Crypto License in UAE – Legal Framework
The United Arabs Emirates (UAE) has one of the most complex legal situations on various things, including cryptocurrencies. When looking to understand if and how the UAE regulates cryptocurrency, it’ll be good to know the state consists of seven emirates. Ras Al Khaimah, Fujairah, Umm Al-Quiwain, Ajman, Dubai, Abu Dhabi, and Sharjah are the seven emirates that form the UAE Despite the existence of federal law, each Emirate has specific regulations in regions. Besides the specified emirates law, the state has four main judicial authorities to ensure firms and individuals follow regulations. These judicial authorities include Ras Al Khaimah, the Federal Judicial Authority, Dubai, and Abu Dhabi.
The Commodities Authority (SCA), the securities, and the Central Bank (CBUAE) are the main bodies governing the capital and monetary markets. The state also allows some institutions to enjoy the regulatory powers of capital and monetary markets. For instance, the Dubai Financial Services Authority (DFSA) is one of the regulators in the Dubai International Financial Center (DIFC) area. In addition, the Financial Service Regulatory Authority (FSRA) regulates the Abu Dhabi Global Market (ADGM) part.
Experts reveal that it’s good to mention that CBUAE started regulating digital currencies in 2017. It’s a great insight when shedding light on the evolution of cryptocurrency regulation in the UAE. In 2017, the law stated that all digital assets transactions were to pass through authorized exchanges. In addition, the transactions were to comply with the CBUAE set Anti-Money Laundering regulations. Thus, the regulations made individuals observe a regulatory focus on using digital assets for illicit activities.
The Financial Services Regulatory Authority (FSRA) in the Abu Dhabi Global Market (ADGM) issued guidance and regulations in 2020. The guidance aimed at regulating virtual security activities in the ADGM. In 2022, the FSRA issued additional guidance on Virtual Assets Activities regulations. In addition, the Security and Commodity (SCA) issued a comprehensive Crypto Assets Activities Regulation (CAAR) in 2020. The CAAR 2020 helped to regulate the main crypto asset aspects in the UAE. The aspects included a promotion, issuance, and operating custody or exchange. The Emirate of Dubai introduced the Virtual Assets Law in early 2022 and operationalized the Virtual Assets Regulatory Authority (VARA) as the Emirate’s primary authority to regulate primary virtual assets.
Law No.4 of 2022 on regulating digital assets in Dubai worked in different ways to ensure that firms comply. The law aimed to design much-warranted international standards to enhance Virtual Asset (VA) industry governance and create a legal framework protecting investors from promoting proper business growth. This law applies throughout the Emirates (including free and special development zones) except the Dubai International Financial Center.
Crypto License in UAE – Dubai Virtual Assets Regulatory Authority (VARA)
VARA is the sole authority responsible for regulating digital assets throughout Dubai
The emirates set up the authority to help achieve Law no.4 goals and objectives It has financial autonomy and legal personality that links to the Dubai World Trade Center Authority (DWTCA). The authority will regulate and license the digital asset sector throughout Dubai’s mainland and free zone territories. Nevertheless, its jurisdiction doesn’t extend to the DIFC, as the law allows it to cover various virtual currency activities in the onshore Dubai territories out of the DIFC With the absence of a passporting regime between the DIFC and the Onshore UAE, companies are free to choose their preferred jurisdiction for licensing. However, companies wishing to offer their services in the DIFC and the Onshore UAE must get licenses from both jurisdictions to operate legally.
The VARA coordinates with the Securities & Commodities and the Central Bank of the UAE to provide a wide range of services. The Emirate mandates the authority to set controls and rules for conducting various virtual assets-related activities. These activities include clearing & settlement services, management services, and specifying & classifying types of digital assets.
Objectives of the VARA DUBAI
Dubai created the authority (VARA) with plans to enhance a strong virtual economy. The Dubai Virtual Asset Regulation Law provides a legal framework to help achieve a strong digital economy. The legal framework ensures proper industry governance and protects investors’ rights. The VARA works to meet the following objectives:
• Raise virtual asset services awareness and encourage more investments in digital assets.
