Although in many countries cash has been on the way out for several years as consumers and businesses embrace digital payments, it was the Covid-19 pandemic that really energised this important change. The results of a study carried out by Dubai Police, Dubai Economy and Visa released in July 2021 found that the use of contactless cards or mobile wallets almost doubled from the start of the pandemic in March 2020.
This proved to be a lasting trend, supporting the UAE study’s findings that about 40 per cent of respondents would be less likely to use cash-on-delivery in the future and 45 per cent would be more likely to use contactless payment methods. Digital currencies have become an unavoidable part of this change and although they largely remain outside the financial mainstream for now, there is increasing evidence that interest in them is growing.
This is what makes this week’s announcement that Abu Dhabi entities IHC, ADQ and First Abu Dhabi Bank plan to launch a dirham-backed stablecoin so important. Stablecoins – a type of cryptocurrency that is pegged to a fiat currency and tends to be less volatile – offers interesting possibilities for the future of finance. Already, an estimated $208 billion worth will be in circulation this year, a 28.4 per cent jump from 2024, according to Visa and its data partner Allium.
According to a joint statement from the Abu Dhabi companies on Monday, the stablecoin will operate on the ADI blockchain and will be issued by FAB, the UAE’s largest bank, subject to regulatory approval. The digital currency “will revolutionise the ease of making payments and doing business, both locally and globally”, the companies added.
There is no doubt that well-regulated, government-backed stablecoins have the potential to be a financial game changer. Proponents argue that they offer faster and cheaper international transfers, an important benefit for millions of workers in the UAE who send remittances home. Stablecoins are also accessible, requiring only an internet connection and a digital wallet thereby bypassing the paperwork and approvals often required by traditional banking services.
For those living in countries with high inflation or unstable currencies, stablecoin presents an attractive alternative. It is even used by those forcibly displaced by armed conflict – in March 2023, the UN’s refugee agency won an award for a project that used blockchain technology and the USDC stablecoin to disburse cash to people affected by the war in Ukraine.
However, as with any emerging technology there are caveats. The digital underworld is nothing if not adaptable: a report released in January by blockchain data company Chainalysis found that cryptocurrency crimes are no longer solely focused on Bitcoin, with stablecoins now accounting for 63 per cent of all illicit transaction volumes. Consumers and businesses must be convinced that stablecoin payment systems are secure.
In addition, moving stablecoin into the mainstream also means persuading people to embrace it and the learning curve that comes with it. Given some people’s connection to legacy technology and payment methods, establishing stablecoin’s reliability and ease-of-use will be paramount to its success.
There is plenty of evidence that regulators and companies in the UAE are aware of these caveats and are working to address them. In March 2023, the UAE Central Bank began implementing its digital currency strategy, Digital Dirham, and last year, the Central Bank’s provision on stablecoins showed it was intent on creating a clear operational framework for cryptocurrencies. Abu Dhabi Global Market and Dubai's Virtual Assets Regulatory Authority already have frameworks in place for cryptocurrencies.
This week’s announcement about a dirham-backed stablecoin is about future proofing. Stablecoin may not enjoy widespread, mainstream acceptance right now but this may change in a few short years. Given this possibility, it pays to be prepared and the UAE’s approach is one that is not about being first, or introducing innovations for the sake of it – it is about building trust, based on transparency and regulation – this is what will help establish stablecoin as a part of people’s daily lives.
