The United Arab Emirates is considered one of the most progressive crypto countries in the world. In fact, government-owned licensing firm KIKLABB in Dubai now accepts crypto payments, including Bitcoin (BTC), Ethereum (ETH), and Tether (USDT), on behalf of the Dubai Financial Services Authority (DFSA), to pay for various trade licenses and visas.
The UAE is a federation of seven emirates along the eastern coastlines of the Arab Peninsula. Hence, a company will be simultaneously governed by emirate law but at the same time subject to federal law.
REGULATIONS ON VIRTUAL ASSETS IN DUBAI
This February, the Government of Dubai enacted Law No. 4 of 2022 on the Regulation of Virtual Assets (VAL) and established the Dubai Virtual Assets Regulatory Authority (VARA). The VAL applies to all virtual asset-related activities within Dubai, excluding the Dubai International Financial Center (DIFC) from its scope of application. The DIFC, a prominent free zone within the UAE, has its own regulatory framework for virtual assets under the Dubai Financial Services Authority (DFSA) jurisdiction.
The key features of the Virtual Assets Law (VAL) can be summarized as follows:
“Virtual Asset” is “a digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes.” Thus, virtual assets will include cryptocurrencies, virtual tokens, NFTs and any other virtual assets defined by VARA. This definition can be seen as broader than the definition of virtual assets prescribed by the Financial Action Task Force – FATF, where virtual assets are understood as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes”. It can be understood that VAL expands the use of virtual assets: can be used digitally, and at the same time expands the purpose of use: as a tool of exchange. Notably, many countries are still using the definition of FATF in their regulations such as BVI, Cayman, etc. Therefore, it can be said that Dubai is a pioneering authority in the regulation of virtual assets.
Another highlight in the Virtual Assets Law is the definition of Virtual Tokens. It is a digital representation of a set of rights that can be digitally offered and traded through a Virtual Asset Platform. We can see this feature almost like Singapore’s utility token definition (1).
2. Activities that require a permit
The VAL also regulates activities that will require a permit and are subject to VARA’s oversight, including:
a. provision of Virtual Asset Platform operation and management services;
b. provision of services for the exchange between Virtual Assets and national or foreign currencies;
c. provision of services for the exchange between one or more forms of Virtual Assets;
d. provision of Virtual Asset transfer services;
e. provision of Virtual Asset safekeeping, management, or control services;
f. provision of services related to Virtual Asset Wallets; and
g. provision of services related to offering, and trading in, Virtual Tokens.
The Virtual Assets Law further clarifies that VARA may establish rules and conditions for the practice of the regulated activities and may expand the list of activities which are subject to the authorization and control of VARA. VARA will, in coordination with the Concerned Entities, prepare a list of the activities, businesses, practices, services, and products that are related to Virtual Assets and are prohibited in the Emirate, although the list has still not been announced.
Therefore, NFT or crypto exchanges or token issuers must apply for a license when operating in Dubai.
3. Requirements and Permits
In order to obtain a license, the Virtual Assets Law stipulates that applicants must establish Dubai as the headquarters for their business and must obtain a commercial business license from the relevant licensing authority in Dubai. The specific licensing process and additional ongoing requirements with respect to anti-money laundering, disclosure, transparency and know-your-client (“KYC”) procedures are expected to be set out in the regulations and decisions supplementing the Virtual Assets Law.
4. Coordination with other agencies
VARA is expected to coordinate with the Central Bank of the UAE to take measures to ensure the protection and stability of the financial system, which could lead to an increase in the number of banking transactions related to virtual assets and decentralized finance services (“DeFi”). In addition, VARA will also coordinate with the competent commercial licensing authority in the Emirate of Dubai to cancel the business licenses of companies that do not comply with the law.
5. Penalties and Sanctions
Under the Virtual Assets Law, VARA is permitted to take various actions and measures, including suspending the issuance of authorizations, suspending the activities of any virtual asset service provider and suspending dealings with any virtual assets in certain circumstances. In addition to any penalty imposed the Virtual Assets Law confirms that VARA may suspend an authorization granted for a period of up to six months or may revoke the license entirely.
The Virtual Assets Law comes at an opportune time for the UAE, while this market has a transaction volume of approximately $26 billion. In accordance with the UAE’s mandate to facilitate business while providing appropriate investor protections, there have been various other recent developments in the regulation of virtual assets. For example, in February 2022, it was reported that the federal Securities and Commodities Authority (“SCA”) is amending legislation to allow virtual asset service providers to set up in the UAE. Moreover, the Financial Services Regulatory Authority (“FSRA”) of the Abu Dhabi Global Market (a financial free zone in the Emirate of Abu Dhabi) has issued crypto exchange licenses to a number of companies. The recent enactment of the Virtual Assets Law together with these developments, and a number of others, reflect the ever-growing interest in virtual assets in the UAE.
(1) Utility token is a token that represents rights to goods or services under IRAS e-Tax Guide dated November 19, 2019.
Read more: Company Incorporation in Dubai
Read more: Regulation of virtual assets in the UAE (Part 2 – Abu Dhabi)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Author: Zed Nguyen