In the latest raft of UAE regulations regarding Virtual Assets (see previous article The Cryptosphere and the UAE), the UAE issued Cabinet Resolution No. 111 of 2022 regulating Virtual Assets and Related Service Providers, which came into effect on 15 January 2023 (the Resolution).
This Resolution adds to the growing number of regulations in the UAE governing Virtual Assets, including those issued in Dubai and the Financial Free Zones.
Virtual Assets are defined in the Resolution as “the digital representation of the value of a property that can be digitally traded or transferred, and can be used for investment purposes. It does not include the digital representation of paper currencies, securities or other funds” (VA).
VASPS are defined as “any legal person who carries on one or more activities or operations related to VA for the interest or on behalf of any person, including the VA platform operators, the VA brokers and the VA custodians and carries on any other activities in accordance with the provisions of the Resolution” (VASPs).
Scope of Application
The Resolution is notable for setting out a regulatory framework regarding Virtual Assets at the federal level as it applies to the VA sector and VASPs in the UAE, including Free Zones.
The Resolution also does not apply to:
- VAs inside Financial Free Zones (that is, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM));
- Digital securities and contracts of digital commodities which are governed by SCA regulations; and
- VAs used for payment including Stored Value Facilities, which fall under the remit of the UAE Central Bank (other than those approved by the UAE Central Bank to be listed and traded for the purpose of investment in the VA platform).
Objectives of the Resolution
The objectives of the Resolution are listed in Article 2 therein and include:
- Banking & Financedeveloping a legislative system for the VA sector in the UAE;
- ensuring the compliance by the VA sector of all applicable AML and CFT regulations;
- supporting the UAE Government’s investment and economic efforts to attract international companies operating in the VA sector to provide their services in the UAE; and
- the protection of investors in the VA sector from illegal activities.
Licensed Activities
Article 5 of the Resolution lists the activities which are subject to licensing by the Securities and Commodities Authority (SCA) and include:
- providing VA platforms operation and management services;
- providing exchange services between one or more forms of VAs;
- providing VA transfer services;
- providing brokerage services for trading of VAs; and
- providing VA custody and management services over VAs.
The list of licensed activities may be amended from time to time.
The Resolution states that it is prohibited for any person to engage in VA activities in the UAE without obtaining approval and a license either from the SCA or the local licensing authorities, as applicable; and that anyone carrying on VA Activities shall have the UAE as its domicile and shall take one of the legal forms approved by the local authorities concerned with commercial licenses. It is also noted that if one wishes to carry out VA Activities, one has to obtain the necessary initial approvals and permits from the SCA or local licensing authorities (as applicable) before proceeding with licensing procedures with the local authorities concerned with commercial licenses- which indicates the importance of implementing the approval process for the VA license before applying for a commercial license. One also notes that it is prohibited to deal with any person carrying on VA Activities in the UAE unless it is licensed by the SCA or the local licensing authorities, pursuant to the provisions of the Resolution.
Violations and Penalties
The SCA shall make a decision defining the violations and penalties in respect of actions committed in violation of the provisions of the Resolution which shall define the powers of the SCA or the local licensing authorities to impose one or more penalties including, without limitation:
- the issuance of a warning;
- the suspension of a listing or trading of VAs; and
- the imposition a fine of not more than AED 10,000,000 (Ten million dirhams).
Timeframe for compliance
All VASPs in the UAE who were licensed before the entry into force of the Resolution must satisfy all operational requirements and conditions pursuant to the provisions of the Resolution within three months of the date of entry into force of the Resolution. This time limit may be extended by the SCA.
Regulatory supervision by SCA
The Resolution clearly stipulates that the SCA is the responsible entity for supervising and controlling VA Activities, VASPS (including those licensed by the local licensing authorities) and VA transactions conducted inside the UAE, including in Free Zones and shall issue the resolutions required to regulate VA transactions and licensing of VASPs.
The SCA may delegate all or any of its functions set out in the Resolution to VASPs and it is also noted that the Cabinet may delegate any of the SCA’s functions to any of the local licensing authorities (for example, the Virtual Assets Regulatory Authority (VARA) which was established pursuant to Dubai Law No. 4 on Regulating Virtual Assets in the Emirate of Dubai) in accordance with rules set by the Cabinet.
The Way Ahead
We await the resolutions necessary for the implementation of the Resolution, which the Board of the SCA shall issue and which should provide further details and guidance on various aspects of the Resolution, including the inter-play between the SCA and local licensing authorities such as VARA.
In any event, it is clear that with the issuance of this federal level resolution, the UAE is committed to attracting investment in the VA sector whilst also ensuring that investors are protected. We can expect to see the UAE VA regulatory framework continue to be developed and strengthened.
For any queries on Virtual Assets or any other banking topic, please contact the Banking & Finance team.