Towards a cashless future?
A commentary by Tribonian Law Advisors on the surge of digital payment transactions in
the UAE and how the latest legal developments secure the country as a regional leader in adopting new payment technologies.
he UAE, like many other countries in the world, has been dominated by cash payments as a means of
settlement of consumers’ day-to-day purchases. In more recent years, the UAE government has recognised and promoted several new initiatives aiming at driving digital developments such as Emirates Digital Wallet, Etisalat Wallet and Noqodi
e-wallet.
The COVID-19 pandemic outbreak and the ensuing global lockdown measures uprooted the consumer’s reliance on physical currency as means of payment, and played a major role in accelerating consumers’ adoption of digital payments. Digital payments have significantly risen, as consumers have shifted to online shopping for all kind of purchases. COVID-19 has effectively condensed years of technological advancements into months.
Whilst the pandemic has served as a catalyst for the growth of e-commerce
(including digital payments) in the UAE, the sector has been, in parallel, encouraged by an active legislative responsiveness by the UAE Government which has launched several initiatives to foster its position as
a regional leader in the digital payments industry and the adoption of new payment technologies.
LEGAL DEVELOPMENTS
In addition to the general legislation aiming mainly at protecting the consumers,
new laws and regulations spurred by the COVID-19 pandemic have been enacted
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in the UAE with the goal of creating a legal framework for digital payments and enhancing the UAE digital payments
services. In this regard, cashless payments have been classified as one of the top priorities of the UAE government in the UAE’s Vision 2021.
On September 30, 2020, the UAE Central Bank (the UAECB) issued the new Stored Value Facilities Regulation (the SVFs Regulation), repealing the 2017 regulations in relation to stored values and electronic payment systems (the SVFs). The SVFs Regulation aims at updating the regulatory framework governing digital payments and give the SVFs providers, fintech firms and other payment service providers easier access to the UAE online market while increasing consumers’ trust in digital payments services.
Under the SVFs Regulation, the SVFs are defined as a non-cash payment facility allowing a customer to transfer a sum of money to the SVFs issuer in order for the
latter to store the value of that money on the facility. Pre-paid cards and mobile e-wallets are some examples of SVFs. As per the
SVFs Regulation, digital currencies may be accepted as stored values when purchasing goods and services and as such, both crypto assets and virtual assets may be stored
on SVFs.
In order to protect consumers from the risks arising from the ever-changing technological developments, the SVFs Regulation seeks to create a secure
environment for digital payment services. In particular, SVFs Regulation requires any person envisaging to conduct SVFs activities to obtain an SVFs license from the UAECB. The UAECB will grant such license after ensuring that the applicant has in place a robust internal policies
and operational framework, as well as an effective control system addressing
specific aspects of the daily operations of the applicant, such as risk management policies, technology risk management, payment security management, business continuity management, business conduct, customer protection, anti-money laundering and combatting terrorism.
Additionally, the licensee must maintain aggregate capital funds amounting to, at least, 5 per cent of the total float received by customers. Such aggregate capital funds consist of the paid-up capital, the reserves and the retained earnings. In this respect,
the licensee should maintain a paid-up capital of, at least, AED15 million, or an equivalent amount, in any other currency, approved by the UAECB which may impose a higher level of capital requirement.
Moreover, the Regulation requires each licensed SVFs business to conduct a
“Know-Your-Client” (KYC) process for new customers within the scope of combatting money laundering and the financing of terrorism.
Notwithstanding the possibility of using crypto assets and virtual assets as SVFs, the UAECB clarified that it is currently not accepting crypto-assets as legal tenders in the UAE nor is it recognising such assets, reconfirming that the only legal currency in the UAE is the UAE Dirham. However, the UAECB Governor has confirmed that Bitcoin and other cryptocurrencies are currently being reviewed by the UAECB and new regulations will be issued in relation thereto. It further affirmed that
it is in the process of issuing a new retail payment services regulation that will introduce the concept of “payment tokens” which, similarly to Safe Coins (a type of
cryptocurrency), has been defined by the UAECB as crypto-assets that are
backed by a fiat currency and used for payment purposes.
