The United Arab Emirates (the UAE) is seeking to position itself as a major virtual assets hub. Over the past 100 years, the area that is now known as the UAE has transformed itself from a series of sheikhdoms, populated by fishing villages and nomadic tribes, into a major global financial hub. Virtual assets may now be about to play a key role in the next chapter of the nation’s story.
The UAE is a federation comprising seven Emirates. Whilst Abu Dhabi is the UAE’s capital, Dubai is generally seen as the UAE’s commercial centre. Taken together with five other Emirates, these component parts comprise the UAE. Each individual Emirate is permitted to exercise all powers not assigned to the Federation, including being authorised to issue their own laws and regulations. This means they each have considerable autonomy. As such, each Emirate has authority to issue its own virtual asset regulatory framework.
In order to encourage further economic growth in the UAE, around forty-five free zones have been established over the last few decades. Most of these are located in the Emirate of Dubai and two of them, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), are financial free zones. Typically, each free zone has its own rules and regulations and is managed and operated by a relevant authority, with the financial free zones having highly sophisticated standalone regulations often inspired by the English common law and which draw on international best practices. From a financial services regulatory perspective, the presence of several jurisdictions in one sovereign state creates some complexity.
The UAE’s onshore regulatory framework for financial services is administered by the Securities and Commodities Authority (SCA) and the Central Bank of the UAE (the CBUAE). The SCA and the CBUAE treat the DIFC and ADGM as if they are foreign jurisdictions and provide limited passporting rights to those operating in those jurisdictions. The Dubai Financial Services Authority (the DFSA) is the financial services regulator of the DIFC and the Financial Services Regulatory Authority (the FSRA) serves as the financial regulator of the ADGM.
Global Virtual Asset Hub
The success of the UAE over the last fifty years in particular (the nation itself was founded in 1972) has been characterised by realising a series of accomplishments that many once considered impossible to achieve. The incredible array of achievements for the nation of just over one million Emiratis (although there are many more expatriates) include the development of a mega-city in the desert in less than a generation, the construction of the tallest structure in the world, and success in attracting several million expatriates who choose to make the country their home along with hundreds of the world’s largest companies. In keeping with this pioneering spirit, the UAE is now seeking to become a global hub for virtual asset businesses. To achieve this ambition, it must, however, reform and further develop its complex legal and regulatory system.
The regulation of crypto assets in onshore UAE generally falls under the jurisdiction of the CBUAE. The regulation of security tokens (including regulated commodity tokens) sits within scope of SCA’s jurisdiction. This aligns with the separation of banking and investment regulation in many other major jurisdictions.
On 28 February 2022, Dubai issued a law regulating virtual assets (the DVAL), which came into effect on 11 March 2022. The DVAL sets out plans for the establishment of a virtual assets regulatory authority (VARA). The VARA is expected to have independent and juridical capacity and to be affiliated to the Dubai World Trade Centre (a new free zone in Dubai). The VARA’s jurisdiction is confined to Dubai (excluding the DIFC); however, the activities that the VARA is set to regulate also appear to fall within scope of the regulatory frameworks issued by the CBUAE and the SCA. It is not yet clear how the regulators will co-ordinate to avoid those wishing to provide virtual asset services to clients in Dubai requiring multiple licences.
The CBUAE continues to maintain that crypto assets are not legal tender in the UAE. Notwithstanding this, the CBUAE has issued regulations that explicitly permit crypto assets to be used as a stored value when purchasing other goods and services. Other CBUAE regulations regulate digital payment services, including Payment Token Services. Separately, the SCA has developed a framework regulating virtual assets. This is currently being amended and it remains to be seen what this will capture and how it will interact with the frameworks established by the CBUAE and the VARA.
Offshore UAE (The Financial Free Zones)
To complicate matters further, anyone wishing to provide financial services activities to clients based in or from the DIFC requires a licence from the DFSA. Recently, the DFSA has started to include various types of crypto assets (including Investment Tokens) as Financial Products in the scope of its licensing regime. The DFSA also recently launched a public consultation on the regulation of Crypto Tokens in the DIFC.
The FSRA in the ADGM published its Virtual Assets Framework in 2020. It was the first regulator in the world to regulate platforms that enable the trading of Virtual Assets as Multilateral Trading Facilities. Under the FSRA’s Virtual Assets Framework, carrying on specified Regulated Activities, including certain Virtual Asset activities, in the ADGM, will require the application for, and granting of, a Financial Services Permission by the FSRA.
The UAE’s virtual asset regulatory landscape is currently in a period of considerable flux and there are a number of open questions in respect of which further guidance and clarifications from relevant regulatory authorities would be of assistance. International and local investors should, however, take considerable heart from the significant political backing and support for virtual assets with the country. Regulators, especially those in the financial free zones, also wish to take a sensible and prudent approach to regulation in this area but also one that is “commercial” and more flexible in practice than the approach being taken in many other jurisdictions.
Many of the world’s other emerging crypto centres are growing out of existing global financial services hubs, such as New York and London. Silicon Valley, Switzerland and Singapore are also of increased relative importance following China’s ban on crypto mining and trading.
Like the UAE, each of these jurisdictions is in the process of seeking to regulate crypto trading, investment, mining, and more. Looking at just the UK, whilst it does not yet have a bespoke financial regulatory regime for virtual assets (more specifically, crypto assets), its primary financial services regulator, the Financial Conduct Authority (FCA), has taken similar steps as the FSRA to extend its existing legislation covering financial products and services to crypto assets. The UK Treasury also released proposed digital asset legislation in July 2022, meaning that further legislative developments in the UK can be expected in the coming months.
Some of the world’s largest crypto players, including Binance, the world’s largest crypto exchange, and Rain, the first crypto business to obtain a licence in the MENA region, have already established a presence in the UAE. Crypto.com and FTX have also received various regulatory approvals in the UAE in recent weeks. Whilst Singapore was previously attracting some big industry players such as Bybit, there is a clear shift in focus to the UAE and, more specifically, Dubai, a process being driven by the willingness and ability of the country’s leadership to provide the necessary legal and physical infrastructure. The UAE is clearly on an upwards trajectory when it comes to digital asset, FinTech and metaverse-based investments.
Notwithstanding the various challenges ahead, given all that’s been achieved in the UAE in the past 50 years, those with a keen interest in digital assets and crypto should keep a watchful eye on developments in this Gulf nation because the UAE really is starting to shake things up across the GCC, and beyond.
Any views expressed in this publication are strictly those of the authors and should not be attributed in any way to White & Case LLP.
Stefan advises Middle East and Western corporates, financial institutions and fintechs (including crypto exchanges, investors and regulators) in connection with financial services regulatory and M&A matters.
Gabrielle is a UK-qualified financial services regulatory lawyer based in Dubai with experience advising banks and other financial institutions on a range of contentious and non-contentious matters throughout the Middle East.