Virtual Assets In The UAE – Updates You Need To Know

Commercial laws in the UAE have undergone major reforms lately, and have been enforced with a sense of evolving the whole business setup established in Dubai and the rest of the country so that it is able to meet the demands raised in the future. The recently enforced Cabinet Decision No. 111 of 2022 on the Regulation of Virtual Assets and their Service Providers, which is another legislative advancement, constructs a standard for businesses involved in virtual assets, and throws light on how they will be regulated.

 

What was the regime governing virtual assets in the UAE before the enactment of this new Cabinet Decision?

The new Cabinet Decision is not exactly the first legislation on virtual assets – the Civil and Commercial Transactions Laws, the Federal Law on Central Bank and Organization of Financial Institutions and Activities of 2018, along with various regulations of the Central Bank and the Securities and Commodities Authority together created a basis for crypto laws in the UAE. Further, a comprehensive framework for crypto already existed in the Abu Dhabi Global Market, regulated by the Financial Services Regulatory Authority. Moreover, in 2022, the emirate of Dubai issued its own comprehensive virtual asset law and established the Dubai Virtual Assets Regulation Authority, to govern activities related to virtual assets in Dubai. 

However, the new Cabinet Decision provides for the definitive and robust legal framework that was much awaited, at the federal level, and as stated in Article 2, its aim is to create an economic and financial environment which attracts large-scale investment from outside. It also obligates those covered under it to adhere to the provisions of the Money Laundering Law, and maintains an interaction between the federal and local authorities.

The following text contains an overview of the salient features of the Decision.

 

What is the scope of application of the Decision?

The provisions of the new Virtual Assets Regulation are applicable to the virtual asset sector, virtual asset activities, and virtual asset service providers within the UAE, including the Free Zones. However, it is not applicable to:

1. Regulation and transactions of virtual assets in the Financial Free Zones
2. Digital securities and digital commodity contracts having their own regulations
3. Payment instruments under the Central Bank’s jurisdiction, except for those explicitly mentioned by the Bank for listing and trading for investment in the virtual asset platform

The activities subject to licensing under Article 5 of the Decision are:

1. Services for operating and managing virtual asset platforms
2. Services for exchange between one or more forms of virtual assets
3. Services for transfer of virtual assets
4. Brokerage services in virtual assets’ trading
5. Services for custody, management and control over virtual assets
6. Financial services related to the Issuer’s offer and/or sale of virtual assets involved in such services

 

Can you list the requirements needed to be fulfilled before getting a license as per the Decision?

As per Article 4 of the Cabinet Decision, anyone dealing in activities related to virtual assets in the UAE is required to obtain a license from either the Securities and Commodities Authority or any of the local licensing authorities in the concerned emirate. He will also be required to obtain all permits from the relevant authority before commencing license procedure.

Article 7 of the Decision lays down certain requirements that Virtual Asset Service Providers need to fulfil in order to obtain a license:

1. The license applicant or the partners must not be named under the lists of sanctions or terrorist watchlists issued in the UAE or internationally, especially those related to money laundering and financing terrorist and illegal organizations
2. They should not have any criminal investigation ongoing against them, whether inside or outside the UAE, and at the time of getting registered they must not have any judgement issued against their name in a case for money laundering or financing terrorist or illegal organizations
3. The Virtual Asset Service Providers must use technical systems that are capable enough to protect the data of investors in accordance with international best practices and latest technology standards
4. They must keep up with the requirements for capital, securities, credit guarantees, compliance management systems etc. as per this Decision
5. They must provide services to the investors in compliance with the rules of this Decision and must disclose all risks in a clear manner
6. The Virtual Asset Service Providers are required to comply with the rules of Federal Decree-Law No. 20 of 2018 On Combating Money Laundering and the Financing of Terrorism and Illegal Organizations, along with other necessary requirements
7. There must be an effective mechanism in place to notify the authorities in cases of security breaches or other acts of cybercrime

 

Which authority is designated for regulating virtual asset service providers in the UAE?

The designated authority for regulation of virtual assets in UAE, as indicated above, is the Securities and Commodities Authority (SCA). It has the power, as per Article 6 of the Cabinet Decision, to regulate and control Virtual Asset Service Providers and their activities in the UAE, issue decisions in this regard, ensure their compliance with the relevant laws, and raising awareness of risks associated with the Virtual Asset sector.

Apart from the SCA, there will be specific authorities for each emirate, which are also granted similar powers under Article 9 of the Decision, but on a lesser scale.

 

Are there any penalties under the Decision?

Those covered under this Decision if found violating the rules set out in it, may face certain penalties, such as cancellation of license, discontinuation of services, or imposition of fines which may go up to 10 million dirhams.

 

The Cabinet Decision came into force on January 14, 2023, and service providers falling under the ambit are given a transition period of 3 months from the date, to comply with the requirements mentioned above. Overall, this is a welcome step given the current importance the UAE accords to the virtual asset sector.