Why the UAE is sanguine about both crypto and a CBDC

Written by Kapronasia || February 21 2023

The United Arab Emirates (UAE) has emerged as a leading fintech hub of the Middle East, with one of the region’s most dynamic startup ecosystems. From a regulatory standpoint, it is also taking a leading role, with big plans for both cryptocurrency and a central bank digital currency (CBDC). While many countries have adopted one or the other, the UAE is one of the few that seems open to both.

At Davos in January, the UAE’s Minister of State for Foreign Trade Thani Al-Zeyoudi said that crypto would play a “major role” in his country’s global trade in the future, adding that "the most important thing is that we ensure global governance when it comes to cryptocurrencies and crypto companies.”

To that end, the UAE is moving to build a comprehensive regulatory regime for virtual assets. In January, the UAE Cabinet introduced new regulation which essentially ensures that entities engaging in crypto activities must secure a license and approval from the Virtual Asset Regulatory Authority (VARA). The regulation also sets fees for advisory services, licensing, and annual supervision for custody, exchanges, broker-dealers and lending services.

The UAE’s pragmatic approach to crypto suggests that its leadership believes that digital assets are here to stay and will become increasingly important in the broader digital financial services ecosystem in the years to come. The UAE likely sees a real opportunity to take a leadership role in an emerging segment of financial services. Other would-be “crypto hubs” in Asia such as Hong Kong and Singapore are already long-established regional financial centers and have less of a need to use crypto to burnish their relevant credentials and attract new investment.

A study by the UAE’s telecoms regulator, the Telecommunications and Digital Government Regulatory Authority (TDRA), found that about 11.4% of the country’s residents own or have invested in cryptocurrencies, which puts the UAE among the world’s 10 crypto-investing countries.

Meanwhile in mid-February, the UAE announced that as far of its nine-point financial infrastructure program that it would issue a CBDC by 2026. The digital dirham will be used for both domestic and cross-border applications and is intended to help boost digital transformation of the country’s payment system.

The commitment to launch the digital dirham follows the UAE’s successful participation last year in the mBridge project, the largest pilot to date for CBDCs, which also included the central banks of mainland China, Hong Kong, Thailand and the Bank of International Settlements (BIS) Over a six-week period, 160 payment and FX transactions were conducted totaling US$22 million.