UAE's Dirham-Backed Stablecoin: Towards Dedollarisation?
Abu Dhabi bolsters its status as a global financial hub for crypto and dedollarisation.
First Abu Dhabi Bank (FAB), in collaboration with the Emirati investment firm IHC and the sovereign wealth fund ADQ, has unveiled plans to introduce a dirham-backed stablecoin, regulated by the Central Bank of the United Arab Emirates. This announcement aligns with the Emirates’ growing role as a global financial and technological hub, particularly for non-Western-aligned and sanctioned economies. The stablecoin offers a secure, blockchain-based alternative that will further facilitate such transactions, supporting Abu Dhabi’s ambitions to diversify its non-oil economy and positioning it as a leader in financial innovation. Furthermore, as a member of BRICS, the UAE’s stablecoin could bolster the bloc’s de-dollarisation efforts.
The Dirham: Global Sanctions Loophole
The dirham-backed stablecoin represents a significant step in Abu Dhabi’s economic diversification strategy, complementing the internationalisation of the dirham. The currency has increasingly served as an intermediary currency for countries constrained by US sanctions, such as Russia, India, and Iran, facilitating trade where the US dollar is inaccessible; this role is now expanding through its integration into cryptocurrency markets. The UAE is positioning itself as a central hub for digital finance, introducing robust regulations and attracting new companies to establish headquarters in Dubai, with government support fostering innovation. The digital dirham thus enhances these efforts, offering a blockchain-based tool that appeals to BRICS nations, the Bank for International Settlements (BIS), and alternative payment systems like Umbrella (formerly Umbridge). By enabling smoother digital transactions, the stablecoin could serve as a vital instrument for sanctioned economies to conduct cross-border trade and payments, circumventing traditional dollar-dominated systems.
Non-Dollar Trade in Dollar-Tied System
The stablecoin elevates the dirham’s status as an international currency, but its peg to the US dollar introduces complexities. Increased global demand for the dirham-backed stablecoin may necessitate greater dollar reserves to maintain the peg, effectively tying the digital dirham to the US dollar’s dominance. Unless the UAE diversifies its currency reserves—potentially incorporating assets like gold or other currencies—this initiative risks reinforcing, rather than challenging, the dollar’s hegemony.
Nevertheless, the UAE has been advancing non-dollar transactions, notably with India, where trade is increasingly settled in dirhams and rupees. The launch of the dirham-backed stablecoin supports these de-dollarisation efforts, aligning with BRICS’ broader objective of fostering economic cooperation among member states seeking alternatives to the US dollar in global trade. This move enhances the country’s role within BRICS, potentially integrating the stablecoin into initiatives like the bloc’s mBridge payment system.
The dirham-backed stablecoin also strengthens the internationalisation of the Emirati currency, generating revenue through transaction fees and creating a new financial instrument for debt or digital purchases. This expands the dirham’s global utility, driving financial innovation in the Gulf.
However, it comes with trade-offs. The dirham’s dollar peg may limit its effectiveness as a true alternative to the US dollar, and the UAE must navigate geopolitical sensitivities to maintain its neutral stance between Western and non-Western partners.
Regionally, the stablecoin cements Abu Dhabi’s leadership in financial technology, intensifying competition with other Gulf states like Saudi Arabia and Qatar. Regardless of dedollarisation potential, this technological leap sets the stage for further financialisation of the region, positioning the UAE as a pioneer in the global shift towards digital currencies.