Insights

In the UAE, the Crypto Assets are regulated on different levels, on the Federal level, in 2020 the Chairman of the Securities & Commodities Authority’s Board of Directors has issued the Decision No. (23/ Chairman) which specified the requirements to operate a crypto asset exchange in the UAE, and in 2022, the Emirate of Dubai has issued Law no. 4 of 2022 Regulating Crypto Assets in Dubai, which is applicable in both mainland and freezones of Dubai, except the DIFC.

Article 16 of the Chairman of the Securities & Commodities Authority’s Board of Directors' Decision No. (23/ Chairman) of 2020 Concerning Crypto Assets Activities Regulation, introduced some requirements to obtain a license to operate a Crypto Asset Exchange in the UAE, such requirements include the following:

1. Provide the necessary technological systems and controls that facilitate the process of recording and reporting trading and transactions taking place on the platform.
2. Provide effective market surveillance programs, to control and monitor trading and transactions in the market, and to detect and prevent conduct amounting to market abuse.
3. Establish appropriate controls to combat money laundering and terrorism financing crimes.
4. Not permit to trade on the Crypto Asset Exchange, except for the following persons:
   • Persons who are able to demonstrate a record of regularly investing in securities, commodities or/and Crypto Assets or having appropriate and adequate knowledge and expertise required to invest in securities, commodities or/and Crypto Assets.
   • Persons who only aim to acquire or sell Crypto Assets solely in relation to exercising the relevant utility provided by the Crypto Assets, without having an investment purpose or achieving future revenues.
5. Provide users of the Crypto Asset Exchange with a risk statement prepared in line with the disclosure requirements in relation to the Crypto Assets.

Additionally, the Crypto Asset Operator shall establish the necessary rules, controls and procedures to operate the Crypto Asset Exchange, such rules shall be fair, transparent, objective and in compliance with the laws of combating money laundering and terrorism financing crimes. Besides, they shall have procedures for immediate disclosure of information to the Securities & Commodities Authority and the possibility of making amendments to the operating procedures to comply with the requirements of the Authority.

Moreover, regarding the transparency requirement, a Crypto Asset Operator shall be required to (1) establish procedures to ensure fair and orderly trading across the Exchange, and for having objective criteria for the efficient execution of trades; (2) disclose the commissions and fees for trading on the Crypto Asset Exchange clearly to users, in advance of their submission of orders.

Furthermore, a Crypto Asset Operator shall be required to adopt mechanisms to ensure the resiliency, integrity and reliability of critical systems in line with industry best internationally accepted practices, including a disaster recovery or back-up arrangements in place, in order to:

• Protect the users' Crypto Assets;
• Mitigate, to the extent practicable, disruption caused to investors upon a failure or outage of the key systems of the Crypto Asset Exchange; and
• Notify the Authority of these mechanisms and subject them to stress tests.

On February 2022, the Emirate of Dubai enacted the Law No. 4 of 2022 on the Regulation of Virtual Assets and establishing the Dubai Virtual Assets Regulatory Authority “VARA”, which shall be affiliated with the Dubai World Trade Centre Authority. This law has established a preliminary legal framework for businesses related to Virtual Assets including Crypto Assets and Tokens. This law shall be applicable in all of the Emirate of Dubai including the Special Development Zones and the Freezones except the Dubai International Financial Centre “DIFC”.

As per the law, the VARA shall develop regulations, rules, and standards for regulating, supervising, and overseeing virtual assets platforms, service providers, which most probably will have a lot in common with the regulations and requirements of the Securities & Commodities Authority.

The Law No. 4 of 2022 on Regulating Virtual Assets in the Emirate of Dubai, has established a framework including some preliminary requirements for conducting the activities related to Virtual Assets.

Requirements for conducting activities related to virtual assets

• Obtaining a permit from VARA.
• Operating in the Emirate of Dubai.
• Set up the business in one of the legal forms approved by the competent commercial licensing authority.
• Other requirements and rules that are expected to be issued by the VARA.

Activities Requiring Permits

• provision of Virtual Asset Platform operation and management services.
• provision of services for the exchange between Virtual Assets and national or foreign currencies.
• provision of services for the exchange between one or more forms of Virtual Assets.
• provision of Virtual Asset transfer services.
• provision of Virtual Asset safekeeping, management, or control services.
• provision of services related to Virtual Asset Wallets.
• provision of services related to offering, and trading in, Virtual Tokens.

And for the DIFC, yet, the DIFC doesn’t have any regulatory regime for providing financial services activities in respect of Crypto Tokens. However, the Dubai Financial Services Authority “DFSA” has issued a number of consultation papers that includes some proposals for the legal framework that will be adopted in regulating Crypto Tokens, seeking public comments. Where it had some proposals for regulating Crypto Tokens:

DFSA has proposed to exclude the following Tokens:

• Utility Tokens
• Non-Fungible Tokens
• Central Bank Digital Currencies
• Privacy Tokens and Devices
• Algorithmic Tokens

DFSA has proposed to introduce an “Accepted Crypto Token” Approach, which means that any person wants to provide a financial service in or from the DIFC in relation to crypto Token shall consider the following factors:

• Regulatory status of the crypto token in other jurisdictions.
• Size, liquidity, and volatility of the crypto token.
• Sufficient transparency around the technology, protocols, and significant stakeholders in the ecosystem around the crypto token.
• Adequacy and suitability of the technology used in relation to the crypto token.
• Risks associated with the use of the crypto token.
• Adequacy arrangements around the reserves, stabilization and redemption mechanisms of a crypto token that purport to be used as a Fiat Crypto Token.

In addition to proposing to require those who wants to provide financial services in relation to accepted crypto tokens to establish as a body corporate and be incorporated under DIFC Law.

DFSA has also proposed to not allow Operators of Crowdfunding Platforms to use Crypto Tokens in the provision of products or services, and to not permit any Representative Offices to market activities related to Crypto Tokens.

Moreover, DFSA has proposed to not allow any Money Service Providers to provide services in relation to Crypto Tokens.

DFSA has proposed to require all operators of Crypto Token trading venues to put in place technology governance requirements and to carry out an annual technology audit report while submitting the report to the DFSA.

DFSA has proposed that an operator of a trading facility provides on-going disclosure to clients of the facility for the (1) total supply of the Accepted Crypto Token; (2) total number and market capitalisation of the Accepted Crypto Token being traded on markets globally; (3) the workings and schedule of any inflationary/deflationary mechanisms (i.e., issuing and burning Crypto Tokens) taking place, other than through the normal mining process; (4) total number of the Accepted Crypto Token being held by the developing team, held in reserves for rewards and other promotional mechanisms, or otherwise locked away from the total supply; (5) the breakdown of largest holders in the Accepted Crypto Token across the native / largest blockchains (those holding 10% or more of total supply); and this is not an exhaustive list; if an operator wishes to publish additional, relevant and up to date information regarding the Accepted Crypto Tokens traded on their venue, they can do so. DFSA may also make refinements to this list in the light of experience.

Additionally, DFSA has proposed to apply Islamic Financial Services module to any financial service or product offering involving Crypto Tokens if they are, or held out as, Islamic or Shari’a compliant.

If you have any question related to the regulations of the Crypto Assets in the Emirate of Dubai or the UAE, feel free to get in touch with our team, who will be happy to provide you with all the needed help.