This includes the sale or transfer of tokens generated by the issuer for distribution to the public.

Key Responsibilities:

• Transfer Upon Payment: The issuer must transfer the Payment Token to the purchaser’s nominated wallet without delay upon receiving payment.
• Redemption: Upon the token holder’s request, the issuer must redeem the Payment Token in fiat currency at par value, without delay, and by the next business day unless otherwise permitted by the Central Bank​​.

Payment Token Conversion

Payment Token Conversion refers to the exchange of Payment Tokens for other tokens, fiat currencies, or other assets. This service can include converting between different types of Payment Tokens or converting Payment Tokens to traditional currencies.

Key Responsibilities:

• Reporting Requirements: Entities performing conversion services must adhere to specific reporting requirements set by the Central Bank, ensuring transparency and regulatory compliance​​.

Payment Token Custody and Transfer

Payment Token Custody and Transfer involve the safekeeping and movement of Payment Tokens on behalf of customers. This service ensures that tokens are securely stored and can be transferred between parties as needed.

Key Responsibilities:

• Facilitation of Payments: This service may facilitate merchants receiving payments through Payment Tokens in exchange for goods or services.
• Complaints Management: Entities must maintain a robust complaints management system, regularly reporting on complaints received, their topics, and resolution statuses to the Central Bank.
• Ad-hoc Reporting: Entities must comply with any additional regular or ad-hoc reporting requirements specified by the Central Bank​ (CBUAE_EN_5731_VER1)​.

Expert Opinion

Kokila Alagh, Founder of KARM Legal Consultants, comments on this significant regulatory development: “The retail use of stablecoins, driven by the Central Bank UAE’s initiative, marks a groundbreaking moment in financial innovation. This move highlights the UAE’s commitment to embracing cutting-edge technology and fostering a forward-thinking financial ecosystem. It sets a precedent for other nations to follow, ensuring a secure and efficient payment landscape. The UAE continues to lead the way in the evolution of digital finance.”

Regulatory Authority

The CBUAE retains broad powers to license, register, and supervise Payment Token Service Providers, including foreign entities. The regulation emphasizes risk-based licensing and stringent oversight to maintain the integrity of the financial system.

The official publication of the Payment Token Services Regulation marks a significant step in the UAE’s digital economy transformation. By providing a clear and structured framework, the CBUAE aims to foster innovation while ensuring robust consumer protection and financial stability.