The anticipation of stablecoins in the UAE continues to increase – along with the number of transactions they are expected to transform.
On Monday, Abu Dhabi entities IHC, ADQ and First Abu Dhabi Bank announced plans to launch a dirham-backed stablecoin, which will be fully regulated by the UAE Central Bank, aimed at easing payment solutions and further doubling down on the use of the digital asset.
We have already established what we can expect with the arrival of stablecoins in the UAE. On the other hand, the underlying programming – from all aspects, technicalities to oversight – to make it work is interesting on its own.
Game-changing 'smart' programming
Stablecoins would be able to make smart contracts – also known as programmable money – even smarter as they can execute payments in stages when certain conditions are met.
FAB last September announced it was the first financial institution to complete a programmable payment pilot with JPM Coin, developed by a unit of US bank JP Morgan.
A smart contract can be programmed to auto-trigger cash token payouts for insurance claims, utility bill payments, corporate actions, dividend payouts and other transactions, said Ronit Ghose, global head of future of finance at the Citi Institute.
Though theoretical at the moment, this can be done by properly “embedding conditions “as logic or a code into the payment leg to efficiently execute payments when certain predefined conditions are met”, he told The National.
As a result, “programmable money will likely [make] money smarter and finance hyper efficient”, he said.
This will eliminate – as with cryptocurrencies in general – traditional systems, people or intermediaries needed to confirm, approve, or process payments. It would also reduce counterparty risk, in addition to enabling traceability that fosters better trust between parties, protection against fraud and fewer disputes, said Arun John, chief market analyst at Dubai-based Century Financial.
“This technology is a game-changer … since everything is automated, there’s no need for people to manually check things or for middlemen to get involved. That means fewer mistakes and fewer delays,” he told The National.
In supply chains, for example, smart contracts make sure that money is only paid when every part of the deal is completed, so there is less risk of fraud or arguments. In corporate finance, it helps keep track of money in real time, making it easier to avoid errors and stay transparent about where the money is going.
“We view this as a foundational milestone – one that strengthens liquidity, enhances transparency and advances cross-border interoperability across the Web3 ecosystem,” Shunyet Jan, head of institutional and derivatives at Dubai-based crypto exchange Bybit, told The National.
Regulation and accountability
Being a piece of code, regulating smart contracts is not straightforward. Typically, regulators tend to adopt a functional approach, regulating instead the outcomes or the activities enabled by such smart contracts.
That said, accountability is not entirely out of reach, especially as the space gradually matures and rules are drawn up.
“We’ll likely see a blend of technical standards and regulatory approaches specially around areas like smart contract audits, transparency tools, and compliance frameworks for the platforms using them,” Arushi Goel, policy lead for the Middle East and Africa at blockchain company Chainalysis, told The National.
While indeed money will continue to be regulated by national financial and fiduciary authorities, including central banks, issuers of stablecoins should and must be subject to global and local laws and guidance.
These include those around know your customer, consumer protection, safety and soundness, and, perhaps arguably the most important, anti-money laundering.
“Policymakers of certain jurisdictions anticipate a looming threat stemming from privately issued money tokens and will likely want to continue sovereign control over money,” Mr Ghose said.
In addition, regulators should find it “relatively easy to hold players accountable because all transactions [including user identities] will be publicly recorded on a blockchain”, Anna Zeitlin, a partner for FinTech and financial services at international law company Addleshaw Goddard, told The National.
What about rents, BNPL and business contracts?
Although stablecoins are pegged to a traditional fiat currency or commodity, they do not require extensive paperwork, approvals and physical branches.
On the other hand, stablecoins would only require an internet connection, a digital wallet and proof of identity.
This system disruption could entirely change how we transact, ranging from remittances, rent cheques, buy-now-pay-later schemes, ethical retail investments and even business contracts.
Rent cheques and other day-to-day expenses are also expected to be vastly affected as blockchain-powered stablecoins will eliminate days-long processing and reduce fees significantly.
BNPL providers, meanwhile, would now start lending through stablecoins, and as the system is now built on blockchain, they could now tokenise those loans and make them available for investors much cheaper and more efficiently, Mr John said.
For investments and business contracts, stablecoins would offer a less volatile exposure to cryptocurrencies while enabling transactions. According to New York-based Chainalysis, 93 per cent of stablecoin transfers in the UAE are retail-sized, portraying the heightened adoption among retail participants.
“Stablecoin payments will allow instantaneous and very cheap payments. This will be beneficial to consumers and will also speed up the business of companies using them,” Ms Zeitlin said.
The key question though is how long it will take for all this to be realised. It can take anywhere between a few to several years, depending on the complexity of use cases – and how artificial intelligence and blockchain further advance.
"Maybe five to 10 years, according to how AI [development] grows," Ryan Chow, chief executive of Solv Protocol, told The National.
"But if you only take a look at some very specific use case, like something very common [such as buying coffee], two or three years are enough [for a] much more convenient, efficient and transparent way to pay for a lot of things."
