Dubai’s virtual assets regulatory accomplishments was the center of discussions at the recent event hosted by Dubai Digital Assets Association (D2A2), supported by Dubai Chamber of Commerce. On the one-year anniversary of VARA (Virtual assets regulatory authority) in Dubai, the forum provided a platform for industry stakeholders to review and analyze the development of the regulatory landscape for virtual assets and the challenges industry is facing.

The feedback and insights gathered during the roundtable discussion will be consolidated into a submission by D2A2 on behalf of the stakeholders to regulatory authorities for suitable action.

Participants included VARA, the Securities and Commodities Authority (SCA), several government authorities that are focused on developing the web3 ecosystem – such as Dubai Economy, DWTC, RAKDAO – to name a few, licensed Virtual Asset Service Providers (VASPs) by VARA, and service providers such as lawyers, compliance specialists and forensic intelligence consultants.

During the Forum, VARA outlined the licensing regime it has put in place and process of licensing adopted to support the industry.  Industry Participants highlighted the areas where they seek clarifications, adjustments, or improvements in the regulatory framework.

The occasion also presented an opportunity for regulators, businesses, and all stakeholders to engage in a meaningful and open discussion about the future of Virtual Assets in Dubai. Participants were able to exchange views with the regulatory authorities and fellow industry participants.

Gaurang Desai, Chairman of the D2A2, commented on the occasion “At D2A2, it is important for us to bring together all stakeholders to bring out opportunities and challenges faced by each of them in order to arrive at solutions that are equitable and prudent for long-term sustainable growth of this nascent industry. We look forward to building on this momentum and becoming a trusted partner for industry participants and the regulators in time to come.”

D2A2 has the  goal of enhancing the ease of doing business in Dubai, driving positive economic impact, and further strengthening the emirate’s position as a leading global business hub.

According to a recent news release, The UAE’s Securities and Commodities Authority (SCA) has received licensing requests and inquiries from companies intending to provide Virtual Asset services following the issuance of the necessary regulations. The UAE SCA also announced that those who do not apply for a license either to VARA or SCA will be fined $2.7 million.

The move aims to ensure that all companies that provide products and services related to the Virtual Assets sector in the country are fully regulated, as the SCA’s Board of Directors, chaired by Muhammad Ali Al-Shorafa seeks to strengthen the country’s position by ensuring that the local financial markets are among the best globally.

Dr. Maryam Al Suwaidi, CEO of the SCA, stated that pursuant to Cabinet Resolution No. (111) of 2022 regarding the regulation of Virtual Assets and their service providers, which gave the SCA the mandate to issue regulatory decisions for Virtual Asset transactions and license its service providers; the SCA’s Board of Directors issued the necessary decisions, which requires all companies providing Virtual Asset services based in the country (except for companies licensed in Financial Free Zones) to obtain a license from the SCA.

All companies operating in Dubai must only obtain a license from the Dubai Virtual Assets Regulatory Authority (VARA), which will inform the SCA to have a unified register of all licensed Virtual Asset service providers in the UAE.

She added that the Virtual Assets sector is among the modern technological industries included in the SCA’s strategy as one of the pillars for sustainable growth of the UAE’s financial markets.

The SCA called upon all companies that practice any of the Virtual Assets services to submit a request immediately to obtain the necessary approval to avoid being subjected to appropriate legal measures, which the Authority will initiate during the next stage, which may include one or more of the following: a warning, a fine not exceeding (AED10 million) equivalent to $2.7 million, or referring the violator to the Public Prosecution.

The SCA also urged all investors to refrain from dealing with any company that provides Virtual Assets services before ensuring that it has the necessary licenses and approvals to protect their investments and not expose them to any risks.

The virtual regulatory environment is heating up in Dubai and across the UAE as both UAE’s Securities and Commodities Authority and VARA race towards regulating virtual asset entities both across UAE as well as in Dubai. The UAE Securities and Commodities Authority in a recent press release announced that it has opened up registration for those seeking licenses as virtual asset providers across UAE and has added new licensing virtual asset sectors, while Dubai’s VARA is working with both the Dubai’s Department of Economy and Dubai’s free zones to ensure the set deadline of 30th April for all initial disclosure questionnaires (IDQs).

