Introduction to Stablecoins
The Central Bank of the United Arab Emirates has taken a significant step in developing regulations for local currency stablecoins and licensing the first issuances. This move acknowledges the growth of crypto finance, despite its volatility and associated risks. The UAE’s initiative indicates that crypto finance has reached a point where it can withstand market fluctuations and scandals.
The UAE’s Stablecoin Landscape
The UAE Central Bank has licensed AE Coin, which is backed by Al-Maryah Bank (MBank), a small digital bank. Another locally licensed stablecoin is expected to be introduced, backed by First Abu Dhabi Bank (FAB), the local sovereign wealth fund, and a private investment house. The contrast between MBank and FAB is notable, with MBank being significantly smaller than FAB. MBank had equity of AED490 million ($132 million) as of June 2024, while FAB had equity of almost AED131 million at the end of December 2024.
Regulations and Risks
The regulations forbid banks from issuing stablecoins directly, so coins are issued through subsidiaries. The lure of stablecoins lies in their digital ledger technology, which facilitates quick and cheap transactions without the need for intermediaries. However, there are risks associated with stablecoins, including the potential for losing value, as seen with the collapse of the Terra USD coin in May 2022. The Bank for International Settlements has also noted that disclosure on reserves backing stablecoins is often opaque, and it is unclear whether such information has been externally audited.
Transparency and Financial Crime
The lack of transparency and controls in stablecoins opens the way for criminals to use them. While banks have strong financial crime controls in place, startups may neglect compliance and controls in their pursuit of growth. The risk of scandal is high, and neither MBank nor FAB can afford to be associated with a stablecoin-related scandal.
Future of Stablecoins in the UAE
It will be interesting to watch how the usage of the two stablecoins grows and the types of transactions they are applied to. Air Arabia has already announced that it will accept payments in MBank’s AE Coin. Other stablecoins, such as the US-based Circle Internet Group’s USD Coin, are also vying for acceptance in the UAE remittance market.
Conclusion
The development of stablecoins in the UAE is a significant step in the growth of crypto finance. While there are risks associated with stablecoins, the UAE’s regulatory framework and the involvement of established banks like FAB and MBank may help to mitigate these risks. As the use of stablecoins grows, it will be important to monitor their impact on the financial landscape and ensure that they are used in a transparent and secure manner.