• Promote the emirates (Dubai) as an international digital asset hub and boost the Emirate’s competitive edge in the digital economy development.
• Attract digital asset companies to have their base in Dubai.
• Develop regulations for companies or individuals dealing in digital assets to prevent illegal practices.
• Supervise and regulate all virtual asset-related matters.
The Dubai Virtual Asset Regulation Law mandates the Virtual Assets Authority (VARA) with the following powers and duties:
• Propose legislation or laws for regulating digital asset services.
• Develop a general policy and strategic plans for regulating virtual asset services.
• Oversee, regulate and supervise virtual assets or tokens processes.
• Issue and regulate permits to qualifying virtual asset firms and oversee compliance.
• Classify types of virtual assets & tokens and prescribe the appropriate standards and rules for trading.
• Establish rules governing virtual asset-related assets.
• Educate beneficiaries and raise awareness on different types of digital assets and their potential risks.
• Monitor virtual asset wallets & distributed ledger technology, virtual asset platforms, and prevent virtual assets price manipulations.
• Educate population on crypto and blockchain.
The Independent Regulator for Virtual Assets (VARA) in Dubai launched its operations officially on August 25th, 2022. The regulator started by issuing licensing regulations on digital tokens or coins. The announcement included regulatory guidelines on virtual assets marketing, statutory penalties, and fines for not complying with the regulations.
VARA issued the regulations under two separate forms or ways. The separate regulations included the Administrative Order No 1 relating to the regulation of promotions and marketing advertising related to digital assets. The other regulation was the 2022 Administrative Order No2 which includes the penalties and fines for non-compliance.
Marketing Regulation
Ultimately, the Marketing Regulation sets the required standards and form for promoting or marketing virtual assets. The principle states that all firms ensure their promotion and marketing don’t mislead. For instance, they should avoid prominent disclaimers or inducing sales by implication of advising individuals to purchase virtual assets using loans.
Crypto License in UAE, in DMCC
The Dubai Multi Commodities Center (DMCC) opened another Crypto Center for companies developing various blockchain and crypto technologies.
The main aim of opening the Center was to expand the crypto asset usage in the Emirate. The DMCC comprises firms issuing, listing, offering, and trading crypto assets. In addition, it houses companies developing blockchain or crypto trading platforms that the national government fully supports.
A crypto license in DMCC is issued only to trustworthy projects. Thera are two types of crypto licesnes:
License for cryptocurrency trading:
Cryptocurrency trading license allows you to trade in your own interests and own assets. This crypto license does not imply and does not allow the offer of services for the exchange, brokerage or management of third-party assets.
The minimum capital required is AED 50,000.
License for distributed ledger technology services:
Under this type of crypto license, companies are allowed to provide database management services and provide distributed ledger technology. This license is intended for and issued to companies that are exclusively engaged in development and do not provide services to the public.
Crypto License in UAE in DIFC
In September 2021, the Dubai Financial Services Authority (DFSA) in the Dubai International Financial Center (DIFC) began the process of regulating cryptocurrency. The regulator started by introducing investment tokens or currencies. The spotlight focuses on the DFSA as it tries to make wholesome changes to its regulatory regime about recognized crypto tokens from November 1st, 2022.
The client alert provides a guideline or overview of the different crypto token categories. In addition, it was to focus on the expectations of companies dealing with different crypto tokens and digital currencies in conjunction with impending DFSA regulations.
What are crypto tokens versus investment tokens?
In contrast, the DFSA defines a crypto token as a toke with one or more of the following characteristics:
2. It confers an interest or a right in another token meeting the requirements in the first characteristics.
– Investment token
– A derivative
– A utility token
– A non-fungible token (NFT)
– A UAE Central Bank Digital Currency
In addition, a crypto token is neither a prohibited nor unrecognized token, which is commonly an algorithmic or privacy token.
You can only transact recognized crypto tokens in and from the DIFC, based on the DFSA regulations.
What financial activities can you practice with crypto and investment tokens within the DIFC?