As stated in the release all virtual asset providers who have a presence in the UAE with exception to those who are licensed in financial free zones are required to apply for a license from UAE SCA authority while entities in Dubai should apply through the unified requirement of both Dubai’s Virtual Asset Authority and SCA enabling them to quickly and easily received their virtual asset service provider licenses.

As per the recent regulations set forth by UAE SCA regarding the operation of virtual asset platforms under Article 3, virtual asset providers in the UAE are not allowed to trade virtual assets until after they have been listed as official licensed virtual asset service providers by the regulatory bodies.

As per article 6 SCA can request documents from virtual asset providers and has the right to oversee, regulate and review the activities of virtual asset platforms. UAE SCA will also have the right to approve virtual assets traded on these platforms as part of the officially accepted virtual asset list.

UAE SCA added that as per recent amendments, SCA has also added other regulated activities to its list of licenses, including virtual asset brokerage services, virtual asset custodians, virtual asset operators, and virtual asset service providers as well as virtual asset wallets.

But this is not all, Dubai’s Virtual Asset Regulatory Authority also announced it is working with Dubai’s Department of Economy and Tourism (DET) and Free Zone Authorities (FZAs), towards meeting the set deadline of 30th April for all initial disclosure questionnaires (IDQs) across the sector to be received as the first step towards the migration of the market to a regulated regime.

Under Cabinet resolution No. 111 of 2022 concerning the regulation of virtual assets and their service providers, which came into effect on 15th January 2023, all companies operating in or seeking to operate in this sector in or from the emirate of Dubai must be licensed by VARA. VARA has been actively engaged, with DET and Dubai’s numerous FZAs to facilitate the seamless transition of existing Virtual Asset Service Providers (VASPs) into the VARA regulatory regime as well as formalize the application process for new regulated licenses.

Helal Saeed Almarri, Director-General of DET, said, “Under the directive of H.H. Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, Crown Prince of Dubai and Chairman of Dubai Executive Council, we are making progress with Dubai’s D33 Agenda which outlines our mission to establish the Emirate as the capital of the Future Economy anchored by Metaverse, AI, Web3.0 and Blockchain. The virtual assets sector that spans all these pillars is integral to the strategy presenting a dynamically evolving ecosystem that fuels all aspects of sustainable economic growth. Ensuring that our marketplace is secure, participants are responsible, and investors and consumers are effectively protected is our top priority. With key stakeholders responsible for commercial licensing across the Emirate working closely to deploy VARA’s full market regulatory construct, we aim to set a benchmark that positions the Emirate of Dubai as a global role model for VA sector development”.

Legacy market operators carrying out VA activities in Dubai (excluding DIFC) are required to declare their desire to undertake regulated activities by submitting an IDQ to their current licensing authority – DET or any of FZAs, by the final deadline of 30th April 2023. Upon subsequent receipt of an Application Acknowledgement Notice (AAN), operating VASPs will commence the appropriate course of action for those requiring regulation or registration under VARA by 31st August 2023.

Dr. Mohammed Al Zarooni, Secretary-General of the Dubai Free Zones Council, added, “Dubai’s Free Zones have been an integral part of the business landscape for decades, providing start-ups, entrepreneurs and overseas companies looking to establish regional headquarters with access to a geographically strategic, multicultural, dynamic and bureaucracy-free environment. We have witnessed growing interest from virtual assets-focused entities who are keen to adhere to the VARA licensing regime. Adopting the new regulations, provides a safe and sustainable operating environment for VA companies and further establishes Dubai as a credible destination for this sector”.

A total of seven distinct types of regulated VA activity licenses can be applied for: Advisory Services, Broker-Dealer Services, Custody Services, Exchange Services, Lending and Borrowing Services, Transfer and Settlement Services and Management and Investment Services.

