Changes for stablecoins in the UAE 2024

Introduction

In 2024 and beyond, UAE regulators have revised their approach to the issuance and use of stablecoins such as USDT and USDC. The Central Bank of the UAE (CBUAE), the Abu Dhabi Global Market Financial Services Regulatory Authority (FSRA/ADGM), and the Dubai Virtual Assets Regulatory Authority (VARA) have strengthened oversight of reserves, transparency, and AML/KYC compliance. These changes affect both issuers and users of stablecoins, creating new opportunities as well as risks.

In this article, we will break down what has changed, the potential threats involved, and how to protect your assets.

New Rules: Key Changes

Key Regulators and Their Documents

1. CBUAE — In 2024, the Central Bank of the UAE introduced regulatory measures aimed at payment tokens and service providers, tightening requirements for reserves and payment processes.
2. FSRA (ADGM) — ADGM publishes consultation papers and proposals for a regulatory framework for issuers of fiat-referenced tokens, including requirements for maintaining parity of face value and other issuer obligations.
3. VARA (Dubai) — VARA is updating its rules for virtual asset issuance and reserve audit requirements for tokens, including stablecoins, as part of the development of the local regulatory framework.

Risks for Users

1. Blocking of Funds and Accounts

Stricter KYC/AML rules and enhanced sanctions monitoring increase the risk of account blocks. For example, a transfer to an address associated with services or addresses flagged for involvement in illegal activity can lead to a freeze of assets. This has occurred previously in cases involving the Tornado Cash service, which was sanctioned, leading wallet operators to block interactions with it.

2. Liquidity Restrictions

Issuers are required to maintain parity of face value and comply with regulatory requirements, which may lead to the exclusion of certain tokens or networks in specific jurisdictions. Support for specific networks and distribution channels for stablecoins may require regulatory approval, and the requirements for such approval vary across jurisdictions.

3. Reputational and Counterparty Risks

If an issuer violates requirements (e.g., insufficient reserves or lack of high-quality auditing), it may lead to a freeze on operations or a loss of counterparty trust. Notably, Tether has previously faced criticism and legal proceedings regarding reserve transparency and the disclosure of information about its backing funds.

How to Protect Yourself

Practical Recommendations

1. Check the Status of Providers and Exchanges
   Ensure your provider holds the appropriate license or registration in the jurisdiction where it operates (e.g., ADGM/FSRA, VARA, or in accordance with CBUAE requirements). This minimizes the risk of unexpected blocks and ensures compliance with local standards.

2. Diversify Your Assets
   Hold funds not only in stablecoins but also in bank accounts in reliable jurisdictions. Use multiple issuers (e.g., USDC, EURC, USDT) to reduce counterparty risks.

3. Perform AML Screening Before Transfers
   Check wallet addresses using blockchain analytics services. This helps avoid interacting with addresses flagged for sanctions or suspicious activity and reduces the risk of frozen funds.

Technical Measures

• Use wallets that support security features and offer integration with KYC/AML processes.
• Set up transaction notifications.
• Verify which blockchains and networks are supported by your provider and the stablecoin issuer; supported networks vary among providers and jurisdictions (often including Ethereum, Solana, Avalanche, etc.); check with your provider for specifics.

Conclusion

The regulation of stablecoins in the UAE is creating new rules of the game for market participants. On one hand, it increases security and transparency; on the other, it heightens user risks related to asset freezes and liquidity restrictions.

To minimize risks:

• Check provider status.
• Diversify your assets.
• Perform AML screening.

Regulatory changes from the CBUAE, ADGM/FSRA, and VARA require a conscious and informed approach to using stablecoins.