Bit by Bit – Digital Currencies in the UAE
Banking & Finance / UAE
The use of distributed ledger technology (DLT) and its associated tokens or coins as a digital currency has taken different forms in different countries.
Law Update: Issue 376 – Transport & Insurance
Kay Ng Senior Associate,Banking & Finance
The use of distributed ledger technology (DLT) and its associated tokens or coins as a digital currency has taken different forms in different countries. In the US, President Donald Trump, recently proposed a strategic cryptocurrency reserve for the United States made up of a portfolio of different crypto tokens. El Salvador made Bitcoin legal tender in 2021. In contrast, the Central Bank of the UAE (CBUAE) announced implementation of the CBUAE’s Central Bank Digital Currency (CBDC) Strategy in March 2023.
A key milestone in this CBDC Strategy is the advancement of Project mBridge, a multi-central bank digital currency platform that reached its minimum viable product (MVP) stage in mid-2024. Developed in collaboration with the central banks of China, Hong Kong, Thailand, and the UAE, alongside the Bank for International Settlements, this initiative highlights the UAE’s leadership in tackling inefficiencies in cross-border payments using DLT.
The legislative platform for mBridge was the enactment of Federal Decree-Law No. (54) of 2023, which introduced amended to Federal Decree-Law No. (14) of 2018 Concerning the Central Bank and Organization of Financial Institutions and Activities. Importantly, the amendments expanded the existing framework of what constitutes ‘currency’ and transfer mechanisms to include digital payments.
Digital Currency Accounts and Operations (Article 42):The CBUAE can now open accounts for licensed financial institutions, foreign banks, and international monetary entities in national or foreign currencies, including digital forms, with interest arrangements as agreed. It may also maintain other digital currency accounts under rules set by the Board of Directors, enhancing flexibility in digital banking operations.
Currency Issuance and Legal Tender (Articles 55, 56, 57):
Currency issuance remains an exclusive state privilege exercised by the CBUAE, with a prohibition on unauthorized instruments resembling currency (Article 55).
Paper notes and digital currency are absolute legal tender for unlimited amounts, while coins are capped at AED 50 except when redeemed at the CBUAE (Article 56).
The Board of Directors now sets specifications for paper notes, coins, and digital currency, including issuance procedures published in the Official Gazette (Article 57).
Monetary Base Cover (Article 62): Reserves backing the monetary base can include gold, foreign cash assets, deposits, and securities, now explicitly encompassing digital currencies issued by central banks or monetary authorities.
Penalties for Currency Damage (Article 141): Publicly mutilating or destroying currency now carries a minimum fine of AED 10,000, imprisonment, or both, reinforcing currency integrity and would extend to digital currency.
Technical Terminology (Article 157): References to “Currency,” “Cash,” or similar terms in UAE legislation now include digital currency unless context dictates otherwise. Virtual assets, like Bitcoin, Ethereum, XRP and the like, however, are excluded from this definition, with the CBUAE empowered to regulate their use as payment instruments.
Introduction of Digital Currency Provision (Article 60 bis):A new article allows the Board of Directors to issue and withdraw national digital currency via resolution, with no CBUAE liability for lost, stolen, or counterfeit digital currency, shifting risk to users.
In contrast, the Central Bank of the UAE (CBUAE) announced implementation of the CBUAE’s Central Bank Digital Currency (CBDC) Strategy in March 2023.
The UAE’s participation in Project mBridge and development of the digital dirham, serves as an opportunity for financial institutions and their clients:
Digital Banking Expansion: The inclusion of digital currency in accounts (Article 42) and monetary reserves (Article 62) enables banks to offer innovative services, such as CBDC-linked accounts, subject to CBUAE rules.
Payment Systems: Updated “Transfer Order” definitions (Article 1) and digital currency provisions (Articles 56, 60 bis) enable financial institutions to adapt clearing and settlement systems using digital currencies.
Enhanced Cross-Border Efficiency: Project mBridge’s real-time settlement capabilities, aim to have faster and cheaper international transactions. This could reduce reliance on traditional correspondent banking networks.
Boosted Financial Inclusion: The Digital Dirham’s retail focus aims to extend financial services to underserved populations, aligning with UAE Vision 2030. Banks could offer services to new or underserved customer segments.
Innovation Opportunities: Compatibility with technologies like the Ethereum Virtual Machine (EVM) in Project mBridge opens doors to smart contracts and decentralized applications (dApps), positioning institutions to innovate in fintech offerings.
Risk Management: With the CBUAE disclaiming liability for lost digital currency (Article 60 bis), institutions bear the burden of securing CBDC transactions and potentially heightened risks of cyberattacks in a digital-first environment.
Financial institutions in the UAE can take the following steps to leverage digital currency advancements:
Engage in CBDC Pilots: Participate in Project mBridge’s ongoing development or similar CBDC trials to gain hands-on experience with cross-border payment systems and assess their operational impact.
Invest in DLT Infrastructure: Upgrade technological systems to support blockchain and DLT platforms, ensuring seamless integration with mBridge and the Digital Dirham for both domestic and international transactions.
Enhance Cybersecurity Measures: Deploy advanced security protocols, such as encryption and multi-factor authentication applicable to digital currency, to safeguard digital assets and mitigate risks highlighted by the CBUAE’s liability stance.
Educate Stakeholders: Train staff on digital currency operations and educate clients about the benefits (e.g., speed, cost savings) and risks (e.g., security) to foster adoption and trust.
For further information,please contact Kay Ng.
Published in April 2025
