Payment Token Services under Central Bank of UAE Circular No. 2/2024 (Payment Token Services Regulation)

With a strong commitment to fostering a secure and thriving digital economy, the UAE implements forward-thinking regulations that support the growth of fintech and the environment for digital financial services.

In furtherance of these objectives, the Central Bank of the UAE (the “CBUAE”), by virtue of Circular No. 2/2024, issued on June 07, 2024, (the “Circular”), has introduced a new regulatory regime governing Payment Token Services (the “Regulation”). This Regulation outlines a comprehensive set of rules and conditions aimed at advancing the UAE's digital economy and ensuring secure management of Payment Tokens.

As part of these developments, a dirham-pegged stable coin is set to be launched in collaboration with the UAE-based conglomerate Phoenix Group and with support from Green Acorn Investments. This new stable coin, which will join Tether’s existing lineup of stable coins (including those pegged to the US dollar and euro), seeks to pioneer compliance with the UAE Central Bank’s recently announced Regulation. The introduction of the dirham-pegged token highlights the UAE's efforts to integrate traditional finance with cutting-edge digital assets, creating a bridge between the local currency and the broader global digital ecosystem.

This article provides a comprehensive overview of the key aspects of the Regulation, including its scope and applicability. It explores the nature and classification of Payment Tokens under the Regulation, differentiating them from Payment Tokens governed by Retail Payment Services Regulations outlined in our previous article published on March 19, 2024. The article also outlines the criteria for obtaining a license or registration to offer Payment Token Services, as well as any exclusions and exemptions.

Scope and Applicability

The Regulation applies to any company incorporated in the UAE that engages in activities related to Payment Token Services, including those operating within free zones. However, it excludes companies located in Financial Free Zones such as the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM).

Payment Tokens

Payment Tokens as per the new regulation refer to the Dirham Payment Token, which means a Payment Token whose value is denominated in Dirham (AED), or denominated by reference to the value of another Payment Token whose value is denominated in AED, and which is issued by a Dirham Payment Token Issuer. In contrast, a general Payment Token, often referred to as a stable coin, is a type of crypto-asset backed by one or more fiat currencies. It functions as a medium of exchange, unit of account, and store of value, but does not hold legal tender status in any jurisdiction.

Furthermore, UAE businesses and vendors are permitted to only accept Dirham Payment Tokens from entities licensed by the CBUAE. In contrast, Foreign Payment Tokens are restricted to specific virtual asset purchases and trading, and their use for payments involving goods and services, such as those involving USDT, is prohibited.

Payment Token Services and Licenses

Any individual or entity intending to offer Payment Token Services must apply for the appropriate license. The CBUAE has classified such licenses into the following categories: (a) Dirham Payment Token Issuer, (b) Payment Token Custodian and Transferor, and (c) Payment Token Conversion. A person or entity incorporated outside the UAE, including those located in DIFC or ADGM, may apply for a Foreign Payment Token Issuer Registration.

For Category (a), the issuance must be limited exclusively to Dirham Payment Tokens. Furthermore, for token conversion under Category (b) and custody and transfer under Category (c), entities already regulated by the Securities and Commodities Authority (SCA), the Virtual Assets Regulatory Authority (VARA), or any local licensing authority can seek a Non-Objection Registration (NOR). For instance, a virtual assets licensed entity might seek a NOR to offer custody and transfer services for Payment Tokens.

Additionally, other requirements are required to comply with the Regulation for each License, such as capital requirements, and on-going obligations.

Excluded Activities

The Regulation does not apply to several specific scenarios. It excludes any activities that are already licensed or require licensing under the Central Bank's Retail Payment Services and Card Schemes Regulation (RPSCS) or Stored Value Facilities (SVF) regulation. It also does not cover information technology security services, operations of technology infrastructure, trust, or privacy protection services that do not directly constitute Payment Token Services. Additionally, the Regulation does not apply to services related to the provision or maintenance of communication networks, Distributed Ledger Technology, or terminals and devices used for Payment Token Services. Furthermore, Payment Token Transfers conducted within a payment or securities settlement system among licensed providers, central counterparties, clearing houses, central banks, and similar entities are excluded. Lastly, it does not include Payment Token Transfers and related services between a parent company and its subsidiaries or among subsidiaries of the same parent, provided there is no intermediary intervention by external licensed or registered entities.

Exempted Activities

Exemptions from the Regulation apply to Payment Token Services involving low-risk tokens. These include Payment Tokens used for specific reward schemes, which are issued in exchange for money or under agreements with merchants and can only be used for purchases from the issuer or merchant, such as loyalty rewards from shops and supermarkets. Payment Tokens for bonus point schemes, like airline mileage programs, are also exempt, provided they are used solely for non-cash redemptions for goods or services. Additionally, Payment Tokens intended exclusively for non-financial goods or services are exempt. The CBUAE may exempt a Payment Token Issuer from licensing if the total Reserve of Assets does not exceed 500,000 AED and the number of token holders is fewer than 100. However, the CBUAE retains the authority to revoke such exemptions and require a license if conditions change.

Transitional Period

There is a one-year Transition Period starting from the commencement of this Regulation, after which a Person licensed under the RPSCS regulation or SVF regulation in relation to Crypto-Assets, Virtual Asset Tokens, or Virtual Asset activities will no longer hold such licenses for these activities following the conclusion of the Transition Period.

With the end of the Transition Period, the RPSCS regulation will no longer apply to Crypto-Assets, Virtual Asset Tokens, Virtual Assets Service Providers, or Virtual Asset Token Services (as defined under the RPSCS regulation).

Similarly, SVF regulation will no longer be applicable to Crypto-Assets, Virtual Assets, or Virtual Asset Service Providers (as defined under the SVF Regulation) after the Transition Period concludes.

Conclusion

The Regulation’s comprehensive licensing and compliance requirements will have profound effects on companies operating within the UAE, particularly those engaging in digital payments, token issuance, and virtual asset-related services. Companies wishing to offer Payment Token Services will need to adhere to strict licensing protocols, and only entities licensed by the CBUAE will be permitted to issue or handle Dirham Payment Tokens. This will likely lead to the consolidation of market players and raise barriers to entry for entities that cannot meet the regulatory and capital requirements.

By leading the launch of the dirham-pegged stable coin, the UAE solidifies its role in advancing fintech, ensuring both innovation and regulatory oversight within the rapidly growing digital economy. This move is expected to shape the landscape of digital assets and payments, contributing to the UAE's vision of being a global hub for financial services.

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*The capitalized words used in this article carry the same meaning as those provided in the Circular.

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Author

Melissa Wehbe, Associate

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