Stablecoins are close to a nation-wide launch in the UAE with a strategy that could upend how residents and banks transact here on out.
While digital currencies are not as ubiquitous as physical money or traditional banking services, authorities are laying the groundwork to increase their adoption with their implementation of the strategy expected this year.
"Utility will drive stablecoin adoption ... clear regulation and compliance are fundamental to all financial services and are as important to blockchain adoption," Reece Merrick, managing director for Middle East and Africa at crypto company Ripple, told The National.
"The jurisdictions that are working to create regulatory clarity around digital assets are the ones that will see greater investment and institutional adoption, driving real-world utility."
Stablecoins and the UAE
In March 2023, the UAE Central Bank began implementing its central bank digital currency strategy, Digital Dirham. Last year, the regulator's regulation on stablecoins indicated that it was to establish a clear operational framework for cryptocurrencies when implemented.
Abu Dhabi Global Market and Dubai's Virtual Assets Regulatory Authority already have frameworks in place for cryptocurrencies. To bolster the strategy, the central bank last month unveiled a new, digital-oriented dirham symbol.
And in December, AE Coin, the first regulated digital currency in the UAE, was granted final approval by local authorities and was scheduled to be launched “soon”.
Tether, whose USDT is the world's biggest stablecoin, in August received the go-ahead to develop a stablecoin in the UAE.
Half of adults globally – an estimated 2.5 billion – do not use formal financial services and about 75 per cent of underprivileged people do not use banking services, January data from the World Bank found.
"Traditional banking systems are either limited, slow, or entirely inaccessible in many regions. This is where stablecoins have the potential to be a game-changer," Sebastien Badault, a vice president at French cryptocurrency and cyber security company Ledger, told The National.
Unlike legacy financial institutions that require paperwork, approvals and physical branches, stablecoins only require an internet connection and a digital wallet. This removes barriers and allows anyone, anywhere, to send, receive and store money without needing a bank.
This is expected to make it easier for residents to send money abroad more directly from the UAE, which is among the top ten senders of remittances globally according to the World Bank.
For migrant workers, small businesses and those in economies with unstable currencies, stablecoins can provide an efficient, low-cost financial alternative.
In the UAE, where the dirham is pegged to the US dollar, "they function as a gateway to broader crypto trading", Arushi Goel, policy lead for the Middle East and Africa at blockchain company Chainalysis.
According to New York-based Chainalysis data, 93 per cent of stablecoin transfers in the UAE are retail-sized – investments that are typically individual and smaller compared to bigger institutional investors – thus "highlighting their role as a gateway for retail market participation", she told The National.
The case for using stablecoins
Stablecoins are rapidly gaining traction across the globe. Last year, El Salvador was the first country to issue and regulate a national stablecoin. Australia, China, Hong Kong and Singapore have all implemented stablecoin frameworks in one form or another.
Stablecoins - which are pegged to a fiat currency - tend to be less volatile then, say, Bitcoin, where swings are influenced by simple factors such as tweets. They are grounded being tied to a currency, or liquid reserves including government treasuries, or commodities such as precious metals.
The World Economic Forum recognises that stablecoins can maintain a steadier value, making them ideal for payments, savings and remittances.
And stablecoin use continues to grow: an estimated $208 billion worth will be in circulation this year, a 28.4 per cent jump from 2024, according to Visa and its data partner Allium.
Coffee table talk
Daily payments for things such as clothes and coffee also stand to benefit from stablecoin use, particularly for merchants. Unlike traditional card payments that need up to several hours – days, even – to be cleared, cryptos in general are instantaneous, meaning those funds can immediately be used.
Also, while bank cards typically charge 2 per cent to 3 per cent for transactions; cryptos would only hit payers with a mere fraction of that.
In the UAE, the Dubai Multi Commodities Centre and Reit Development in January unveiled plans for Crypto Tower, which will use blockchain for real estate, and tenant management and ownership, on-chain voting and smart contracts.
That is a vote of confidence that would open up more opportunities for mainstream stablecoin and crypto adoption.
"Ultimately, stablecoins and decentralised finance are addressing the pain points of traditional finance systems, offering solutions that aren't constrained by the 9-to-5, five-day workweek," a representative for Binance, the world's largest cryptocurrency exchange, told The National.
However, stablecoins' appeal varies by market: for example, in Turkey, where inflation and economic instability are persistent concerns, stablecoins can serve as a reliable store of value. In Argentina, the use of stablecoins has also helped shield consumers from inflation.
"Regardless of what they’re pegged to, a clear regulatory environment is key. The UAE, through its various regulators, requires stablecoins to be fully backed by high-quality liquid assets and subject to regular audits," Ms Goel said.
If you can't beat 'em, join 'em?
As with any other new innovation, those engaged in traditional practices may initially resist change. A similar case was when music labels opposed digital music until Apple introduced iTunes in the early 2000s.
In the case of stablecoins, and crypto in general, banks may initially resist, arguing that traditional finance remains safer and better regulated, but they could ultimately be forced to adopt stablecoin technology to remain competitive, said Josh Gilbert, a market analyst at investment platform eToro.
"We’re already seeing financial institutions explore CBDCs [central bank digital currencies]. Stablecoins play a significant role in cross-border payments and remittance because they don’t require middlemen or hefty service fees, all without having to worry about volatility," he told The National.
This has led to many traditional financial institutions to begin adopting digital assets, "recognising that they can't ignore the shift toward decentralised finance", the Binance representative said.
Big names in the industry have began adopting digital assets. In February, the UK's Standard Chartered Bank, Europe's fifth-biggest bank by assets, said it was partnering with crypto companies to launch a stablecoin to be pegged with the Hong Kong dollar. Others, such as Bank of America, PayPal and Stripe have either launched stablecoins or have made their intentions to enter the market known.
"Those who integrate stablecoin infrastructure into their offerings rather than fight it will not only survive but emerge as leaders in the next financial era," Mr Badault said.
This doesn't mean stablecoins are bulletproof: despite their name, they are not immune from market fluctuations. Fiat-pegged stablecoins, such as those linked to strong global currencies such as the dollar, remain the most practical and predictable for trading and payments.
But commodity-backed stablecoins, such as those tied to gold or oil, offer an alternative hedge but ultimately remain susceptible to market fluctuations in those underlying assets.
Analysts admit digital assets still have a long way to go and their progress would largely depend on regulation and oversight. Collapses such as the one that beset Luna in 2022 mean that concerns around reserves, transparency and systemic risks persist.
"To ensure mainstream adoption, regulators must establish clear guidelines on reserve backing, transparency and consumer protection," Mr Gilbert said, noting that even proactive countries like the UAE will have to wait before stablecoins are fully integrated into regulated financial systems.