Furthermore, the UAE issued Federal Law No. (15) on Consumer Protection (the New Consumer Protection Law) on November 10, 2020, repealing Federal Law No. (24) of 2006. The issuance of the New Consumer Protection Law, which covers the sale and purchase of all goods and services offered in the UAE, including electronic commerce channels, is crucial in terms of protecting consumers and strengthening their trust while using digital payments methods.
Indeed, the New Consumer Protection Law introduces privacy and data security for consumers and prohibits the use of
consumers’ data for purposes of promotion and marketing. Moreover, under the New Consumer Protection Law, e-commerce
service providers registered within the UAE are required to provide consumers and competent authorities with their name, legal status, address, details of their licensing authority and other sufficient information in Arabic on the services
that they provide. Non-abiding service providers are subject to strict penalties including imprisonment and fines of up to AED2,000,000.
The m-CBDC Bridge project aims at further exploring the capabilities of distributed ledger technology, through developing a proof- of-concept (PoC) prototype allowing participating
banks to conduct
payments, on a peer-to-peer basis, in a
multijurisdictional context and on a 24/7 basis.”
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NEW INITIATIVES TOWARD A CASHLESS ECONOMY
On February 23, 2021, the UAECB joined the Multiple Central Bank Digital Currency Bridge Project (m-CBDC Bridge) (previously named Inthanon-LionRock), which is a central bank digital currency project for
cross-border payments initiated by the Bank of Thailand and the Hong Kong Monetary Authority. The m-CBDC Bridge project
aims at further exploring the capabilities of distributed ledger technology, through developing a proof-of-concept (PoC) prototype allowing participating banks to conduct payments, on a peer-to-peer basis, in a multijurisdictional context and on a
24/7 basis. Thus, the m-CBDC Bridge project will enhance the role of distributed ledger technology in building-up a conducive financial infrastructure for cross-border payments.
Recently, on February 16, 2021, the Dubai Government-owned entity KIKLABB announced, in a leading move, that it
has started to accept cryptocurrencies, including Bitcoin, Ethereum and Tether, as means of payment for trade licenses and visa fees, becoming as such the first government-owned entity to accept such digital currencies as a payment method.
In the same context, for the purpose of encouraging entrepreneurs to set-up in the UAE, the Dubai Multi Commodities Centre (DMCC), in partnership with Swiss company Cypto Valley Venture Capital and its subsidiary Crypto Valley Labs, announced in January 2020 that it will launch Crypto Valley in Dubai in order to enhance Blockchain economy. The DMCC
Crypto Valley will offer a variety of services to attract innovators, entrepreneurs and pioneers by developing an ecosystem in Jumeirah Lakes Towers, DMCC’s business district. As announced by the DMCC, this project will further enhance the city’s dynamic business environment, helping build more successful projects and startups, and foster the settlement of new Blockchain focused companies in the UAE.
Furthermore, it is worth mentioning that the Telecommunications Regulatory Authority, the primary regulatory body responsible for regulating electronic transactions and commerce in the UAE, has facilitated the process of obtaining
e-commerce licenses and has seen as such a significant increase in the number of applications for online store licenses since the beginning of the pandemic.
These new laws, regulations and initiatives support the evolution towards a cashless economy in the UAE and will position the UAE as the hub of attraction
and the key actor in the GCC region for the burgeoning of the digital payments industry in this highly competitive tech era, without compromising the rights of consumer in the cyber environment.
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Text by:
- CARLO PIANESE, partner, Tribonian Law Advisors
- JEAN RAFFOUL, associate, Tribonian Law Advisors
- SARA ZAROUR, trainee, Tribonian Law Advisors