The price of Dubai’s first cryptocurrency, DubaiCoin (DBIX), launched by UAE-based company Arabianchain Technology, gained 1000% in just 24 hours. The cause of this surge in the price from $0.17 to $1.13 can be traced to the company’s false claim of announcing DubaiCoin as the official digital currency of Dubai. This prompted the Government of Dubai Media Office to issue a statement warning the public about the website’s design which aimed to steal personal information through an elaborate phishing campaign as the coin had received no official approval from any authority. Though cryptocurrency has the potential to open a new future for the financial world, many countries including the UAE are reluctant to embrace the changes it will bring about. This is the primary reason why the cryptocurrency sector is under a legally grey area in the UAE without any specific legalization. However, there are rules and regulations on the use of crypto assets including cryptocurrency that was recently issued.
The FSRA (Financial Services Regulatory Authority) regulates virtual assets (originally called crypto assets) in the ADGM (Abu Dhabi Global Market) after its first publication of the guidance on ‘Regulation of Crypto Asset Activities in ADGM’ in 2018, the latest amended update of the publication being the ‘Regulation of Virtual Asset Activities in ADGM’ in 2020. A Virtual Asset is defined by the FSRA as a digital representation of value that may be traded digitally and acts as
As the first global regulator to allow the trading of Virtual Assets as Multilateral Trading Facilities, the FSRA prioritizes proper governance, oversight, and transparency with regard to the users of this free zone. This is achieved by establishing requirements concerning market surveillance, settlement, transaction recording, transparency, and other systems and controls. Chapters 5.3 and 5.4 in the ADGM General Rulebook (GEN) outline the Controlled Functions and the Recognized Functions that financial services entities are required to fulfill. Controlled Functions (Ch. 5.3 ADGM GEN) are specific resource requirements that need to be approved by the FSRA, which is a list of Approved Persons allowed to carry out such activities. 5.3.1(1) states that Rules 5.3.2 to 5.3.4 are the Controlled Functions:
5.3.2 The Senior Executive Officer function is carried out by an individual who:
5.3.3 Subject to Rule 5.5.4, the Licensed Director function is carried out by an individual who is a Director of an Authorized Person which is a Body Corporate.
5.3.4 The Licensed Partner function is carried out by an Authorized Person, which is a Partnership, by an individual specified in Rule 5.5.5.
The entities appoint recognized Functions (Ch. 5.4 ADGM GEN) after obtaining approval from the FSRA. 5.4.1 lists Rules 5.4.5 to 5.4.9 as the Controlled Functions:
5.4.5 The Finance Officer function is carried out by an individual who is a Director, Partner or Senior Manager of an Authorized Person who has responsibility for the Authorized Person’s compliance with the applicable Rules in PRU or PIN.
5.4.6 The Compliance Officer function is carried out by an individual who is a Director, Partner, or Senior Manager of an Authorized Person who has responsibility for compliance matters in relation to the Authorized Person’s Regulated Activities.
5.4.7 The Senior Manager function is carried out by an individual who is responsible either alone or jointly with other individuals for the management, supervision, or control of one or more parts of an Authorized Person’s Regulated Activities who is:
5.4.8 The Money Laundering Reporting Officer function is carried out by an individual who is a Director, Partner or Senior Manager of an Authorized Person and who has responsibility for the implementation of an Authorized Person’s anti-money laundering policies, procedures, systems and controls and day to day oversight of its compliance with the Rules in AML and any relevant anti-money laundering Rules.
5.4.9 The Responsible Officer function is carried out by an individual who:
Following technological developments, the Central Bank of UAE (CBUAE) issued an amended Regulatory Framework on Stored Value Facilities Regulation (“SVF Regulations”) including crypto-assets in September 2020. It defines crypto-assets as “digital representations of value or contractual rights that are cryptographically protected and may be transmitted, stored, or exchanged electronically via a distributed ledger system (DLT)”. However, CBUAE has stated that crypto-assets or virtual assets will not be identified as legal tender and only be utilized as a high-risk investment asset.
A recent legal development with regards to cryptocurrency is the “The Authority’s Chairman of the Board of Directors Decision Number 21/R.M of 2020 Concerning the Regulation of Crypto Assets” issued by the Securities and Commodities Authority (SCA) in the UAE. The Decision, issued in November 2020, interprets crypto assets as a “record within an electronic network or distribution database functioning as a medium for exchange, storage of value, unit of account, representation of ownership, economic rights, or right of access or utility of any kind, when capable of being transferred electronically from one holder to another through the operation of computer software or an algorithm governing its use.” Any person who wants to set up cryptocurrency services in the UAE must fall within the scope of the Decision as laid out in Art. 3 and follow the licensing rules imposed by the Decision (Arts. 12, 15, and 16). This mainly involves all financial services that capitalize on crypto-assets such ICOs, exchanges, marketplaces, crowdfunding platforms, custodian services, and other related services. Crypto-asset providers are required to be incorporated within the UAE or the financial free zones (the Dubai International Financial Centre or the Abu Dhabi Global Market). Licensees may ‘passport’ the recording of crypto assets on a single cryptocurrency exchange or multiple if preferred. Alternatively, crypto-asset providers who wish to provide services within the UAE shall be licensed by the SCA. The applicants must strictly adhere to the UAE’s anti-money laundering and counter-terrorism financing laws, cybersecurity compliance standards, and data protection regulations following the SCA’s procedure.
According to the decision, crypto assets may be offered to two classes of people:
Before offering the crypto assets to investors, licensees shall file documents of Qualified Investors with the SCA and obtain prior approval from the SCA for Non-Qualified Investors. All customers are classified and assessed as ‘high risk’ to protect customers from money laundering and as a part of checks on potential investors. This is accomplished by conducting ‘enhanced due diligence’ into a customer’s source of funds, political exposure risks, ultimate beneficial ownership structure, the potential risks of customers being used as channels for money laundering activities, and any geographical perils presented by customers, their directors, shareholders, and associated suppliers and intermediaries.
Furthermore, a Memorandum of Understanding (MoU) was drawn between the world’s flagship Free Zone and Government of Dubai Authority on commodities trade and enterprise, and the SCA on March 2021, creating a directing framework for businesses offering, listing, trading, and issuing crypto assets in (Dubai Multi Commodities Centre) DMCC.
The latest legal development with regards to cryptocurrency is the Framework for Regulating Security Tokens published by the Dubai Financial Services Authority (DFSA) to seek public comments regarding the provisions, in the form of Consultation Paper No. 138. Though it is yet to be finalized, the DFSA has drafted a regulatory framework for Security Tokens as a first step toward controlling tokens that are issued and distributed via DLT or similar technology such as stable coins and cryptocurrencies. The Paper also proposes to undertake to regulate exchange tokens and utility tokens in the near future.
Thus, even if cryptocurrencies and other digital assets do not fall into a specific jurisdiction in the UAE’s legal system, the country is showing a trend of partaking in the cryptocurrency revolution. As the most ‘cryptocurrency-friendly country among the Middle Eastern nations, the UAE is expected to completely legalize the cryptocurrency sector in the upcoming years. To know more about the cryptocurrency regulations reach the well-qualified lawyers at Fotislaw.