The UAE is becoming a leader in the stablecoin market because it has clear regulations, institutional support, and a plan to use both dollar- and dirham-backed stablecoins, according to Arthur D. Little.
Mohammad Nikkar of Arthur D. Little told Coin Edition that the UAE is taking a different approach from many other countries. Instead of making dollar stablecoins and local-currency stablecoins compete, the UAE sees them as serving different purposes.
Three things give the UAE an advantage:
- It introduced stablecoin regulations early.
- It created a system where dollar and dirham stablecoins can work side by side.
- Large financial institutions supported stablecoins from the beginning.
The UAE introduced its Central Bank framework for fiat-backed tokens in June 2024, which gave companies clear rules before the market became more developed.
The country also allows dollar-backed stablecoins such as $USDC and RLUSD to handle international payments, while dirham-backed stablecoins can be used for payments within the UAE.
Institutional support has also helped. The launch of DDSC involved IHC, Sirius International Holding and First Abu Dhabi Bank (FAB). Nikkar said this gave the market credibility from the start.
Institutions and Cross-Border Payments Will Come First
Nikkar expects stablecoins to first become popular among businesses and financial institutions rather than everyday consumers. The expected path is:
- Institutional payments and treasury operations.
- Cross-border trade and remittances.
- Retail payments.
The first major uses involve businesses that already have compliance systems in place.
Cross-border payments are especially important for transactions between the UAE, the Gulf, Africa, and South Asia.
DDSC’s first major transaction was a $30 million institutional payment, rather than a consumer purchase. This shows where demand is currently strongest.
Retail adoption may take longer because UAE consumers already have easy access to cards and fast payment systems. A dirham stablecoin will need enough users, liquidity, and infrastructure before it can compete for everyday payments.
Stablecoins also have a role in buying and selling tokenized assets. For example, a dirham stablecoin can be used to settle payments for tokenized securities.
Dollar and Dirham Stablecoins Can Coexist
Nikkar does not believe dirham stablecoins will replace dollar stablecoins.
Instead, he sees the market developing in three layers:
- International: Dollar stablecoins are likely to remain dominant because global trade and commodities are heavily based on the U.S. dollar.
- Domestic: Dirham stablecoins will be more important for UAE payments, salaries, and local business.
- Regional: This will be the biggest opportunity for payments between GCC countries and nearby markets.
USD-backed stablecoins currently make up about 97% of the fiat-backed stablecoin market.
The Dirham’s Dollar Peg Is an Advantage
The UAE dirham is pegged to the U.S. dollar. This gives dirham stablecoins an important advantage.
A dirham stablecoin can provide economics similar to a dollar stablecoin while still being regulated in the UAE. The main difference is where the reserves are held, which regulator oversees the stablecoin, and what legal protections users have.
This makes UAE-regulated dirham stablecoins attractive for regional transactions when one side is based in the UAE.
It may also give the dirham an advantage over stablecoins based on currencies that are not pegged to the dollar, because those currencies can involve more exchange-rate risk.
Regulation and Connectivity Are the Biggest Challenges
The UAE has made progress, but the wider GCC stablecoin market still faces major challenges. The biggest issue is whether regulators in different GCC countries will recognize each other’s stablecoins.
If every country creates its own stablecoin with separate rules, the region ends up with several disconnected systems.
Liquidity is another problem. Stablecoins need enough buyers and sellers to make transactions cheap and easy. New stablecoins struggle because companies do not want to hold an asset that is difficult to sell, while market makers may not want to provide liquidity until there are enough users.
Technology also needs to connect. UAE stablecoins will need to work with global networks where major stablecoins such as $USDC and USDT already have large amounts of liquidity.
Consumer protection is another consideration. The UAE’s regulations cover areas such as redemption, custody, and disclosure.
Banning Algorithmic Stablecoins Could Help
The UAE does not allow algorithmic stablecoins under its payment-token rules. Nikkar believes this increases confidence among banks and institutional investors.
Algorithmic stablecoins are designed to maintain their value through algorithms and market mechanisms rather than being fully backed by reserves.
