The cryptocurrency and virtual assets industry has grown at an extremely fast pace and continues to grow as a result of wider adoption and clarity on regulatory environment with regard to the industry. The United Arab Emirates (“UAE”) is at the forefront of enabling and encouraging the growth of the virtual assets industry.

Various jurisdictions around the globe have developed regulations to regulate the activities relating to virtual assets and have further collaborated with industry participants to form an understanding regarding all the activities and developments in the space. In some cases, this has led to an overregulation by jurisdictions which has restricted and hampered growth of the industry. This has led to participants being deterred/ repelled from such jurisdictions.

However, the UAE has taken a positive approach to the regulation of the virtual assets industry. The regulatory framework in place in the UAE has struck a perfect balance between safeguarding of consumers and providing an encouraging environment for businesses involved in activities relating to virtual assets hence making it stand out globally for its forward-thinking regulatory stance on digital assets. One example of this is establishment of the Virtual Assets Regulatory Authority in the emirate of Dubai, and the robust regulatory framework under the same.

• Legal Framework

There are multiple frameworks present in the UAE which makes the country perfect for setting up of cryptocurrency and virtual asset related businesses. These frameworks exist within UAE mainland as well as free zones.

There are numerous free zones which provide licenses to conduct activities associated with virtual assets, these include the Dubai Multi Commodities Centre (DMCC), Ras Al Khaimah Digital Assets Oasis (RAK DAO), and Dubai World Trade Centre (DWTC). The Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) are the two financial free zones in UAE which offer crypto business licenses with their own regulatory frameworks. Each free zone provides services that fulfill requirements of different kinds of cryptocurrency businesses. For instance, the DMCC is suitable for proprietary trading of virtual assets whereas ADGM has a comprehensive framework for businesses dealing with stablecoins.

UAE Federal Law on Virtual Assets

Cabinet Resolution No. (111) of 2022 on the Regulation of Virtual Assets and Their Service Providers sets federal regulations for virtual assets, defined as a digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes (“Virtual Asset”). It restricts involvement in specific regulated activities related to Virtual Assets (“Virtual Asset Activities”) unless a proper license is obtained from the Securities and Commodities Authority (“SCA”) or a local authority with the power to regulate Virtual Assets at the emirate level. Activities that don’t require a license include journalist and educational work publishing or presenting content of or relating to any virtual asset or such activities, and those that deal in virtual assets with own funds.

The Virtual Assets Regulatory Authority (VARA):

The Virtual Assets Regulatory Authority, established under Dubai Law No. 4/2022 Regulating Virtual Assets in the Emirate of Dubai, is the competent entity in charge of regulating, supervising, and overseeing Virtual Assets and Virtual Asset Activities across the emirate of Dubai including Free Zones, except DIFC. Businesses who wish to incorporate as free zones entities to carry out Virtual Asset Activities (“VAA”) must obtain a Virtual Asset Services Provider (“VASP”) license from VARA in combination with any operational license(s) required to operate under the respective free zone regulatory authorities.

No entity shall carry out any Virtual Assets Activity in the emirate of Dubai without an authorization and a license granted to it for conducting such an activity under VARA. Any activity conducted by a VARA licensed entity outside the emirate is subject to further rules and regulations applicable in the other territory.

Virtual Asset Activities under VARA: The VARA regulations list eight categories of Virtual Asset Activities that encompass a wide range of services that may be offered by cryptocurrency businesses. A business can apply for a license for such Virtual Asset Activities and be approved as a VASP. These categories are-

• Advisory Services: Includes services as providing personal investment advice/ recommendation in respects of actions relating to virtual assets;
• Broker-Dealer Services: Includes arranging/ facilitating of purchase or sale of virtual assets, or matching of such transactions;
• Custody Services: Includes safekeeping of virtual assets on behalf on another entity and virtual asset Wallet services. This would also include staking of virtual assets;
• Exchange Services: Includes matching of orders between buyers and sellers and conducting an exchange/ trade from virtual assets to fiat currency as well as virtual asset to another virtual asset;
• Lending and Borrowing Services: Includes lending and borrowing services under which a virtual asset is transferred between the parties involved;
• Virtual Assets Management and Investment Services: Includes investment management services, and acting on behalf of an entity as an agent;
• Virtual Assets Transfer and Settlement Services: Includes transfer and/ or settlement of virtual assets between entities or virtual assets wallets.
• Fiat-Referenced Virtual Assets: Includes dealing in services pertaining to the use of stablecoins.

