This article is reprinted with permission from Mankun Blockchain Legal Services, author: Huang Wenjing, copyright belongs to the original author.
In the current wave of Web3 sweeping the globe, PayFi (Payment Finance, a concept first proposed by Solana Foundation Chair Lily Liu in 2024) is an innovative track connecting traditional payments with blockchain technology, rapidly reshaping the landscape of cross-border payments. Imagine this: users can achieve instant, low-cost global transfers using blockchain technology, without the need for bank intermediaries, while still enjoying the value anchoring protection of stablecoins. This is not just a technological upgrade, but a dawn of financial democratization.
As a Web3 hub in the Middle East, the UAE, represented by Dubai's VARA (Virtual Assets Regulatory Authority) and Abu Dhabi's ADGM (Abu Dhabi Global Market), has built a globally leading crypto-friendly framework. However, for entrepreneurs and investors targeting the UAE market, the allure of PayFi hides invisible "landmines"—business compliance risks. Like any emerging market, the "double-edged sword" effect of regulation is evident: abundant opportunities, but the cost of non-compliance is high.
In the first half of 2025, the UAE Central Bank (CBUAE) issued fines totaling over AED 20 million (approximately USD 5.4 million) to several payment institutions for inadequate AML/CFT (Anti-Money Laundering/Counter-Terrorism Financing) compliance.
This article will focus on "identifying risks and providing pathways," systematically analyzing the business compliance risks of PayFi in the UAE. We will combine the latest regulatory developments and real cases to dissect layer by layer; the aim is to identify "red lines" and provide risk prevention strategies and ideas.
1.1 What is PayFi? Why is it "hot" in 2025?
PayFi is the payment branch of DeFi (Decentralized Finance), focusing on optimizing the core elements of payment processes—speed, security, and inclusivity—using blockchain and smart contracts. Unlike traditional payments (such as the SWIFT system, which typically takes 3-5 days for cross-border transfers), PayFi achieves near real-time settlement through stablecoins (like USDT, USDC) or algorithmic payment protocols. Typical applications include:
- Cross-border remittances: Providing instant transfer services for international trade and labor.
- Merchant payments: Integrating crypto payment gateways into e-commerce platforms.
- Embedded finance: Seamlessly cashing out virtual assets in Web3 games.
Messari estimates that PayFi's liquidity target will reach USD 200-250 million, with strong growth momentum. PayFi's popularity stems from its effective resolution of pain points: the high friction of traditional payments (with currency conversion losses of 5-7%) and barriers formed by regulation/industry. The disintermediation design of PayFi makes it the preferred choice for emerging economies—such as Africa's mobile payment revolution, which has made significant strides with blockchain.
1.2 UAE: The "Gold Coast" or "Regulatory Maze" for PayFi?
Why has the UAE become a "hotcake" for PayFi? The answer lies in its strategic positioning. As a G20+ member that restored its FATF whitelist status (successfully removed from the list in 2024), the UAE's digital economy is expected to account for 20% of its GDP in 2025. The Web3 Festival PayFi Summit in April further catalyzed market enthusiasm, while Dubai's Vision 2031 plan aims to establish virtual assets as a pillar industry, with giants like Huma Finance and Athar Finance achieving business milestones in 2025.
Specific opportunities:
- Tax haven: Corporate income tax is only 9% (starting in 2023), and crypto transactions are exempt from VAT.
- Sandbox mechanism: VARA's Innovation Testing License allows projects to test in a "controlled environment" for 6-12 months without a full license.
- Infrastructure: Abu Dhabi's ADGM supports Fiat-Referenced Tokens (FRT), perfectly aligning with PayFi's stable payment needs.
- Talent and funding: In 2025, UAE crypto startups raised over USD 1 billion, with Middle Eastern investors accounting for 40%.
- Regulatory exploration: The latest proposal from DIFC removes the crypto investment cap for funds, benefiting embedded PayFi funds.
Compared to 2024, the UAE has upgraded from a "crypto paradise" to a "PayFi laboratory," but don't celebrate too early. The UAE has a three-tier compliance structure of "federal + emirate + free zone," and PayFi businesses may simultaneously touch upon CBUAE's payment laws and VARA's virtual asset regulations. A slight misstep could lead to "multiple surprises" from different regulatory agencies.
