Navigating Merchant Payments under CBUAE’s New Payment Token Services Regulation

By: Akshata Namjoshi, Associate Partner, KARM Legal
Kabir Hastir Kumar, Associate, KARM Legal

Blockchain and digital assets are transforming the financial landscape, with increasing applications in payments, lending, and asset management.

Stablecoins are particularly being explored for payments due to their price stability. According to the CoinGate Q1 2024 report, USDT transactions accounted for 41.4% of all crypto payments, highlighting a growing trend towards stablecoin use in commerce. Additionally, Deloitte’s report underscores that over 60% of merchants express significant interest in accepting cryptocurrency payments, aiming to enhance customer experience and expand their market reach.

Merchants are increasingly interested in enabling their customers to pay with cryptocurrency. They partner with various acquiring platforms that facilitate these transactions through third-party crypto liquidity providers. Enabling such payment options benefits merchants by expanding their customer base, offering payment flexibility, and enhancing overall customer experience.

In the UAE, the Central Bank of the UAE (CBUAE) has recently introduced the Payment Token Services Regulation (PTSR), which imposes specific requirements on payments in virtual assets. This article discusses the impact of this regulation on merchant payments and its potential to shape the virtual asset industry in the region.

Risks with unregulated Crypto Merchant Payments

Many solutions globally have operated in a legally grey area, where fiat-to-virtual asset conversions were facilitated by both regulated and unregulated liquidity providers, posing risks particularly related to AML practices. Accepting crypto payments without stringent AML/KYC checks, including wallet screenings, could facilitate money laundering by integrating illicit funds into the traditional financial system. This highlights the importance of comprehensive AML measures to prevent illegal activities and ensure the integrity of the financial system. This can only be accomplished through regulation of all players invovled.

Position under PTSR

The new PTSR clarifies the legal framework for crypto payments in the UAE. Contrary to some beliefs, PTSR does not ban crypto payments but regulates them.

The PTSR stipulates that merchants can only accept payments for goods and services in dirham-backed stablecoins.

While many have interpreted this to mean an outright ban on crypto payments, there is no express prohibition on licensed Virtual Asset Service Provider (VASP) first converting virtual assets to fiat or dirham backed stablecoins.  

The conversion of virtual assets into fiat or dirham-backed tokens through VARA or SCA -regulated VASPs is still permissible provided the appropriate no-objection registrations and licenses are procured from the CBUAE.

Implications on Existing Merchant Acquirers and Payment Aggregators

Merchant acquirers and payment aggregators in the UAE, regulated under the Retail Payment Services and Card Schemes Regulation (RPSCS Regulation), enable merchants to accept payments through various methods including debit cards, credit cards, and bank transfers. The PTSR though supersedes references to virtual assets in the RPSCS Regulation. Merchant acquirers and aggregators regulated under RPSCS Regulation can seek a custody and transfer license under PTSR for settlements in dirham-backed stablecoins, or a conversion license for facilitating fiat-to-stablecoin exchanges. If they wish to only handle the fiat leg of the transaction, they may continue under their existing license.

To enable trading of virtual assets – fiat/dirham backed stablecoins pairs, partnerships with VARA based VASPs can be explored. Such partnerships would involve front-end integrations to allow paying customers to acquire fiat/ dirham backed stablecoins for payment to merchants. All players must ensure that they operate within their licensing scopes for such arrangements.

Similar models can be seen in other jurisdictions, where the conversion of cryptocurrencies to fiat is handled by licensed VASP, and the fiat leg of the transaction is managed by payment service providers (PSPs), often operating in distinct regulatory environments.

Depending on the structure of the solution offered, contractual relationships will exist between (i) VASPs-paying customers for trading of crypto to fiat/dirham backed stablecoin; (ii) PSPs and merchants for acceptance and settlement of payments; and (iii) between PSPs and VASPs for front-end integration.  

These partnerships benefit all parties: customers enjoy flexible payment options, merchants expand their payment methods, and payment service providers and VASPs gain an additional revenue channel.

Implications for Merchants

Merchants should seek comprehensive solutions for seamless crypto payments. These solutions streamline payment processes and enhance customer satisfaction by providing more payment options. Additionally, adopting crypto payments can position merchants as forward-thinking and tech-savvy, attracting a broader audience and potentially increasing sales.

However, in the absence of such licensed solutions in the market currently, some platform structuring may have to be undertaken for quick go-to-market.

Conclusion

While the full impact of the PTSR on payments and the virtual asset market in the UAE is yet to unfold, this regulation marks a progressive step. It offers legal clarity, fosters trust among customers, and ensures regulatory compliance, mitigating AML risks. This novel approach is likely to positively influence the perception and adoption of virtual asset payments in the region, enhancing overall market confidence.