Technological innovations are advancing and transforming the financial service industry in the Middle East. The constant advancement of new technologies has paved a path to new innovations and opportunities to significant changes globally. The developments of distributed ledger technologies (DLT) have seen an emergence of digital assets, including virtual coins or tokens for the facilitation of economic transactions and transfer of value.
The UAE has regulations that are set in place to monitor and regulate the emerging blockchain industry in the region and certain federal authorities that govern these regulations. The federal regulators for the financial and capital markets in the UAE are the United Arab Emirates Central Bank and Securities and Commodities Authority (SCA). There are different legal regulatory positions adopted by the UAE federal regulators – the Central Bank, SCA, free zone regulators, the Dubai Financial Service Authority (DFSA), and the Financial Service Regulatory Authority (FSRA). With the objective of being at the forefront of new business regulations, the UAE will aim to carve a dominant space in the field of blockchain as the use of coins and virtual tokens are creating an impact in the UAE market. The Abu Dhabi Global Market (ADGM) has introduced its virtual asset regulations ahead of time, hence has gathered worldwide recognition and has attracted several centralized crypto exchanges to operate out of ADGM.
In regard to ADGM, the regulations of blockchain and cryptocurrency projects in the UAE are performed by the FSRA, and the authority publishes guidance on cryptocurrencies. It also monitors blockchain businesses and companies to ensure transparency, and prevent money laundering or any financial terrorism. The other authorities such as the SCA and the DFSA will aim to contribute to the regulations of cryptocurrencies in UAE in the future. The DFSA is an independent regulator of financial services that are conducted in or from the DIFC, which is a financial free-zone in the UAE. The DFSA’s regulatory mandate includes asset management, securities, collective investment funds, custody and trust services etc. The DFSA is also responsible for supervising and enforcing anti money laundering (AML) and counter- terrorist financing (CTF) requirements that are applicable in the DIFC. The Dubai Multi Commodities Center Free Zone (DMCC) is considered to be the world’s most interconnected free-zone, which is a leading trade and enterprise hub for commodities. It handles legal licensing of a crypto currency company in the UAE.
As of today, there is no Crypto law in the UAE. There are however, regulations set in place such as the Regulation of Crypto Asset Activities in ADGM by the FSRA which is the most detailed guide of Cryptocurrencies in the UAE. With this the SCA aims to complete the legislative infrastructure for the crypto assets in relation to financial markets and instruments, in addition to commodities from one side as well as the licensing of financial activities that are related to crypto assets to ensure security while encouraging innovations and competition in the financial sector.
As of 2018, the UAE Government launched the Emirates Blockchain Strategy 2021 and will start to use blockchain for digital transactions, while ensuring that each customer has a unique identification number that consists of their information in order to make the chain more secure. The main aim is to prevent any hackers from stealing or changing the information and data on the blockchain platform which will ensure digital security of transactions as well as national documents. It will also eventually reduce operational costs, and has the ability to improve and escalate the decision-making process.
This set of regulation was issued under section 15(2) of the Financial Services and Market Regulations (FSMR), and is applicable to an individual to carry on a regulated activity in relation to virtual assets in or from ADGM. This regulation is primarily focused on the FSRA’s treatment and conduct of these financial service activities. The FSRA has defined the Virtual Assets for the purpose of setting up a framework and is as follows: “Virtual Asset means a digital representation of value that can be digitally traded and functions as
(1) a medium for exchange; and/or
(2) a unit of account; and/or
(3) a store of value, but does not have legal tender status in any jurisdiction.”
This regulation is primarily focused on Virtual Assets. Treated as commodities, therefore not considered as investments under the FSRM. Market intermediaries such as brokers, custodians, asset managers etc. must be licensed and approved by the FSRA before dealing in or managing Virtual Assets, as well as multilateral trading facilities using Virtual Assets. Only activities that are accepted as Virtual Assets will be permitted. Capital formation activities are not provided in this regulation such as activities not predicted or foreseen under the Market Rules (MKT).
This framework does not intend to apply to the following:
I. Initial coin offering (ICO) whether it be digital securities or utility tokens, or other capital formation. The FSRA has a regulatory treatment of ICOs under the FSRA’s ICO Guidance and Digital Securities Guidance.
II. The creation or administration of any Virtual Asset that is not accepted by the federal authorities.
III. The development, dissemination or use of software for the purpose of mining or creating a Virtual Asset
IV. Any other activity in relation to Virtual Assets that is considered by the regulator to not be a regulated activity, or where the objectives of the regulator is not pursued.
I. In contrast to fiat currencies which are created and issued by governments and stored and transferred in banks, virtual assets can enable users to create, store and transfer Virtual Assets without the need of a third party. This in turn, creates a set of challenges for regulators worldwide, and the system is open to financial crime and other risks without regulated entities controlling the creation and use of Virtual Assets.
II. The Virtual Asset framework effectively addresses the key risks that the trading of Virtual Assets poses. FSRA understands that the regulation of anti-money laundering and combating of financial terrorism risks is not sufficient enough to mitigate other related risks. The increased adoption of Virtual Assets worldwide as a method for financial transactions has significantly increased potential risks that impacts the stability of the financial industry. The issue is that there are no current safety measures set in place to ensure that users will be able to recover their Virtual Assets in cases of loss or theft.
III. The FSRA has addressed issues surrounding consumer protection, technology governance, market abuse, disclosure/transparency, and the regulation of Multilateral Trading Facilities using Virtual Assets in a manner similar to the regulatory approach taken in relation to security exchanges globally.
This set of regulations is issued under section 15(2) of the Financial Services and Market Regulations 2015 (FSMR), and is applicable for those wishing to utilize ICOs to raise funds. The table below will aim to summarize the regulation of virtual tokens and Crypto Assets Category of Instruments Regulatory Approach Security Tokens E.g., virtual tokens such as shares, debentures, investment funds Pursuant to Paragraph 58(2)(b) of FSMR.
All financial service activities in relation to a security token will be subject to relevant regulatory requirements under the FSMR. FSRA will need to approve market operators and market intermediaries dealing with security token investments, or recognized investment exchanges. Crypto Assets (Non-fiat virtual currencies) It is treated as a commodity and therefore not considered as a specified investment under FSMR. Market intermediaries and market operators dealing in crypto assets will need to be approved by the FSRA. Utility Tokens or Non-Security Tokens (Virtual tokens that do not exhibit the features of a regulated investment under the FSMR) are treated as a commodity and therefore not considered as a specified investment under FSMR. Unless specified under the definition of crypto assets, transactions and spot trading of Utility Tokens is not constituted as a regulated activity under a recognized authority. Collective Investment Funds of Crypto Assets, Security Tokens and Utility Tokens Regulated as Specified Investments under the FSMR. Market Intermediaries and market operators that manage investments such investment funds will need to be approved by the FRSA as FSP holders.
The blockchain and cryptocurrency platform in the UAE is significantly new and there are no laws governing this industry yet, however with the UAE’s rise of innovation and use of technological platforms, there are regulations set by the federal authority to govern and regulate cryptocurrency and blockchain in the UAE.