Stablecoins: The Future of Payments or a Ticking Regulatory Time Bomb?

Stablecoins have positioned themselves as game-changers — providing the bridge between traditional finance (TradFi) and the world of decentralized finance (DeFi).

Stablecoins, a bridge between traditional finance (TradFi) and decentralized finance (DeFi), have become essential in the crypto economy. Their role in payments is undeniable, but so is the global regulatory scrutiny they face.

What defines Stablecoins?

Stablecoins are digital currencies pegged to a stable asset, usually a fiat currency like the U.S. dollar, to minimize price volatility. Unlike Bitcoin or Ethereum, whose values fluctuate dramatically, Stablecoins provide the stability needed for payments and everyday transactions.

According to the International Monetary Fund (IMF), Stablecoins had a global market capitalization of over $130 billion in 2023, a 500 percent increase since 2020.

In the UAE, Stablecoins are particularly attractive for fast, cost-efficient cross-border payments. A 2024 Cointelegraph article indicated that nearly 50 percent of cross-border payments in the UAE’s fintech sector are now facilitated through Stablecoins, a significant rise from just 20 percent in 2020.

Disrupting traditional finance

Stablecoins promise to democratize payments on a global scale.

With transaction fees as low as 0.1 percent compared to the 1.5 percent to 3 percent charged by traditional financial institutions, they’re revolutionizing remittances, which are crucial for many developing economies.

According to the World Bank, remittance flows to low- and middle-income countries reached $840 billion globally in 2023, a significant portion of which was facilitated by Stablecoin transfers.

In the UAE, a key financial hub in the Middle East, Stablecoins are increasingly used for remittances. UAE expats sent over $47 billion in remittances in 2023, with Stablecoins playing an instrumental role in reducing costs and increasing transaction speed.

With over 200 nationalities in the UAE, this technology has the potential to reshape the region’s financial landscape, allowing migrants to send money back home at lower fees and in real time.

The regulatory spotlight: Friend or foe?

But this potential comes with challenges.

Globally, Stablecoins face intense regulatory scrutiny, with governments fearing they may undermine monetary sovereignty. Both the European Union and the U.S. Federal Reserve have expressed concerns about Stablecoins’ impact on financial stability. The TerraUSD (UST) algorithmic Stablecoin collapse in 2022 further exacerbated these concerns, triggering market-wide panic and raising questions about the viability of algorithmic Stablecoins.

In the UAE, the Dubai Virtual Asset Regulatory Authority (VARA) is leading the charge on Stablecoin regulations, ensuring their growth is sustainable.

VARA recently imposed new guidelines on asset-backed Stablecoins, requiring strict auditing and transparency and ensuring that each issued token is backed 1:1 by reserve assets. Additionally, foreign currency-backed Stablecoins like USDC can only be used for purchasing virtual assets within the UAE, while the new Dirham-backed Stablecoins offer enhanced transaction stability.

Moreover, the UAE Central Bank (CBUAE) is playing a crucial role. It oversees the issuance of Dirham-backed Stablecoins and implements frameworks for foreign Stablecoins to be used under specific conditions. With its comprehensive regulatory frameworks, the UAE is positioning itself as a leader in Stablecoin innovation.

The global view: Adoption versus risk

Globally, Stablecoin adoption is accelerating. According to Chainalysis, 60 percent of businesses involved in cross-border trade have now adopted Stablecoins for payments, up from 25 percent in 2021.

Stablecoins reduce the friction associated with traditional banking systems, particularly in regions with volatile currencies or limited banking infrastructure, offering an alternative that is fast, dependable and secure.

However, their rise isn’t without risk. The Bank for International Settlements (BIS) has warned of potential risks in using Stablecoins as they are often governed by private institutions, leading to questions of transparency and reserve adequacy. There’s also the risk of de-pegging, where the value of a Stablecoin might fall below its fiat equivalent, as seen in some algorithmic Stablecoin models. Globally, regulators are pushing for a common framework to ensure Stablecoins do not become ‘too big to fail’.

Future outlook: The UAE at the forefront

The UAE is uniquely positioned to lead in the Stablecoin revolution. With regulatory clarity and a forward-thinking approach, the country could become a global center for Stablecoin innovation. In fact, the Dubai International Financial Centre (DIFC) is actively working to create a regulatory sandbox for Stablecoins, allowing fintech firms to experiment with this technology under controlled conditions.

Globally, Stablecoins may be the harbingers of a new era in payments, offering speed, security and cost-effectiveness. However, their future hinges on regulators’ ability to strike the right balance between fostering innovation and ensuring stability.

The UAE, with its regulatory foresight, is already on that path.