The collapse of Terra in 2022 showed the risks of this model. By requiring payment tokens to be fully backed by fiat reserves, the UAE gives financial institutions a simpler rule.
Stablecoins: Risk and Opportunity for Banks
Stablecoins also create problems for banks, but Nikkar believes the biggest threat is not necessarily the loss of deposits.
Payment stablecoins generally cannot pay interest, so they do not directly compete with normal savings accounts. But the risk is that fintech companies take control of the customer relationship.
For example, a fintech builds an app that uses stablecoins for payments while banks provide the underlying financial infrastructure.
Banks can respond in three ways:
- Issue or support stablecoins and become important players in the new system.
- Focus on international payment corridors where stablecoins make cross-border payments faster and cheaper.
- Provide infrastructure for large-scale institutional settlement.
Banks that wait too long could lose customers and business to faster-moving competitors.
Saudi Arabia to Be the Next Major Player
Nikkar expects other GCC countries to follow the UAE.
Saudi Arabia is the next major market considering its large economy, financial institutions, and dollar peg. Regulators announced plans in November 2025 for riyal-pegged stablecoins.
Meanwhile, there is a risk that every GCC country will create its own stablecoin without making them compatible. If that happens, the region ends up with separate riyal, dinar, and dirham systems that cannot easily work together.
For the GCC, the challenge is therefore not just creating stablecoins. Regulators also need to make it possible for them to work across borders without requiring companies to deal with completely different licensing and compliance systems in every country.
Africa and South Asia Are Important Markets
The UAE has an opportunity to use dirham stablecoins for trade with Africa and South Asia.
For example, a business in Kenya or India can receive payment in a dirham stablecoin instead of dollars.
Because the dirham is pegged to the dollar, the recipient would have similar currency exposure to receiving dollars, while potentially benefiting from faster and cheaper digital settlement.
However, Nikkar does not expect the dirham to replace the dollar in global markets. Instead, the opportunity is in trade routes in which digital payments reduce costs and delays.
Five Things Will Show Whether the Strategy Works
Arthur D. Little identifies five measures that can show whether the UAE’s strategy succeeds over the next three to five years:
- More cross-border trade uses stablecoins. UAE-Africa and UAE-South Asia trade would increasingly move away from traditional correspondent banking.
- More licensed issuers enter the market. Multiple companies issuing dirham stablecoins would indicate the market is beyond one major player.
- GCC regulators recognize each other’s stablecoins. This would show that a real regional market is developing.
- The UAE’s transparency rules become a regional standard. This includes clear information about reserves and real-time verification.
- Users choose UAE-regulated stablecoins. If businesses start choosing UAE-regulated stablecoins instead of offshore options, it then confirms the strategy is working.
In other words, issuing licenses is not enough. The real test is whether people actually use the stablecoins.
Stablecoins to Change How Banks Fund Themselves
If stablecoin wallets become widely used, they may change how banks obtain funding. At first, stablecoins would probably replace some money held in everyday transaction accounts rather than traditional savings accounts.
But if large amounts of money move into stablecoin wallets, banks lose some of the low-cost deposits they currently use to support lending.
This creates what Nikkar calls a “narrow-banking” model, where fully reserved stablecoins handle payments while lending happens separately.
Meanwhile, Banks may respond by creating tokenized deposits. These would allow customers to use digital money while the funds remain on the bank’s balance sheet.
Banks could also make money from services such as custody, reserve management, foreign exchange, and converting traditional money into and out of stablecoins.
Bottom Line
The UAE has an early advantage because it created stablecoin regulations before the market fully developed and has attracted major institutions.
Its strategy is not to replace dollar stablecoins with dirham stablecoins. Instead, the UAE wants dollar stablecoins to handle international payments and dirham stablecoins to handle domestic and regional transactions.
The biggest challenges are liquidity, cross-border regulation, and making different stablecoins work together.
If the UAE solves those problems and gets businesses across the GCC, Africa, and South Asia to use its stablecoins, its early regulatory advantage can develop into a major regional payment network.
