PayFi in the UAE: Analysis of Business Compliance Risks

Written by: Huang Wenjing

Introduction

In the current wave of Web3 sweeping the globe, PayFi (Payment Finance, a concept first proposed by Lily Liu, the chair of the Solana Foundation, in 2024) is rapidly reshaping the landscape of cross-border payments as an innovative track connecting traditional payments with blockchain technology. 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 guarantee 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 is represented by Dubai's VARA (Virtual Assets Regulatory Authority) and Abu Dhabi's ADGM (Abu Dhabi Global Market), creating 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 Central Bank of the UAE (CBUAE) issued fines totaling over AED 20 million (approximately USD 5.4 million) to several payment institutions for inadequate performance in AML/CFT (Anti-Money Laundering/Counter-Terrorism Financing).

This article will focus on “Identifying Risks and Providing Pathways” and systematically analyze the business compliance risks of PayFi in the UAE. We will combine the latest regulatory developments and real case studies, breaking it down step by step; the aim is to identify the “red lines” and provide risk prevention strategies and ideas.

PayFi - From Concept to Global Opportunities in the Desert Oasis

1.1 What is PayFi? Why will it be “hot” in 2025?

PayFi is the payment branch of DeFi (Decentralized Finance), focusing on optimizing the core elements of the payment process: speed, security, and inclusivity, using blockchain and smart contracts. Unlike traditional payment methods (such as the SWIFT system, which typically takes 3-5 days for cross-border transfers), PayFi achieves near real-time settlement through stablecoins (such as USDT, USDC) or algorithmic payment protocols. Typical applications include:

Cross-border remittance: Providing instant transfer services for international trade and labor.

Merchant Payment: E-commerce platform integrates encrypted payment gateway.

Embedded Finance: Seamless cashing out of virtual assets in Web3 games.

Messari estimates that PayFi's liquidity target will reach USD 200-250 M, showing strong growth momentum. PayFi has gained popularity by effectively addressing pain points: the high friction of traditional payments (currency conversion losses of 5-7%) and barriers formed by regulations/industries. The decentralized design of PayFi makes it the preferred choice for emerging economies— for example, the mobile payment revolution in Africa has already made “great strides forward” with the help of blockchain.

1.2 UAE: Is PayFi's “Gold Coast” or “Regulatory Maze”?

Why has the UAE become the “darling” of PayFi? The answer lies in its strategic positioning. As a member of the G20+ that has restored its status on the FATF whitelist (successfully removed from the list in 2024), the UAE expects the digital economy 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 by 2025.

Specific opportunities:

Tax Haven: Corporate income tax is only 9% (starting from 2023), and crypto transactions are exempt from value-added tax.

Sandbox mechanism: VARA's Innovation Testing License allows projects to test for 6-12 months in a “controlled environment” 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 will raise over USD 1 billion, with Middle Eastern investors accounting for 40%.

Regulatory Exploration: The latest proposal from DIFC removes the investment cap on crypto funds, benefiting PayFi embedded funds.

Compared to 2024, the UAE has upgraded from a “cryptocurrency paradise” to a “PayFi laboratory,” but don't get too excited too soon. The UAE has a three-layer 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.

UAE PayFi Regulatory Framework - Who is the “gatekeeper”?

The regulatory system in the UAE is like a precise web, covering the entire chain from traditional payments to blockchain innovations. In 2025, with the implementation of the new law by CBUAE, the PayFi project 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 Responsibilities

The regulation of PayFi business in the UAE is characterized by a “divide and conquer” pattern, with four main pillars each performing their respective duties:

Tip: If you are a PayFi startup, VARA is the preferred choice—it essentially covers 90% of virtual asset activities, with an approval period of only 3-6 months. However, cross-regional business (such as issuing FRT in ADGM) requires dual filing to avoid “jurisdictional vacuum.”