The UAE's regulatory system is like a finely woven net, covering the entire chain from traditional payments to blockchain innovations. In 2025, with the implementation of new laws by CBUAE, PayFi projects will need to face the test of a unified framework, which can be peeled back layer by layer as follows:
2.1 Core Regulatory Agencies and Their Roles
The regulation of PayFi business in the UAE is characterized by a "divide and conquer" approach, with four pillars each performing their duties:
Tip: If you are a PayFi startup, prioritize VARA—it can cover about 90% of virtual asset activities, and the approval cycle is only 3-6 months. However, cross-zone operations (such as issuing FRT in ADGM) require dual filing to avoid "jurisdictional vacuums."
2.2 Licensing Requirements: From "Entry" to "Full Package"
PayFi is not "plug and play." According to VARA's seven categories of VASP licenses, payment-related businesses require at least Advisory + Payment Services dual licenses. The application thresholds include:
- Capital: Minimum AED 100,000 (approximately USD 27,000), with high-risk projects reaching AED 1,000,000.
- Anti-money laundering and risk control systems: Fulfill AML and "Travel Rule" obligations, monitoring and reporting transactions as required.
- Technical audit: Blockchain nodes must undergo technical certification to prevent potential malicious attacks.
- Localization: At least one UAE resident executive, and the office must be in Dubai.
But remember: Sandbox ≠ exemption; violations during the testing period still incur fines starting from AED 500,000.
2.3 Global Connectivity: The "Spillover" Effects of FATF and MiCA
UAE regulation is not isolated. In 2025, FATF's guidance for VASPs requires PayFi platforms to track the entire path of on-chain transactions, which the UAE has fully adopted. The EU's MiCA (Markets in Crypto-Assets) also indirectly influences: UAE merchants connecting to euro stablecoins must comply with reserve disclosure.
Through this framework, we can see that the UAE's regulation is a balancing act of "innovation-friendly + zero tolerance for risk." Next, we will further analyze business compliance risks.
3.1 Risk One: Insufficient AML/CFT Monitoring—The Invisible Killer of "Money Laundering Black Holes"
Interpretation: According to CBUAE's "AML Guidelines," PayFi platforms must implement anti-money laundering obligations based on risk, including customer due diligence (CDD), transaction monitoring, and suspicious transaction reporting (STR). Violating regulatory provisions can result in fines of up to AED 5 million for first-time offenses, and severe cases may face license revocation.
Case Analysis: The AML Breach of the Fuze Platform
In August 2025, VARA issued a fine to the crypto payment platform Fuze, registered in Dubai, due to significant flaws in its AML/CFT system, including ineffective monitoring of high-risk transactions and failure to timely report suspicious activities, leading to potential money laundering vulnerabilities. Fuze, which provides stablecoin payment services and processes millions of dollars monthly, had numerous oversights in customer due diligence. After VARA's investigation, not only was an undisclosed fine imposed, but an independent "Skilled Person" was appointed to oversee rectification, ensuring the platform addresses its risk control shortcomings within three months.
3.2 Risk Two: Licensing and Operational Violations—The Fatal Flaw of "Driving Without a License"
Interpretation: Article 15 of VARA's Law No. 4/2022 stipulates that any VASP activity must be pre-approved; operating without approval is considered "illegal business." ADGM requires prior filing for FRT issuance; otherwise, it is deemed a violation.
Case Analysis: VARA's Collective "Sweep" of 19 VASPs
In early October 2025, VARA launched enforcement actions against 19 unlicensed crypto payment and virtual asset service providers, many of which were involved in PayFi-related stablecoin transfers and marketing activities, promoting services in Dubai without a VASP license. One typical company was accused of operating illegally for several months, attracting over a thousand retail users. VARA issued a cease-and-desist order and imposed fines ranging from AED 100,000 to 600,000 (totaling over AED 5 million), with some companies also required to undergo independent compliance reviews.
3.3 Risk Three: Data Privacy and Cybersecurity—The Double Blow of "Hacker + Leak"
Interpretation: DIFC's Data Protection Law (PDPL, 2021) requires PayFi to obtain consent for processing personal data and report any data-related security incidents. VARA's FRVA rules add cyber resilience standards: platforms must undergo penetration testing to prevent DDoS attacks. Violations can incur fines of up to AED 10 million.
Case Analysis: Privacy Breach Incident of a DIFC-Registered Platform
In mid-2024, a DIFC-registered FinTech payment platform (involved in crypto wallet services) suffered a phishing attack that leaked data of approximately 50,000 users, including transaction histories and KYC information, leading to a surge in subsequent fraud cases. The DFSA investigation found that the platform had not enforced multi-factor authentication (MFA) and encrypted storage, violating PDPL Article 28's data incident reporting obligations. The platform was fined AED 4 million and was forced to suspend operations for three months for rectification, with a collective lawsuit from users further amplifying the losses.
