8 July 2024
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Financial Technology: CBUAE issues new regulations on Sandbox Conditions and Payment Token Services

To The Point
(5 min read)

The Central Bank of the UAE has introduced comprehensive regulations to advance its digital economy. The Payment Token Services Regulation governs issuance, conversion, custody, and transfer of payment tokens, aiming to secure financial transactions and foster innovation. Concurrently, the Sandbox Conditions Regulation establishes a supervised environment for testing innovative financial services. Participants can experiment under defined rules, excluding certain activities, with safeguards ensuring consumer protection and financial stability. These regulations underline the UAE's commitment to fostering fintech innovation while maintaining regulatory oversight.

Overview of the Payment Token Services Regulation:

In a proactive move to regulate digital payment services within its jurisdiction, the Central Bank of the United Arab Emirates ("CBUAE") has introduced a comprehensive regulatory framework for payment token services. This initiative marks a pivotal step towards embracing the digital economy while ensuring a secure and robust financial environment. This article provides an overview of the key aspects of the Payment Token Services Regulation ("PTS Regulation"), highlighting its scope, objectives, and implications for both the payment token service providers and consumers.

The PTS Regulation, crafted by the CBUAE, delineates the criteria and conditions under which licenses or registrations are granted to entities offering payment token services in the UAE. It encompasses three primary categories: Payment Token Issuance, Payment Token Conversion, and Payment Token Custody and Transfer.

The PTS Regulation's primary goal is to establish a secure and efficient framework for digital monetary services, fostering innovation while safeguarding consumer interests and maintaining financial stability.

Entities seeking to provide payment token services must undergo a rigorous evaluation of their financial health, operational capabilities, and compliance with regulatory standards as part of the licensing or registration process overseen by the CBUAE. Foreign entities interested in operating within the UAE market can also apply for registration, subject to specific conditions and supervision by the CBUAE.

A significant focus of the PTS Regulation is on consumer protection and operational standards. Payment token service providers are required to implement robust risk management practices, ensure the confidentiality of customer data, and maintain adequate capital and liquidity to meet their obligations. Additionally, they must provide clear and transparent information to customers regarding the terms and conditions of their services.

Acknowledging the pivotal role of technology in digital payment services, the PTS Regulation mandates the adoption of effective technology and cybersecurity risk management frameworks by the payment token service providers. Adherence to international best practices is essential to fortify systems against threats and ensure the reliability and security of services offered.

The CBUAE has instituted rigorous compliance and reporting requirements for payment token service providers. Entities are obligated to comply with anti-money laundering and counter-terrorism financing standards, conduct regular audits, and promptly report significant operational incidents. Non-compliance with these regulations may result in administrative penalties and financial sanctions.

Overview of the Sandbox Conditions Regulation:

On the other hand, the CBUAE issued the Sandbox Conditions Regulation" ("Sandbox Regulation") on June 25, 2024, with the aim of establishing a regulatory sandbox environment as a supervisory tool enabling participants to test innovative business models, products, and services in the financial services sector. This sandbox operates within a specified timeframe under appropriate regulatory supervision to ensure optimal outcomes for all stakeholders, while fostering innovation and attracting innovators.

The Sandbox Regulation outlines eligibility criteria and participation rules for the regulatory sandbox, in addition to the regulatory compliance requirements. It specifies that the sandbox is open to all entities and individuals, including the financial free zone companies, interested in testing licensed financial activities, excluding activities related to (i) taking deposits of all types; (ii) carrying out insurance activities in the UAE; and (iii) acting as principal in financial products that affect the financial position of the person, including but not limited to foreign exchange, financial derivatives, bonds and sukuk, equities, commodities, and any other financial products, as determined by the CBUAE.

Furthermore, the Sandbox Regulation stipulates a minimum level of safeguards that participants must fulfill during their time in the regulatory sandbox, aiming to mitigate risks associated with innovative financial technologies in terms of consumer protection and financial system stability. These safeguards include, for example, appropriate mechanisms for handling consumer complaints, compensations, dispute settlements, as well as necessary measures to combat money laundering and terrorist financing in accordance with relevant legislation.

Regarding the duration of the regulatory sandbox, the testing period ranges between six (6) to twelve (12) months, with the possibility of extension based on an evaluation by the CBUAE for each case. It should be noted that the testing may be discontinued at any time during or after the specified testing period, subject to specific circumstances outlined in the Regulation.

In conclusion

The Sandbox Regulation and the PTS Regulation, issued by the CBUAE, represent pivotal advancements towards fostering innovation and ensuring stability in the digital economy and financial services sector of the UAE. These regulations provide a structured framework that encourages experimentation and growth while safeguarding consumer interests and maintaining the integrity of the financial system. By promoting a secure environment for digital payment innovations and establishing clear guidelines for regulatory compliance, the CBUAE is paving the way for sustainable development and enhanced competitiveness in the global digital landscape. These regulatory initiatives underscore the UAE's commitment to embracing technological advancements and maintaining leadership in the evolving realm of financial technology.

Next steps

To delve deeper into these fintech regulations and their relevance to your UAE business, please reach out to the Fintech and Financial Services Team.

To the Point 

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