2.2 License Requirements: From “Getting Started” to “All-in-One”

PayFi is not “plug and play.” According to VARA's 7 categories of VASP licenses, payment-related businesses require at least both Advisory and Payment Services licenses. The application thresholds include:

1. Capital: Minimum AED 100,000 (approximately USD 27,000), high-risk projects up to AED 1,000,000.

2. Anti-Money Laundering and Risk Control System: Fulfill AML and “Travel Rule” obligations, monitor and report transactions as required.

3. Technical Audit: Blockchain nodes must undergo technical certification to prevent potential malicious attacks.

4. Localization: At least 1 executive resident in the UAE, the office must be in Dubai.

But remember: Sandbox ≠ Exemption, violations during the testing period are still fined starting from AED 500,000.

2.3 Global Connectivity: The “Outward” Impact of FATF and MiCA

UAE regulation is not isolated. In 2025, the FATF's VASPs guidance requires PayFi platforms to trace the entire on-chain transaction path, which has been fully adopted by the UAE. The EU's MiCA (Markets in Crypto-Assets) also has an indirect impact: UAE merchants that accept euro stablecoins must comply with reserve disclosure.

Through this framework, we can see that the regulation in the UAE is a balancing act of “innovation-friendly + zero tolerance for risk.” Next, we will further analyze business compliance risks.

Analysis of Business Compliance Risks - Case-Driven “Alarm”

3.1 Risk One: Insufficient AML/CFT Monitoring - The Invisible Killer of the “Money Laundering Black Hole”

Interpretation: According to the CBUAE “AML Guidance”, the PayFi platform must implement anti-money laundering obligations based on a risk-based approach, including customer due diligence (CDD), transaction monitoring, and suspicious transaction reporting (STR), etc. Violating regulatory provisions can result in an initial fine of up to AED 5 million, and serious cases may face license revocation.

Case Analysis: Fuze Platform's AML Failure

In August 2025, VARA issued a fine to the cryptocurrency payment platform Fuze registered in Dubai due to significant deficiencies in its AML/CFT systems, including ineffective monitoring of high-risk transactions and failure to timely report suspicious activities, leading to potential money laundering loopholes. Fuze, as a VASP providing stablecoin payment services, processed over millions of dollars monthly, yet had numerous oversights in customer due diligence. After the investigation, VARA not only imposed a fine of an undisclosed amount but also appointed an independent “Skilled Person” to oversee the rectification to ensure that 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 Law No. 4/2022 stipulates that any VASP activities must be pre-approved; operating without approval is considered “illegal business.” ADGM requires prior filing before the issuance of FRT, otherwise it will be regarded as a violation.

Case Analysis: VARA's Collective “Sweep” of 19 VASPs

In early October 2025, VARA launched enforcement actions against 19 unlicensed cryptocurrency 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 cessation order and imposed fines ranging from AED 100,000 to AED 600,000 (totaling over AED 5 million), and some companies were also required to undergo independent compliance reviews.

3.3 Risk Four: Data Privacy and Cybersecurity - The Dual Blow of “Hacking + Leaks”

Interpretation: The DIFC Data Protection Law (PDPL, 2021) requires PayFi to obtain consent to process personal data and to report any data-related security incidents. The VARA FRVA rules introduce cyber resilience standards: platforms must undergo penetration testing to prevent DDoS attacks. Violations can result in fines of up to AED 10 million.

Case Analysis: The Privacy Breach Controversy of the DIFC Registration Platform

In mid-2024, a DIFC-registered FinTech payment platform (involving cryptocurrency wallet services) leaked approximately 50,000 user data due to a phishing attack, including transaction histories and KYC information, leading to subsequent frequent fraud cases. The DFSA investigation found that the platform did not enforce Multi-Factor Authentication (MFA) and encrypted storage, violating Article 28 of the PDPL regarding data incident reporting obligations. The platform was fined AED 4 million and was mandated to cease operations for 3 months for rectification, while a collective lawsuit from users further amplified the losses.