1. The regulatory status of the crypto-token in other jurisdictions, including the fact that it has been evaluated and approved for use by a regulatory body in another recognized country.
2. The degree of transparency regarding a crypto-token, including details of its purpose, protocols, consensus mechanism, governance mechanisms, founders, key persons, miners and significant holders.
3. Size, liquidity and volatility.
4. The adequacy and suitability of the technology used for the crypto-token.
5. Adequacy of the level of risks associated with the crypto-token, including risks related to governance, legal and regulatory issues, cybersecurity, money laundering, market abuse and other financial crimes.
It is worth noting that derivative financial instruments, such as futures contracts or options, can also be issued in the form of cryptocurrencies. However, these derivatives will be considered investment tokens and not crypto tokens. Similarly, if the arrangements associated with the token are a collective investment fund, then the token will be considered a share and therefore a security, not a crypto token.
What financial transactions can be carried out with investment tokens and crypto-tokens in DIFC or from its territory?
You can trade investment tokens on a trading facility or clear them through a clearing house A dealer, working as an agent or principal, can also make the transactions. In addition, a financial adviser can arrange investment deals related to managing assets or investing tokens.
An authorized agent or principal can also deal with recognized crypto tokens or arrange investment deals. Asset managers can also manage these tokens, while financial advisers provide the appropriate advice on the custody of these digital currencies. In addition, they are allowed to be transferred to custody. To trade recognized crypto-tokens firms require a valid Multilateral Trading Facility (MTF) license and a DFSA endorsement to trade recognized crypto tokens.
Nevertheless, the regulation prevents a crowdfunding operator from offering crypto tokens. In addition, money service providers can’t use digital tokens in connection with other services or businesses except in limited positions. Lastly, individuals can’t trade crypto tokens on an organized Trading Facility (OTF) or promotion on representative offices.
What are the excluded & prohibited tokens and related financial programs that the regulations prohibit from or in the DIFC?
The regulation prohibits crypto token-related financial promotion that the DFSA doesn’t consider as recognized cryptocurrency. Privacy and algorithmic tokens.
A privacy token is one of the prohibited crypto tokens that manufacturers use technological features to anonymize, hide, prevent or obscure the tracing of vital information. The features hide the holder’s identity, transaction value, cryptographic keys, and beneficial owners.
In contrast, algorithmic tokens are prohibited crypto tokens that use a specific algorithm to decrease or increase the supply to reduce or stabilize its price volatility.
The law requires that licensed firms consider staking decentralized finance (DeFi) and crypto tokens appropriately. It’ll be good for the firms to consider it appropriately, as staking is only available to non-retail clients. Nonetheless, the sole purpose of lending is for borrowers to participate in the proof-of-stake mechanism.
What do firms looking to deal with recognized crypto tokens need to be compliant with DFSA regulations?
The DFSA from November 1st, 2022, has started providing licenses to companies that want to offer or are currently providing recognized crypto tokens from or in the DIFC. These firms have to submit a pre-application to the authority via the DFSA website. The regulation applies to the existing DFSA-authorized companies wishing to obtain a varying license, allowing them to deal in recognized digital tokens.
Crypto License in UAE in ADGM
The FSMRs divide digital tokens and coins into two broad classes. The currently regulated virtual assets, such as digital securities, virtual currencies, fiat tokens, funds, and derivatives, make the first class. The second class includes utility tokens (for example, tokens that can be exchanged for access to a specific product or service, usually provided using a DLT platform).
Prospects for the development of crypto regulations in the UAE
In addition, Dubai has held various national engagements with the online network of the digital world (metaverse) to allow for human interaction. The Dubai Municipality announced in March 2022 the plans for having One Human Reality, a model city in the metaverse. Subsequently, Emirates announced the formation of a higher regulatory committee. The committee is responsible for preparing the Dubai Metaverse Strategy and enhancing Dubai’s position as a worldwide center for the new metaverse technology. In addition, the committee was to supervise Dubai’s current and future technological developments. VARA also established the MetaHQ through the Sandbox metaverse platform.
Survey shows that UAE’s local and federal institutions fully weigh targets or consider the development of the virtual economy.