Commenting on the imminent April deadline to receive all legacy operator IDQs as the first phase of the migration plans, Henson Orser, Chief Executive Officer, VARA, said, “VARA has been working closely with both DET and the emirate’s Free Zone Authorities in order to ensure a smooth transition for legacy VASPs in Dubai, many of whom were at the forefront of innovation in this space. This transition was further supported by VARA’s Minimum Viable Product (MVP) program, a time bound initiative that enabled new applicants to set up operations and become market ready until official release of our full suite of regulations on 7th February 2023. The introduction of the Virtual Assets and Related Activities Regulations gives the existing companies, a clear timeline to ensure that they submit their initial disclosures by the end of April.”

UAE Securities and Commodities Authority (SCA ) publishes the Cabinet Resolution No. (111)of 2022 regarding the regulation of virtual assets and their service providers and has noted which entities it will regulate and the penalties that can reach $2.7 million. 

As per the resolution, the regulation of virtual assets and their providers will be overseen in the UAE by the Securities and Commodities Authority, as well as the Central Bank of the UAE. It will also include local licensing authorities that include free zones, and financial free zones. 

As per the resolution virtual assets are defined as a digital representation of the value that can be traded or transferred digitally, can be used for investment purposes, and does not include digital representations of paper currencies, securities or other funds.

The activities that fall under virtual assets include the provision of virtual asset services in the UAE. 

As for virtual assets service providers , they are any legal person practicing one or more activities related to virtual assets or the related processes for the benefit or on behalf of a person, such as the operator of the virtual assets platform, the broker of virtual assets and the custodian of virtual assets, and any other activities in accordance with the provisions of this Resolution.

The resolution defined Virtual Assets Platform as a digital platform for listing, trading and transferring ownership of virtual assets, conducting related clearing and settlement processes, and storing and saving information and data through distributed ledger technology or any other similar technology.

According to the resolution it aims to develop the legislative system of the virtual assets sector in the State, its related activities and service providers in a way that defines and guarantees the rights and duties of all related parties. 

The resolution will also regulate the virtual assets sector in the State and its related activities and service providers and will be compliant with all all provisions of the Federal Decree-Law No. (20) of 2018 concerning Combating Money Laundering Crimes, Combating Financing of Terrorism and Financing of Illegal Organizations, as amended, and its executive regulations and applicable legislations related to the sector.

The resolution also seeks to protect investors in virtual assets from illegal practices.

The virtual asset regulation will cover all entities within the UAE including free zones, except for those within financial free zones such as ADGM and DIFC, which work with entities offering digital securities and digital commodity contracts. 

There is an exception for entities working in the virtual assets for payment purposes, and stored value facilities. They will fall under the jurisdiction of the Central Bank of UAE. However virtual asset platforms are not included under Central Bank jurisdiction.

As per the decision no one can engage in virtual asset activities unless they are licensed. The UAE Securities and Commodities Authority will offer licenses for the following activities:

a. provision of Virtual Asset Platform operation and management services;

b. provision of exchange services between one or more forms of virtual assets;

c. provision of Virtual Asset transfer services;

d. provision of brokerage services in trading operations in Virtual Assets;

e. provision of Virtual Asset custody, management, and control services; and

f. provision of financial services related to offering and/or selling by the issuer to the Virtual assets, or participating in providing those services.

Licensed entities must meet minimum requirements such as not being a sanctioned or on terrorism lists especially those concerned with combating money laundering and combating the financing of terrorism and illegal organizations, and not be subject to any criminal investigations within or outside the State during the submission or study of the application for registration, and that no final judicial judgment has been rendered against him in the crime of money laundering, financing terrorism, or financing illegal organizations;

In addition the entities seeking license need to implement technical systems that are able to protect investor data in accordance with international best practices, current technology and/or cybersecurity standards. 

These entities also need to meet the capital requirements and conditions, credit guarantees, insurances, compliance management systems and other rules in accordance with the executive resolutions issued by the Authority.