3.4 Risk Four: Sanctions and Cross-Border Compliance—The Unexpected "Landmines" of "Geopolitics"
Interpretation: CBUAE collaborates with OFAC for enforcement, and PayFi must ensure compliance with sanctions and the implementation of the Travel Rule for information sharing and verification.
Case Analysis: OFAC-Linked Fine Against a CBUAE Bank
In July 2025, CBUAE fined an unnamed UAE bank AED 3 million for processing stablecoin transfers involving high-risk jurisdictions (suspected to be related to Iran) in its payment system, failing to implement OFAC sanctions screening and Travel Rule sharing, leading to cross-border compliance gaps. The bank's crypto payment channel, originally intended for legitimate MENA remittances, became embroiled in an investigation due to lax monitoring, resulting in partial asset freezes and a rectification period of six months.
The law is not a shackle but a solid shield for the long-term development of compliant operations. Based on the aforementioned risks, entrepreneurs (project parties) and investors (LP/VC) have different focuses on risk identification and prevention, roughly as follows:
4.1 General Prevention Framework: Building a "Compliance Loop"
Risk Assessment Initiation: Conduct compliance assessments and audits before launch/investment, covering key areas such as business model sustainability, compliance risk control, and technical security.
Policy Internalization: Develop a compliance manual, implement team training in advance, and foster a compliance culture.
Technical Empowerment: Integrate effective on-chain analysis and monitoring tools to strengthen risk monitoring and mitigation.
Continuous Monitoring: Regularly assess the effectiveness of the entire process of risk identification, monitoring, and mitigation, and update as necessary.
4.2 For Entrepreneurs: The "Five-Step Method" for Project Implementation
Step 1: Licensing Path Planning
Assess jurisdiction: For example, Dubai PayFi prefers VARA.
Business planning: Use the sandbox to bridge, transitioning to a full license after testing.
Step 2: Three Lines of Defense for Compliance Risk Control
Build a team that matches the scale of the business.
Utilize information systems to achieve automated risk monitoring.
Step 3: Sanctions Screening "Firewall"
Implement initial and ongoing sanctions compliance screening for clients.
Avoid risks associated with connection points that may be subject to "long-arm jurisdiction."
Step 4: Data and Security Fortress
Adopt high-standard information security and data protection configurations.
Regularly conduct system availability and penetration testing to ensure dynamic compliance.
4.3 For Investors: Due Diligence "Traffic Light" System
Investors should not only look at the white paper—compliance is the key to alpha (excess returns).
Preliminary Screening: Check VARA or other regulatory license status through official channels. Green light: full license; red light: only the project claims to be licensed.
In-Depth Due Diligence: Conduct due diligence through professional institutions, reviewing various data and reports.
Risk Classification: Conduct risk assessments based on product business forms.
Exit Mechanism: Embed compliance-triggering clauses in contracts (non-compliance leads to redemption).
As the PayFi business in the UAE rapidly develops, it has entered a stage of institutionalized and standardized regulation. In 2025, the UAE Central Bank and Dubai's Virtual Assets Regulatory Authority (VARA) successively strengthened anti-money laundering (AML/CFT) and licensing approval mechanisms, establishing compliance baselines through typical enforcement cases.
In August 2025, VARA penalized the crypto payment platform Fuze for deficiencies in its anti-money laundering system, and in October of the same year, collectively fined 19 unlicensed virtual asset service providers, demonstrating the regulatory authority's zero-tolerance attitude towards "unlicensed operations" and risk control lapses. These measures reflect the UAE's risk-oriented and proportional principles in the field of virtual asset regulation, providing a predictable legal boundary for the compliance framework of PayFi.
In the future, if PayFi enterprises wish to operate long-term in the UAE, they should embed compliance assessment mechanisms in the early stages of licensing applications and business planning, ensuring that licensing applications, customer due diligence, data protection, and sanctions screening comply with local and international standards.
Stricter regulation does not mean limited innovation; rather, it establishes market trust and capital security through the rule of law. It is foreseeable that the UAE will continue to promote the legalization and transparency of the virtual asset payment system under the principles of "open innovation and prudent regulation," providing a model path for regional digital financial order.
Related: ClearBank will become one of the first EU banks to join the Circle payment network.
Original text: “PayFi in the UAE: An Analysis of Business Compliance Risks”
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