3.4 Risk Four: Sanctions and Cross-Border Compliance - The Unexpected “Landmines” of Geopolitics

Interpretation: CBUAE collaborates with OFAC for law enforcement, and PayFi must ensure compliance with sanctions as well as the implementation of information sharing and verification of the Travel Rule.

Case Analysis: OFAC Linked Penalty Order of CBUAE Bank

In July 2025, the CBUAE imposed a fine of AED 3 million on an unnamed UAE bank for processing stablecoin transfers involving high-risk jurisdictions (suspected to be related to Iran) in its payment system, without implementing OFAC sanction screening and Travel Rule sharing, resulting in cross-border compliance loopholes. The bank's crypto payment channel, originally intended for legitimate MENA remittances, became embroiled in an investigation due to lax monitoring, with part of its assets frozen and a rectification period of 6 months.

Practical Guide to Risk Prevention - From “Passive Response” to “Active Protection”

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 recognition and prevention, roughly as follows:

4.1 General Prevention Framework: Build a “Compliance Loop”

1. Risk assessment initiation: Conduct compliance evaluations and audits before launch/investment, covering key areas such as business model sustainability, compliance risk control, and technical security.

2. Policy Internalization: Develop compliance manuals, implement team training in advance, and create a compliance culture.

3. Technical Empowerment: Integrate effective on-chain analysis and monitoring tools to strengthen risk monitoring and mitigation.

4. Continuous Monitoring: Regularly assess the effectiveness of the entire process of risk identification, monitoring, and mitigation, and update and improve as necessary.

4.2 For Entrepreneurs: The “Five-Step Method” for Project Implementation

Step 1: Permission Path Planning

Assessment jurisdiction: For example, Dubai PayFi prefers VARA.

Business planning: Use sandbox bridging, switch to full license after testing.

Step 2: Three Lines of Defense for Compliance and Risk Control

Build a team that matches the scale of the business.

Achieve automated monitoring of risks through information systems.

Step 3: Sanctions Screening “Firewall”

Initial and ongoing sanctions compliance screening for landing clients.

Try to avoid exposing risk points that can easily be used for “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 just look at the white paper – compliance is the key to alpha (excess returns).

1. Preliminary screening: Check VARA or other regulatory license status through official channels. Green light: full license; red light: only claimed by the project party.

2. In-depth Due Diligence: Conducted by professional institutions, reviewing various data and reports.

3. Risk classification: Conduct risk assessment based on the product business model.

4. Exit mechanism: The contract embeds compliance trigger clauses (redemption upon violation).

Compliance first, PayFi's path to success in the Middle East.

The PayFi business in the UAE is rapidly developing and has entered a stage of institutionalization and regulation. In 2025, the Central Bank of the UAE and the Dubai Virtual Assets Regulatory Authority (VARA) successively strengthened anti-money laundering (AML/CFT) and licensing approval mechanisms, establishing compliance baselines through typical law enforcement cases.

VARA imposed penalties on the cryptocurrency payment platform Fuze in August 2025 due to deficiencies in its anti-money laundering system, and in October of the same year, it collectively fined 19 unlicensed virtual asset service providers, demonstrating the regulator's zero-tolerance attitude towards “unlicensed operations” and risk control lapses. These measures reflect the UAE's risk-oriented approach and proportionality principle in the field of virtual asset regulation, while also providing a predictable legal boundary for PayFi's compliance framework.

In the future, if PayFi enterprises wish to operate in the UAE for the long term, they should apply for licenses and embed compliance assessment mechanisms at the initial stage of business planning, ensuring that the processes of license application, customer due diligence, data protection, and sanctions screening meet local and international standards.

The tightening of regulations does not mean that innovation is limited; rather, it establishes market trust and fund security through legal means. It can be anticipated that the UAE will continue to promote the legalization and transparency of virtual asset payment systems under the principle of “open innovation and prudent regulation,” providing a demonstration path for the regional digital financial order.