Finally the UAE SCA has the authority to suspend listing or trading virtual assets, or the technologies used by these services providers, or the operation of virtual asset platforms. 

The authority can impose financial fines not exceeding AED (10,000,000) ten million AED equivalent to $2.7 million.

This is the first time that the UAE has endorsed its onshore virtual asset regulations, it will now be time to see who can meet these regulations and who will not. 

As per a recent PWC Crypto regulation report 2023, the UAE has finalized its crypto regulation, includes AML/ CTF Money laundering and counter terrorist financing rules as well as its travel rule and has already prepared the stablecoin regulation for payments which is awaiting final legislation. ( refer to graph page 8 of report).

For those not familiar with the travel rule, it is a Bank Secrecy Act (BSA) rule [31 CFR 103.33) which requires all financial institutions to pass on certain information to the next financial institution, in certain funds transmittals involving more than one financial institution.

This PwC Global Crypto Regulation 2023 report provides an overview of the crypto regulation landscape, with a focus on financial services. It offers insights into how the regulatory frameworks are developing across the world and seeks to identify how this may impact relevant industry participants and virtual service providers within the financial services sector.

The report notes that UAE authorities are assessing their approach to areas including stablecoins and wider DeFi.

In addition as per the report, the Central Bank of UAE is establishing its position in communicating permissible virtual asset activities to local banks. These include opening accounts for Virtual Asset Service Providers (VASPs) better known as crypto exchanges. 

 UAE Securities Commodities Authority with its Decision on Crypto Assets Activities Regulation (CAAR), regulates the offering, issuing, listing and trading of crypto assets in onshore UAE. This includes the initial coin offering exchanges, marketplaces, crowdfunding platforms, custodian services and related financial services based upon or leveraging crypto assets.

In December 2022 the UAE Cabinet updates some of its legislations including those pertaining to virtual business and virtual assets allowing them to be regulated onshore.

As for the rest of the GCC and Arab countries, the report notes that Bahrain has implemented crypto regulations and AML/CTF  yet has not implemented neither the travel rule nor stablecoin regulations for payments.

Jordan, Kuwait, and Oman have not initiated a crypto regulation process, while KSA and Qatar have prohibited cryptocurrencies.

It is interesting that while the report for example considers that Oman has not initiated the crypto regulation process, Oman had announced in 2021 that it was launching through the Central Bank a high level Oman cryptocurrency task force to study the economic advantages and disadvantages of authorizing the use of cryptocurrencies in the country.

In January 2022 Oman capital markets Authority announced a tender for specialized companies to assist in setting up a legislative and regulatory framework for virtual assets and licensing supervision and regulations of Virtual assets service providers within the Sultanate of Oman. Since then no other announcements have been made.

Both Bahrain and Oman have allowed crypto payments to be made in the country through virtual asset providers. Oman based, cryptocurrency broker, Easy Coins launched its trial of Tether USDT on the Tron Blockchain. Accordingly Easy Coin users in Oman can now purchase TRC20 USDT. At the end of 2021 there were 43 thousand registered crypto wallet addresses in Oman.

In the meantime even stablecoins are being trialled in Oman. The Oman Water and Waste Water Services Company (OWWSC), member of Nama Group, to trial a stablecoin linked to the Oman Riyal. The company signed an MOU with Oman based Digital Digits, the creators of Easy coins and Connected Chains to trial “ Hasalah” a stablecoin Wallet.

While in Bahrain EazyPay, a payments solution provider partnered with Binance’s Binance Pay to launch a regulated and approved crypto payments service offering in the Kingdom.

The Kingdom of Saudi Arabia crypto traders and investors are growing despite the ban on cryptocurrencies and the Central Bank of Saudi Arabia has created a division to study implementation of virtual assets and CBDCs. In 2022, Qatar announced the introduction of its blockchain blueprint for the country.

So while regulations are essential for the growth of crypto ecosystem, and the UAE is leading in this regards, it doesn’t mean that crypto is not being utilized in other countries regardless of their regulatory status.