AML/CFT Compliance for Cryptocurrencies and Other Virtual Assets in Dubai
Introduction
The grand scale that the Dubai skyline represents is evident in its economic ambition too. The Dubai Economic Agenda D33 plans to double the size of Dubai’s economy by 2033 and position it among the top 3 global cities. One of the main drivers of this ambition is Dubai's plan for digital transformation. As part of the D33 agenda, Dubai aims to generate an annual contribution of AED 100 billion from digital transformation projects. This also includes “Sandbox Dubai ” – a platform for testing and commercialising new technologies. The creation of the Virtual Assets Regulatory Authority (VARA) as the world's first independent regulator for regulating virtual assets in Dubai aligns with the Emirate’s ambition to become a global innovation hub and a leader in the virtual assets sector.
Virtual Assets Regulatory Authority (VARA) and the Regulatory Framework
VARA is responsible for regulating and overseeing the Virtual Assets (VA) and Virtual Asset Service Providers (VASPs) operating in the Emirate of Dubai. Except for the Dubai International Financial Centre, VARA has regulatory authority over all zones across Dubai, including Special Development Zones and Free Zones. VARA aims to:
a)?position Dubai as the regional and international hub for virtual assets and attract investments in the process;
b)?frame regulations to stop illegal practises in the virtual assets sector;
c)?empower customers and increase awareness related to virtual assets;
d)?attract companies functioning in the virtual assets domain to base their businesses in Dubai;
e)?develop rules and standards for regulating and overseeing VA and VASPs.
To achieve these goals, the Virtual Assets and Related Activities Regulations 2023 were introduced. Along with other regulations, VARA has developed 12 Rulebooks to regulate Virtual Asset Service Providers (VASPs). Four of these Rulebooks are mandatory for all VASPs, while eight are VA Activity and Other Rulebooks. Depending on the activities for which each VASP is licensed, they must comply with relevant specific Rulebooks in addition to the compulsory ones. As of March 2024, VARA's Public Record of Licensed VASP documents the names of 17 VASPs of which 11 are deemed active.
AML/CFT Compliance for Virtual Assets
Virtual Asset Service Providers (VASPs) need to comply with all UAE’s Federal Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) laws as well as with other related legislations and regulatory requirements. VARA has also issued a separate Compulsory Rulebook for Compliance and Risk Management that all VASPs operating under the regulatory authority of VARA will need to follow. VASPs must operate with integrity and diligence and ensure that their clients are always safeguarded. They will need to make effective disclosures for their clients and devise strategies to comply with legal and regulatory requirements. VASPs are also required to establish a comprehensive Compliance Management System (CMS) including appointing a Compliance Officer who shall be responsible for establishing and administering the CMS and notifying VARA whenever required.
Part III of the Rulebook for Compliance and Risk Management specifies AML/CFT Compliance targeting VASPs. It is important to note that the Rulebook is comprehensive and meticulous and VASPs need to follow the Rulebook and other legislations rigorously.
Here are few of the important points mentioned in the rulebook regarding combating illegal activities such as money laundering, financing of terrorism, and proliferation financing that VASPs operating under VARA need to implement:
1. Appointment of MLRO: A Money Laundering Reporting Officer (MLRO), with two years of experience in AML/CFT, should be appointed to oversee a VASP’s AML/CFT compliance. MLROs are responsible for training staff and the board on AML/CFT laws, developing policies, conducting risk assessments, and monitoring and reporting suspicious transactions, and reporting quarterly on the effectiveness of AML/CFT policies. The quarterly report should also include a summary of all Anonymity Enhanced Transactions, and it should be made available to VARA upon request.
2. AML/CFT Policies and Procedures: Comprehensive policies and procedures should be implemented to comply with AML/CFT laws and guidelines, as well as with the international standards recommended by the Financial Action Task Force (FATF) on Virtual Assets. The policies should identify, assess, and mitigate AML/CFT risks.
3. AML/CFT Controls: Effective AML/CFT controls should be implemented, including the use of distributed ledger analytics tools for monitoring transactions. If applicable, internal controls should be put in place to address FATF's Red Flag Indicators for Virtual Assets.
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4. Risk Assessment: Thorough AML/CFT risk assessments should be conducted to understand and mitigate risks related to Virtual Assets and related products, services, businesses, and technologies.
5. Client Due Diligence (CDD): CDD measures should be adopted following AML/CFT laws, and the specific criteria laid down in the Compliance and Management Rulebook. This includes identifying clients and Ultimate Beneficial Owners (UBOs) before or during the establishment of the business relationship, or before executing a transaction if there is no prior relationship.
6. Suspicious Transaction Monitoring and Reporting: Business relationships and transactions should be monitored for any suspicious activities and reported appropriately to relevant authorities, including the UAE’s Financial Intelligence Unit (FIU) and VARA.
7. FATF Travel Rule Compliance: The FATF Travel Rule should be followed by obtaining and holding the required originator and beneficiary information for transactions exceeding AED 3,500.
8. Record Keeping: Records related to AML/CFT, including transaction records and CDD information, should be kept for a period of no less than 8 years.
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Importance of Regulating Crypto and Other Virtual Assets
Regulating virtual assets presents a unique challenge for regulators. The technology behind virtual assets has evolved at an incredible speed creating a range of virtual asset products that is often difficult to place into existing regulatory frameworks. ?To address this issue, VARA has developed extensive and comprehensive activity-specific rulebooks. The IMF has recognised the necessity of “coordinated”, “consistent” and “comprehensive” approaches to regulating crypto and other virtual assets. The 2022 “crypto winter ,” ?with failures of the TerraUSD and Luna stablecoins and the FTX crypto trading platform, wiping out billions of investor money, highlighted the necessity for robust policies to protect investors in the virtual assets ecosystem. VARA's regulatory framework tries to mitigate the risks associated with virtual assets and services while helping the industry to expand the use of the technology.
Conclusion
This enthusiasm with virtual assets, especially cryptocurrencies, has particularly grown since the US Securities and Exchange Commission approved the first spot Bitcoin ETFs in January 2024. As of March 13, 2024, the Global Cryptocurrency market cap touched $2.89 trillion, with Bitcoin reaching an all-time high above $73,000. This enthusiasm further highlights the importance of regulation and global cooperation so that virtual assets and the principles of decentralised and borderless economy that virtual assets represent are not exploited by bad actors for perpetrating financial crimes.??
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