Crypto Asset Regulation in the United Arab Emirates
Financial free zones in the United Arab Emirates (“UAE“) such as Dubai International Financial Centre (“DIFC“) and Abu Dhabi Global Markets (“ADGM“) have been at the forefront of technological innovation in the financial sector. The Dubai Financial Services Authority in DIFC has published its comprehensive and innovative framework for regulating security tokens for public consultation. The Financial Services Regulatory Authority (“FSRA”), the financial regulator of ADGM is the first regulatory agency in the UAE to issue comprehensive guidelines and regulations on crypto assets-related activities. In 2018, FSRA introduced regulated activities for the operation of crypto assets in Abu Dhabi. It allowed companies to establish crypto asset exchange, act as depositaries, brokers of crypto assets, and engage in crypto investment activities in ADGM.
Until recently, there was no specific regulation governing the crypt activities in mainland UAE. One of the key indicators of the future of the crypto asset industry in the UAE is the ongoing attempt of the Securities and Commodities Authority (“SCA“) in formulating the legal framework for cryptocurrencies in the mainland. In October 2019, the SCA published the draft crypto asset regulation for review and comments of the stakeholders. A year later in December 2020, the Chairman of the Authority’s Board of Directors’ Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation (“Regulation“) was published. Pursuant to our discussion with a SCA representative, we understand that the regulation is undergoing a process of evolution and may undergo further amendments.
Scope of Application and Exclusions
The Regulation defines crypto assets as “the recording of an electronic network or distribution network acting as a medium of exchange, storage, account, representation, ownership, use or transmission from one person to another or as the operation of a computer program or algorithm regulating its use.”
For the first time in mainland UAE, the regulators have set out the regulatory parameters within which a crypto-asset exchange for trading can be licensed and operated. The Regulation establishes the structure and requirements for, inter alia, the following activities vis-à-vis crypto assets in UAE.
- Licensing and operations of crypto assets exchange;
- Crypto asset listing on the crypto-asset exchange;
- Offering crypto assets and tokens and the pre-conditions to the same;
- Licensing and operations of crypto assets custodial services; and
- Licensing of crypto fundraising platforms.
It must be pointed out that the providers who wish to offer crypto assets and engage in related activities within the UAE must be licensed by the SCA and must strictly comply with the UAE anti-money laundering, anti-terrorism financing laws, cybersecurity, data protection laws, and develop technology platforms which provide real-time information on ownership and trading.
It is pertinent to note that the Regulations do not apply to crypto assets issued by the federal government, governments of each emirate, and governmental institutions or companies which are wholly owned by the government. Additionally, they are not applicable on currency, virtual currency, unit of stored value through systems that are subject to licensing and/or approval by the UAE central Bank (for further details refer to UAE Central Bank: Stored Value Regulations 2020).
Qualified and Non-qualified investors profiles
The Regulation recognizes qualified investors and distinguishes them from non-qualified investors. SCA license holders must file offer documents with the SCA while offering crypto assets to qualified investors. Whereas prior approval must be obtained from SCA before offering crypto assets to non-qualified investors. The qualified investor category includes banks, financial institutions/companies holding assets over AED 75 million or having a net turnover of AED 150 million, and foreign governments. The qualified investors category includes individuals who hold AED 4 million in net equity funds excluding his/her main residence or have an annual income of no less than AED 1 million.
SCA Agreement with DAFZA and DMCC
Pursuant to the Regulation, SCA has signed an agreement with Dubai Airport Free Zone Authority (“DAFZA“) to support the latter in the regulation of the offer, issue, listing, and trading of crypto assets in the UAE. This agreement will allow companies to trade in crypto assets under a license from DAFZA subject to SCA issuing the relevant approvals. Further, in collaboration with the Dubai Multi Commodities Centre (“DMCC”) Free Zone, SCA can issue permits for crypto asset companies wishing to establish and operate in the DMCC Free Zone.
It is evident that the UAE has realized the significance of crypto assets and blockchain technology and their power in promoting technological innovation and development within the country. The Regulation and other initiatives by the SCA as detailed above are significant steps in cementing UAE as an attractive jurisdiction for crypto businesses. We anticipate further developments in the legal and regulatory framework within this sector.