To add further to the continued developing nature of the regulatory perimeter for virtual assets (“VA”) in the United Arab Emirates (“UAE”), the UAE Cabinet (“Cabinet”) has introduced a new regulation governing VAs which will be the first of its kind in this sector at a federal level (the “Decision”). The new regime will shape the UAE’s federal VA supervisory regime and bring activities pertaining to VAs, at an onshore level, within the regulatory purview.
As set out in the Decision, the objectives of the new regime will be to:
- formulate legislation to govern the VA sector and its service providers;
- create a licensing regime for VAs;
- align with local AML and CTF legislation;
- encourage investment within the sector and ensure that the UAE is an attractive environment for companies within this space; and
- protect investors from illegal practices.
Scope of the Decision
The Decision applies throughout the VA sector in the UAE and captures virtual asset service providers (“VASPs”). The Decision does not apply to the regulation of VAs in the financial free zones (i.e the DIFC and AGDM). The Decision also aims to strengthen existing legislation and in doing so, has excluded digital securities and digital commodity contracts which are governed by the Securities and Commodities Authority (“SCA”). VAs which are used for payment (including non-cash facilities exchanged online for goods/services) and governed by the UAE Central Bank (“Central Bank”) are also excluded, though the Decision is careful to caveat this by including VAs which the Central Bank approves for listing and trading on VA platforms under its remit. However, these assets must be listed and traded for investment purposes.
What are Virtual Assets and who does the Decision affect?
The Decision defines VAs as a numerical representation of a value that can be digitally traded or transferred and may be used for investment purposes. This does not include the digital representation of fiat currencies (e.g. the US Dollar) securities or other funds. The Decision also applies to VASPs in the UAE, with VASP being defined as ‘legal persons that carry out one or more activities related to VAs or related operations, for the benefit of or on behalf of a virtual asset platform, broker or custodian’. Importantly, the Decision limits the definition of a “virtual assets platform” to a digital platform which exists to list, trade and transfer VAs. Platforms which conduct VA clearing and settlement operations and/or store and maintain information and date through distributed log technology (a public or private digital database through which virtual asset transactions are recorded) and the like, also fall under this definition.
The Decision sets out a number of Virtual Asset Activities (as defined in the Decision) that would require licencing and therefore fall within scope. Though these activities are subject to local licencing authorities and Central Bank approval, they currently include:
- providing services for the operation and management of VA platforms;
- providing services for the exchange between one or more forms of VAs;
- providing services for the transfer of VAs;
- providing brokerage services in VA trading;
- providing services for the custody and management of VAs and enabling control over them; and/or
- providing financial services in connection with the issuer's offer and/or sale of VAs or participating in the provision of such services.
The carrying out of any of the regulated activities specified above would require a licence from the SCA or a local licencing authority that is subject to the SCA’s remit. Furthermore, the Decision sets out a number of minimum requirements that must be met by VASPs in order for them to qualify for a licence, which include the VASPs technical capability and requirements for capital, credit guarantees, securities, and other compliance and control management systems (which are to be later defined by executive decisions from the SCA).
Interestingly, the Decision requires anyone that decides to carry out Virtual Asset Activities to be based in the UAE “according to a legal form approved by the local authorities” and prohibits the dealing with any UAE persons unless they have a licence to do so. The Decision does not require, prime facie, any obligation to headquarter in the UAE which contrasts with Dubai's Virtual Assets Regulatory Authority (“VARA”) directions, which mandates firms headquartering in onshore Dubai prior to any licence being granted. The Decision is clear to note that the above activities may be amended or deleted from time to time, should it be required.
Administrating authorities and sanctions for violation
The Decision has designated the SCA as the administering authority for those VAs within scope of the Decision. As a result, the SCA, in conjunction with local licencing authorities, has broad supervisory and enforcement powers to ensure compliance, and to further the aim of protecting investors. The SCA also has assumed the competence to participate in organisations and events on behalf of the UAE, inviting local licencing authorities to participate as and when required.
The Decision has empowered the SCA to issue penalties for violations of the Decision, which include warnings, a suspension of all trading activity, a prohibition of the violating activity or platform, the cancellation of any existing licences, escalation to the attorney general, and a fine of up to AED10 million (USD $2.7 Million) or equal to the proceeds/avoided losses of the violation.
Timeframe for compliance
VASPs which fall within the scope of the Decision have three months from the date the Decision comes into force to comply. The Decision was published in the Official Gazette on 12 December 2022, and came into force thirty days from the date of its publication. As such, firms have until 11 April 2023 to apply for a licence and comply with the requisite requirements set out in the Decision
With the VA market rapidly evolving and the retail investor being more exposed to VAs, a consistent and clear regulatory framework within onshore UAE is welcomed and needed. However, it remains to be seen how in practice the Decision will be enforced and how additional regulations will be implemented to provide much needed clarity. Additionally with the VARA governing activities in respect of VAs in Dubai (onshore) it remains to be seen how the Decision will interact with the laws and regulations issued by the VARA and whether there will be any conflict or cross over in this regard.
The wide remit of the Decision which brings those who service onshore clients within scope, indicates that the Decision is much more far reaching than previous decisions and regulations. With UAE federal licensable activity traditionally capturing any “promotions, invitations, inducements or solicitation” to UAE persons, firms will need to consider whether any promotional activity or marketing of VAs brings them within the scope of the Decision and in turn require licensing.
CMS has leading experts within the virtual asset space in the Middle East and should any contacts or clients require further guidance, we encourage them to get in touch with the contacts listed.
Co-authored by Bernice Edwards and Justin Kwik