Decoding UAE Central Bank Circular No. 2/2024: Payment Token Regulations for Legal Professionals

UAE Central Bank Circular No. 2/2024 sets out the framework governing the use of payment tokens in the UAE. For legal professionals advising clients in fintech or digital assets, it is now required reading. The Circular opens certain doors, closes others firmly, and leaves a third category under active review. The distinctions matter.

Three Categories of Token

1. Regulated tokens. These are tokens approved for use as a means of payment under the Circular. The common thread is stability and asset-backing: tokens whose value is tied to a real-world asset — principally fiat currency — and that comply with AML and KYC requirements. Section 3.1 explicitly approves Central Bank Digital Currencies and asset-backed stablecoins. Article 7.1.4 sets out the conditions, which are strict. USDC and USDT meet the test under Article 5.3.2. Tokens that fluctuate freely against fiat are not on the approved list.

2. Prohibited tokens. Section 4.2 identifies categories of token the Central Bank will not permit. Algorithmic stablecoins — those that use algorithmic mechanisms rather than asset reserves to maintain their peg — are banned outright. The Terra/UST collapse illustrates why the regulatory instinct here is sound. Privacy coins, including Monero and Zcash, are similarly prohibited under Section 5.2.4, on the basis that their design is incompatible with the UAE’s AML and CTF framework. Advising clients on the use of either category for transactional purposes in the UAE is not viable. Article 9.3 sets out the penalty exposure.

3. Tokens under review. A third category sits in regulatory limbo. The Central Bank is still evaluating tokens associated with decentralised finance and cross-border stablecoins used in large-scale financial services. Section 8.4 leaves the door open for future regulation, but the current posture is caution, particularly around the implications for monetary policy control. Clients active in the DeFi space should be prepared for further regulatory updates.

CBDCs: The Privacy Trade-off

The Circular gives significant attention to the potential introduction of a UAE CBDC. The operational case is real: a Central Bank-issued digital currency could materially improve the speed, cost, and reliability of cross-border payments and remittances.

Section 6.2 acknowledges the other side of that ledger. Unlike Bitcoin, which offers pseudonymous transactions, a CBDC would give the issuing authority comprehensive visibility into financial flows. That capability streamlines AML and CTF compliance. It also represents a significant shift in financial privacy. The trade-off is not hypothetical — it is structural and built into the architecture of any state-issued digital currency. Clients should be informed of it rather than presented with CBDC adoption as an unambiguous advance.

Where Bitcoin Stands

Bitcoin is not named in the Circular, but its position can be read clearly from Section 2.7. No merchant or service provider in the UAE may accept a Virtual Asset as payment for goods or services unless it is either a Dirham Payment Token or a Foreign Payment Token issued by a Registered Foreign Payment Token Issuer — and even the latter is limited to the purchase of Virtual Assets or Virtual Asset derivatives.

Bitcoin qualifies as neither. It is not an approved payment token under the Circular, and it is not permitted for use in everyday commercial transactions. Bitcoin may be treated as a virtual asset for investment or trading purposes under other applicable frameworks, but Circular No. 2/2024 effectively bars its use as a payment method.

The apparent tension with the Dubai court’s ruling permitting Bitcoin salary payments is worth noting. That decision operated within an employment law context and reflected VARA’s more accommodating stance within Dubai’s jurisdiction. The two positions are not fully reconciled, and the matter warrants separate analysis.

What to Watch

Three areas are likely to produce further regulatory movement:

CBDC development. The Central Bank’s CBDC programme will advance, but public adoption will depend on whether adequate privacy protections are built into the design. This is an area where legal and policy input matters.

DeFi and asset tokenisation. As decentralised finance matures, more detailed rules around smart contracts, automated financial products, and tokenised assets will follow. The current framework is a foundation, not a ceiling.

Cross-border payment tokens. Given Dubai’s role as an international trade hub, regulations governing cross-border stablecoins will become more specific — particularly in the context of remittances and trade finance.

Circular No. 2/2024 provides meaningful clarity. It also raises questions that the framework has not yet resolved, and the pace of regulatory development in this space means that compliance advice given today requires regular review.

References

• UAE Central Bank, Circular No. 2/2024
• Anti-Money Laundering and Counter-Terrorist Financing Regulations, UAE, 2022
• UAE Central Bank, Regulatory Framework for Stablecoins, 2023

This is not legal advice. Consult a qualified legal professional familiar with UAE financial regulation before advising clients or making decisions on the basis of this framework.