Crypto Assets in the UAE – regulatory landscape

The United Arab Emirates (UAE) has made progressive approach towards cryptocurrency and digital assets. There are regulatory bodies that govern crypto in the UAE which involves authorities and regulations depending on the jurisdiction within the UAE. How do these authorities define, regulate and manage crypto assets and what are the key differences on crypto between mainland UAE, Dubai and the financial freezones like the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM).

In the UAE, crypto assets are defined through several regulatory frameworks depending on the jurisdiction. On a Federal Level, the UAE Central Bank under the Stored Value Facilities Regulation (SVF Regulation), defines crypto assets as cryptographically secured digital representations of value or contractual rights that use distributed ledger technology and can be transferred, stored, or traded electronically. According to the Securities and Commodities Authority (SCA), SCA Decision No. 23/RM/2020, a crypto asset is an electronic record functioning as a medium of exchange, store of value, unit of account, or representation of ownership, transferable electronically through computer software or algorithms. The Dubai Financial Services Authority’s (DFSA) Consultation Paper No. 143, defines a crypto token as a token used as a medium of exchange or for payment or investment purposes, excluding investment tokens or other types of investments and the Financial Services Regulatory Authority (FSRA) defines a crypto asset as a digital representation of value functioning as a medium of exchange, unit of account, or store of value but does not have legal tender status. Security Tokens are defined similarly across various regulations, with a general agreement that they represent securities or have features similar or comparable to shares, debentures, or other investment instruments.

Crypto assets falling within the definitions of security tokens are subject to the crypto token regime. This regime requires compliance with specific regulations depending on the jurisdiction. In mainland UAE, the SCA regulates crypto assets and requires licenses for conducting financial activities involving them. In Dubai, the Virtual Asset Regulatory Authority (VARA) regulates all crypto activities except within the DIFC. VARA's regulations include licensing requirements and compliance standards for virtual asset activities. In DIFC, the DFSA oversees and regulates crypto activities within the DIFC, with specific regulations for security and crypto tokens. In ADGM, the FSRA regulates crypto assets and requires financial services permissions for operating crypto asset businesses.

The UAE has established several key regulations and laws governing crypto tokens, on a Federal Level, SVF Regulation which was issued by the UAE Central Bank provides a framework for digital assets and electronic payments and the SCA Decisions No. 23/RM/2020 and No. 11/2021 structures the regulation of crypto assets and token activities. Dubai Law No. 4/2022 establishes VARA and provides a comprehensive regulatory framework for virtual assets in Dubai and the Dubai Administrative Decision No. 1/2023 creates the VARA Grievance Committee and introduces additional regulations. In DIFC, the DFSA Consultation Paper No. 143 and No. 138 outline the DFSA's new crypto token regimes, focusing on security and crypto tokens. And in ADGM, the FSRA Guidance provides regulations for digital security offerings and virtual assets, including the Spot Crypto Asset Framework.

To use crypto tokens for financial services in the UAE, entities must follow specific regulatory procedures in order to obtaining permission to use Crypto Tokens. Within the mainland UAE, entities must apply for a license from the SCA, providing detailed information about their business activities and compliance with SCA regulations. In Dubai, entities must obtain a pre-approval from VARA and comply with licensing requirements, including fees ranging from AED 40,000 to AED 100,000. In DIFC, entities need to secure a license from the DFSA to conduct financial services involving crypto tokens and in ADGM entities must apply for a Financial Services Permission from the FSRA, which involves a multi-stage application process for crypto related services.

The concept of pre-recognized crypto tokens can be seen in the DIFC and ADGM unlike in the mainland. In DIFC, the DFSA has established a list of pre-recognized tokens, including Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC). New tokens like Toncoin (TON) and Ripple (XRP) have been added as of November 2023. In ADGM, the FSRA has approved certain crypto tokens for use within its jurisdiction without prior regulatory approval. The list is available on the ADGM’s Digital Asset Exchange (DAX). Tokens that are not pre-recognized must undergo a regulatory approval process. The DFSA and FSRA assess these tokens based on their compliance with existing frameworks and regulations.

Certain tokens are excluded and prohibited from financial services regulation. In DIFC, privacy tokens and algorithmic tokens are prohibited due to their potential for masking transactions and creating price instability. In ADGM, tokens which may be used for illegal activities, unregulated payment systems, or those mirroring traditional securities without regulatory compliance are prohibited.

Crypto tokens may fall under Anti-Money Laundering (AML) laws and regulations during Initial Coin Offerings (ICOs), if tokens are classified as securities or financial instruments, AML regulations will apply. Crypto Exchanges and Wallet Providers must also comply with AML regulations, including Know Your Customer (KYC) and Customer Due Diligence (CDD) requirements. Any Peer-to-Peer transactions whether large or small involving crypto tokens may be subject to AML regulations even if not conducted through regulated platforms.

Funds in the UAE have specific restrictions on investing in crypto tokens. In DIFC, retail funds are prohibited from investing in cryptocurrencies due to high risks. In ADGM, investments in crypto tokens are permitted but typically limited to qualified clients and under specific conditions.

Fiat crypto tokens are digital assets directly tied to the value of a traditional, government-issued currency like the US dollar, Euro etc. Unlike cryptocurrencies like Bitcoin/Solana/Ethereum, which fluctuate in value independently, fiat crypto tokens aim to maintain a stable price by mirroring the underlying fiat currency. Popular stablecoins often pegged to the US dollar include Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) etc. In DIFC Fiat token are classified as Accepted Crypto Tokens, issuers in this instance must comply with the DFSA regulations. In ADGM fiat tokens are treated as digital representations of fiat currency, and are regulated by the FSRA.

In DIFC permitted financial services include activities such as advising, dealing, custody, and trading of accepted crypto tokens and such entities providing these activities must be incorporated within the DIFC and regulated by the DFSA. In ADGM the permitted financial services include conducting various activities such as running exchanges, custody services, and advisory roles, all of which are subject to FSRA regulations.

Trading venues and platforms dealing with crypto tokens in the UAE are subject to strict regulatory requirements. Entities operating crypto platforms must obtain licenses or approvals from authorities, providing disclosures when asked, and adhering to data protection and consumer rights regulations from the Central Bank, SCA, DFSA, or FSRA. These regulations require compliance with AML and counter-terrorism financing (CTF) measures for investor protection and a firm regulated market.

The UAE's approach balances innovation with strict regulatory measures, this ensures a strong framework for the growth and management of crypto assets while safeguarding against financial risks and illegal activities. As the global cryptocurrency market evolves, the UAE's regulations will likely adapt to new developments, maintaining its position as a leading hub for digital finance.

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