Virtual Assets Regulatory Landscape in the UAE

The UAE is leading the race to become the jurisdiction of choice when it comes to regulating virtual assets with last week’s releases indicating that there may soon be three options for firms looking to establish a regulated virtual assets entity.

In 2019, the Financial Services Regulatory Authority (the independent regulator in the Abu Dhabi Global Market (“ADGM”) became the first regulator in the world to create a regulatory framework for crypto-asset activities. This framework was superseded in 2020 and replaced by The Regulation of Virtual Asset Activities in ADGM, which encompasses the Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers released by the Financial Action Task Force (“FATF”). This regulation supports the use of Stablecoins within the ADGM, Multi-Lateral Trading Facilities and Virtual Assets, Virtual Assets Broker and Dealer and Custody of Virtual Assets.

Last week, the regulator of financial services firms in the Dubai International Financial Centre (“DIFC”), the Dubai Financial Services Authority (“DFSA”), published Consultation Paper No.143 – Regulation of Crypto Tokens, which sets out the proposed regulatory regime for firms who wish to provide financial services activities in respect of Crypto Tokens from the DIFC. The DFSA is also aligning the proposed regulation with international standards and has specifically mentioned it will take “direction” from the FATF, Financial Stability Board (“FSB”), and, the International Organization of Securities Commissions (“IOSCO”). Whilst the DFSA has already defined a “Token”, which has been added to the Glossary Module of the rulebook, they have taken this one step further under CP 143 by proposing classification for Crypto Tokens. Under the proposed classification, Utility Tokens, Non-Fungible Tokens (“NFTs”), and Central Bank Digital Currencies (“CBDC”) are excluded from the definition of a Crypto Token, while Privacy Tokens and Devices and Algorithmic Tokens could be prohibited.

Also last week, H.H Sheikh Mohammed bin Rashid Al Maktoum announced the creation of The Dubai Virtual Assets Regulatory Authority (“VARA”), and The Dubai Virtual Asset Regulation Law (“Law”), which will govern virtual assets throughout Dubai, excluding the DIFC financial free zone. Whilst the new Law has not yet been released, it will cover both cryptocurrencies and NFTs and allow regulated firms to conduct business as a broker, custodian, and exchange, amongst other activities.

With such rapid development of the UAE regulatory landscape, firms in the virtual asset space may well be asking themselves:

1. How will the UAE regulatory options for virtual asset firms differ?
2. How does each regulator define a virtual asset?
3. Will each regulator have a different approach towards which Coins could be considered an “acceptable coin”?
4. What factors could be considered when making an assessment on an “acceptable coin”?
5. What marketing restrictions will each regulator impose, and would incentives and bonuses be banned?
6. Will you be required to incorporate as a subsidiary only, or could you branch in from a foreign jurisdiction or operate as a representative office?
7. Will there be requirements to have a local presence to support the day-to-day activities of regulated firms, such as senior management/directors, tech support and oversight?
8. Will you be able to offer both conventional assets and virtual assets together (either as a broker, custodian, or exchange)?
9. What will each regulator’s position be on retail clients?
10. Will an appropriateness/suitability test be a mandatory requirement? If so, how will the knowledge, experience, and financial soundness of potential users be assessed?

We are creating a forum to support firms in finding answers to these questions. To join our Virtual Assets Regulatory Forum, please contact me directly by email at [email protected]