On 14 January 2023, new federal-level virtual assets legislation came into force in the United Arab Emirates (the UAE). Contrary to some reports, the new legislation did not introduce any new UAE virtual assets regulator, but did introduce potentially significant changes to the regulation of virtual assets by the UAE’s Securities & Commodities Authority (the SCA) and clarifies the scope of virtual assets subject to regulation by the UAE Central Bank (the UAE CB).
Overview of the new legislation
Cabinet Decision No. (111) of 2022 (the Decision) applies on a federal level to Virtual Assets, which are defined as digital representations of value that can be digitally traded or transferred and can be used for investment purposes. It prohibits engaging in certain regulated activities with respect to Virtual Assets (Virtual Asset Activities) without an appropriate licence from the SCA or a local authority with Emirate-level competence to regulate Virtual Assets (a Local Licencing Authority). Currently, the only Local Licencing Authority within the UAE is the Virtual Assets Regulatory Authority (VARA), which regulates Virtual Assets in the Emirate of Dubai, one of the seven Emirates in the UAE.
The list of Virtual Asset Activities set out in the Decision is relatively broad and covers:
- providing services for the operation and management of Virtual Asset platforms;
- providing services for the exchange between one or more forms of Virtual Assets;
- providing services for the transfer of Virtual Assets;
- providing brokerage services in Virtual Asset trading;
- providing services for the custody and management of Virtual Assets and enabling control over them; and
- providing financial services in connection with an issuer’s offer and/or sale of Virtual Assets or participating in the provision of such services.
While the Decision applies to all commercial free zones within the UAE, such as the Dubai World Trade Centre and the Dubai Multi Commodities Centre, it does not apply to the UAE’s financial free zones, namely the Dubai International Financial Centre (the DIFC) and the Abu Dhabi Global Market (the ADGM). In addition, the Decision does not apply to Virtual Assets regulated by the UAE CB such as stored value facilities and fiat-backed stablecoins.
Welcome clarifications
The Decision sheds some much needed light on the interaction between the jurisdictions of VARA and the SCA, which had until now been uncertain. According to the Decision, no person may engage in Virtual Asset Activities in the UAE without obtaining a licence from “the [SCA] or the Local Licencing Authorities – as the case may be”. This seems to acknowledge that a person conducting Virtual Asset Activities (a Virtual Asset Service Provider or VASP) in the Emirate of Dubai with a licence from VARA should not require an additional licence from the SCA, to the extent that its VARA licence covers the Virtual Asset Activities concerned. Furthermore, while not entirely clear, it is implied that an SCA licence would not, on its own, be sufficient for a VASP to operate in the Emirate of Dubai. The SCA does, however, reserve the power to supervise and oversee VASPs that are licenced by VARA.
It was also made clear in the Decision that VASPs:
- must be based in the UAE to conduct Virtual Asset Activities in the UAE;
- are required to obtain both a regulatory licence and a commercial licence to operate, and must obtain initial regulatory approval from the SCA or a Local Licencing Authority prior to applying for a commercial licence; and
- are required to meet certain minimum requirements in order to obtain a licence from the SCA, and notably:
- VASPs must comply with both UAE federal-level anti-money laundering requirements as well as requirements from the Financial Action Task Force; and
- VASPs and their partners must not be subject to any criminal investigations whether inside or outside of the UAE at the time of the licence application.
Lingering questions
While these clarifications are helpful, several questions still remain following the publication of the Decision. Perhaps what is most unclear is the impact of the Decision on the SCA’s existing Virtual Assets regulation, the Chairman of the Authority’s Board of Directors’ Decision No. (23/Chairman) of 2020 Concerning Crypto Assets Activities Regulation (the 2020 Crypto Regulation), which has been in effect for more than two years.
Under the 2020 Crypto Regulation, Virtual Assets with security-like characteristics are categorised as Security Tokens and subject to the SCA’s regulations applicable to securities. Most Virtual Assets that are not Security Tokens and that are traded on an organised market (e.g., BTC and ETH) are categorised as Regulated Commodity Tokens and subject to the various provisions within the 2020 Crypto Regulation. Rather confusingly, the Decision is stated not to apply to digital securities and digital commodity contracts that are already regulated by the SCA, and so it is not clear whether the Decision is meant to supersede the 2020 Crypto Regulation or cover the minority of Virtual Assets that are neither Security Tokens nor Regulated Commodity Tokens.
Furthermore, the Decision also prohibits any dealings with VASPs that are not appropriately licenced by the SCA or, where relevant, a Local Licencing Authority. It is certainly unusual to place this burden on consumers, and it is not yet clear what sanctions would be applied to those who breach this prohibition.
Current regulatory landscape
The result is that the Virtual Assets regulatory landscape in the UAE remains complex – there are currently five Virtual Asset regulators within the UAE, each with their own jurisdiction and regulatory approach. We have summarised the current landscape in the table below.
Interestingly, the reference to “Local Licencing Authorities” in the Decision, rather than VARA specifically, leaves room for the establishment of other Emirate-level Virtual Asset regulators, which would add another layer of complexity to the existing landscape.
Looking to the future
We expect the SCA to publish implementing regulations shortly which should hopefully clarify some of the ambiguities mentioned above, in particular the impact of the Decision on the scope and requirements of the SCA’s 2020 Crypto Regulation. This will be much needed, as all VASPs currently licenced in the UAE have been given a grace period of up to 14 April 2023 to fulfil the licencing conditions and requirements set out in the Decision.
Due to the complexity of UAE Virtual Assets regulation, VASPs should seek legal guidance before conducting any activities in relation to Virtual Assets in the UAE, including any marketing of such activities. For further information, please contact Muneer Khan.
