The UAE Forges Ahead in Fintech Innovation with New Regulations

In the interests of securing financial transactions and fostering innovation in the United Arab Emirates, the Central Bank of the UAE (CBUAE) has issued the Payment Token Services Regulation governing issuance, conversion, custody and transfer of payment tokens.

The Central Bank of the United Arab Emirates (CBUAE) has issued two crucial regulations to govern digital payment services and foster innovation within the financial services sector. These regulations aim to create a secure and efficient framework for digital monetary services while ensuring consumer protection and maintaining financial stability.

The first regulation, titled the Payment Token Services Regulation (PTS regulation), introduces a comprehensive regulatory framework for entities offering payment token services in the UAE. This regulation defines the criteria and conditions under which licenses or registrations are granted to these entities, covering three primary categories: payment token issuance, payment token conversion, and payment token custody and transfer.

The PTS regulation outlines the objectives of establishing a secure and efficient framework for digital monetary services, fostering innovation, and safeguarding consumer interests. As part of the licensing or registration process, entities seeking to provide payment token services will undergo a rigorous evaluation of their financial health, operational capabilities, and compliance with regulatory standards. Notably, foreign entities interested in operating within the UAE market can apply for registration, subject to specific conditions and supervision by the UAE Central Bank.

A key focus of the PTS regulation is on consumer protection and operational standards. Payment token service providers are required to implement robust risk management practices, ensure the confidentiality of customer data, and maintain adequate capital and liquidity to meet their obligations. Additionally, they must provide clear and transparent information to customers regarding the terms and conditions of their services.

Recognizing the pivotal role of technology in digital payment services, the PTS regulation mandates the adoption of effective technology and cybersecurity risk management frameworks by the payment token service providers. Adherence to international best practices is essential to fortify systems against threats and ensure the reliability and security of services offered.

The CBUAE has instituted rigorous compliance and reporting requirements for payment token service providers. Entities are obligated to comply with anti-money laundering and counter-terrorism financing standards, conduct regular audits, and promptly report significant operational incidents. Non-compliance with these regulations may result in administrative penalties and financial sanctions.

The second regulation, known as the Sandbox Conditions Regulation (sandbox regulation), establishes a regulatory sandbox environment as a supervisory tool. This sandbox enables participants to test innovative business models, products, and services in the financial services sector within a specified timeframe under appropriate regulatory supervision.

The sandbox regulation outlines the eligibility criteria and participation rules for the regulatory sandbox, in addition to the regulatory compliance requirements. It specifies that the sandbox is open to all entities and individuals, including the financial free zone companies, interested in testing licensed financial activities, excluding activities related to (i) taking deposits of all types; (ii) carrying out insurance activities in the UAE; and (iii) acting as principal in financial products that affect the financial position of the person, including but not limited to foreign exchange, financial derivatives, bonds and sukuk, equities, commodities, and any other financial products, as determined by the CBUAE.

The sandbox regulation also stipulates a minimum level of safeguards that participants must fulfill during their time in the regulatory sandbox, aiming to mitigate risks associated with innovative financial technologies in terms of consumer protection and financial system stability. These safeguards include, for example, appropriate mechanisms for handling consumer complaints, compensations, dispute settlements, as well as necessary measures to combat money laundering and terrorist financing in accordance with relevant legislation.

Regarding the duration of the regulatory sandbox, the testing period ranges between six to 12 months, with the possibility of extension based on an evaluation by the CBUAE for each case. It should be noted that the testing may be discontinued at any time during or after the specified testing period, subject to specific circumstances outlined in the regulation.

These regulations, issued by the UAE Central Bank, represent pivotal advancements towards fostering innovation and ensuring stability in the digital economy and financial services sector of the UAE. The regulations provide a structured framework that encourages experimentation and growth while safeguarding consumer interests and maintaining the integrity of the financial system.

By promoting a secure environment for digital payment innovations and establishing clear guidelines for regulatory compliance, the CBUAE is paving the way for sustainable development and enhanced competitiveness in the global digital landscape. These regulatory initiatives underscore the UAE’s commitment to embracing technological advancements and maintaining leadership in the evolving realm of financial technology.