There are specific rulebooks issued by the VARA for each of the activities above to be followed by VASPs that undertake them.

Other Virtual Asset activities which requires voluntary registration:

• Proprietary trading/ investing of virtual assets;
• Providing of technology services relating to or utilizing Distributed Ledger Technology to other businesses.

Licensing fee under VARA will vary as per the activity(ies) conducted by the VASP.

Compliance

The VARA Regulations, 2023 and rulebooks issued under it further provide clarity on adherence to compliance requirements on conducting operations by a VASP, such as-

• Compliance on issuance of Virtual Assets;
• Compliance with VARA issued rulebooks are specific to the virtual asset activity(ies) provided by the VASP in addition to compliance with the compulsory rulebooks applicable to all VASPs;
• Obligations on VASPs for ensuring compliance with the UAE federal laws on Anti-Money Laundering and Combating the Financing of Terrorism;
• Adherence to regulations pertaining to marketing regulations and market offences;
• Requirements with respect to Data Reporting and Auditing; and
• Implementation of internal policies on Risk Management, Transaction Processing, etc.

Dubai International Financial Centre (DIFC)

The Dubai Financial Services Authority (“DFSA”) under DIFC regulates virtual assets through its ‘Crypto Token regime’. The DFSA’s regime addresses the full range of associated risks, including those relating to money laundering and financial crime, consumer protection, technology governance, custody and exchange operations. Under the regime, firms in DIFC can obtain a license to provide financial services with ‘Crypto Tokens’ within or from the DIFC.

The following financial services may be provided in respect of crypto tokens: dealing in investments as principal; dealing in investments as agent; arranging deals in investments; managing assets; advising on financial products; operating an exchange; providing custody; arranging custody; operating a clearing house; and operating an alternative trading system.

Abu Dhabi Global Market (ADGM)

The Financial Services Regulatory Authority (“FSRA”) under ADGM provides for the framework that governs the operations of entities engaging in crypto-asset spot transactions from within ADGM.

Under Financial Services and Markets Regulations (“FSMR”), ‘Digital Securities’ are defined as securities that include digital or virtual tokens with features similar to shares, debentures, and units in a collective investment fund. Entities that provide services related to Digital Securities, such as investment management or advisory services, must obtain a Financial Services Permission (“FSP”) and comply with regulations for market intermediaries and operators within ADGM. In contrast, Virtual Assets are categorized as commodities. While they are not considered as ‘Specified Investments’ under FSMR, market intermediaries dealing with these assets, including brokers and custodians, must secure approval from the FSRA and an FSP.

The following assets may be dealt with: Digital Securities; virtual assets; virtual asset exchange tokens; derivatives and collective investment funds of virtual assets, digital securities and utility tokens; and fiat tokens/ stablecoins.

• UAE as a Cryptocurrency Innovation Hub

Being one of the earliest regions to legislate virtual assets, the UAE has differentiated itself amongst other jurisdictions by taking a positive approach in regulating the industry rather than leaving the regulatory aspect for this relatively newer industry to remain uncertain.

Other legal frameworks pertaining to virtual assets around the globe have taken a mixed approach. The United States of America has in the past overregulated virtual assets by treating many assets as ‘securities’, bringing them under the intense scrutiny of the Securities Exchange Commission, placing certain prohibitions. Singapore has implemented adequate regulations for licensing of cryptocurrency businesses as ‘Digital Payment Token Providers’ under the Monetary Authority of Singapore and safekeeping of customers’ assets.

The UAE has struck the right balance as to avoid overregulation and hence dissuasion of setting up of virtual asset businesses. Instead, it has recognized the fundamental advantages introduced by blockchain technology, including the creation of digital assets and their extensive range of applications and consequently has endeavored to enable growth of this technology while simultaneously ensuring that any harmful aspects of it are kept in check my implementing compliance measures and consumer protection.

The UAE’s forward looking and a pro-innovation approach ensures that the country will continue to establish and grow itself as the innovation hub for cryptocurrency and virtual asset businesses.

• Conclusion

Entities involved in activities related to virtual assets may opt to set up their businesses under the UAE Federal Law or VARA in any of the free zones, or may alternatively set up their businesses in the financial free zones of DIFC or ADGM, all of which provide for a comprehensive regulatory framework with respect to virtual assets.

Each framework may offer unique advantages to any entity exploring to set up their business in the fast growing virtual assets hub of the UAE. VARA has proved to be a robust framework and has successfully created a unique ecosystem that promotes the development and growth of Virtual Asset Service Providers.