ON 28 FEBRUARY 2022, THE EMIRATE OF DUBAI ISSUED LAW NO. 4 OF 2022 REGULATING VIRTUAL ASSETS
The Virtual Assets Law (the "VAL") was issued on 28 February 2022 and came into effect on 11 March 2022 for the purpose of regulating virtual assets in the Emirate of Dubai ("Dubai"). The VAL is a landmark piece of legislation which specifically regulates virtual assets and establishes the Dubai Virtual Assets Regulatory Authority ("VARA"). The VAL creates a legal framework for investors and businesses alike involved in virtual assets in Dubai and covers fungible tokens such as cryptocurrencies as well as non-fungible tokens ("NFTs").
The VAL is an exciting development and reflects Dubai's vision to become the leading jurisdiction in the virtual asset space. The introduction of the VAL makes Dubai one of the few jurisdictions to have adopted a legal framework governing assets of this kind. It demonstrates Dubai's commitment to create a tech and data-driven ecosystem that embraces the emergence of the distributed ledger technology and digital infrastructure whilst maintaining appropriate investor protections.
SCOPE OF THE NEW LAW
The VAL establishes VARA which is an independent regulatory body that sits within the Dubai World Trade Centre ("DWTC"). VARA is mandated to approve activities relating to virtual assets in Dubai (including all free zones and special development areas) with the exception of the Dubai International Financial Centre ("DIFC"). The DIFC, a well-known financial services free zone in Dubai, is separately supervised by the Dubai Financial Services Authority ("DFSA") which has its own regulatory framework for virtual assets. The DFSA has recently published Consultation Paper No. 143 for the Regulation of Crypto Tokens and the consultation period ends on the 6 May 2022. In the Abu Dhabi Global Market ("ADGM") (another financial services free zone in Abu Dhabi), the Financial Services Regulatory Authority (“FSRA”) has already published its own detailed laws and regulations to govern virtual assets in its jurisdiction.
VARA's objective under the VAL is to develop Dubai’s digital economy so as to position Dubai as the regional and global destination of choice for all digital transactions concerning virtual assets. VARA shall establish the systems, rules and standards necessary for regulating and supervising everything relating to virtual assets. VARA will be solely responsible for enforcing the VAL in Dubai and has broad enforcement powers for any breaches of the VAL including the ability to issue penalties and fines and to withdraw licenses granted by it for six months (in addition to coordinating with the competent commercial licensing authority in Dubai to cancel the commercial trade license of the relevant entity).
VARA is expected to coordinate with the UAE Central Bank (a federal regulator) to ensure the protection and stability of the financial system in Dubai. We expect this could lead to an increase in the number of transactions involving virtual assets and the regulation of decentralized finance ("DeFi") in the near future. It should be noted that regulation of the financial sector and other markets within the UAE is the responsibility of the UAE Central Bank and the Securities and Commodities Authority ("SCA") and it remains to be seen what interaction the VAL will have with the existing federal laws issued by existing regulators. We expect VARA to issue further guidance on this point together with details on which virtual assets are exempted from the VAL. Other details to be published include additional details on the scope of the VAL, the competencies and powers of VARA, procedures for licensing and associated fees and charges.
WHAT IS A VIRTUAL ASSET AND WHAT ARE THE CURRENT LICENSING REQUIREMENTS?
The VAL defines virtual assets very broadly as "a digital representation of the value that can be digitally traded or transferred or used as an instrument for exchange, payment or investment purposes". This therefore would include cryptocurrencies, tokens, NFTs and any other virtual asset determined by VARA (we expect VARA will be able to exercise a certain degree of discretion in determining the applicability of the law given the broad nature of the definition above).
Under the VAL, there is an express prohibition on any person in Dubai engaging in certain activities falling under VARA’s scope without VARA's prior authorisation. These activities are:
- operating and managing virtual assets platform services;
- exchange services between virtual assets and currencies, whether national or foreign;
- exchange services between one or more forms of virtual assets;
- virtual asset transfer services;
- virtual asset custody and management services;
- services related to virtual asset portfolios; and
- services related to the offering and trading of virtual tokens.
Furthermore, the VAL explicitly states that any person or legal entity that offers virtual asset services to consumers and businesses in Dubai can only do so if it is:
i. granted a license by VARA;
ii. operates in Dubai; and
iii. has a trade license from the relevant commercial authority in Dubai.
We understand that VARA has granted at least one preliminary licence during the first few weeks since the VAL was enacted. It is therefore clear that VARA is taking a proactive approach in issuing approvals which is good news for potential investors and entrepreneurs operating in this space.
It is worth noting that the VAL does not expressly impose any obligations or requirements on individuals who invest in or trade crypto assets in Dubai and it does not apply to virtual asset service providers that operate outside of Dubai. We are expecting these matters to be clarified in the upcoming guidance which is to be issued by VARA regarding the exact scope of its powers and competencies.
THE BROADER PICTURE
In the Middle East, the Kingdom of Bahrain is one of the leading jurisdictions in embracing crypto assets having issued its own regulations in 2019 and, more importantly, its regulations permit crypto companies to access the nation's banking system (this is a significant move that has resolved a long-standing issue that crypto companies have traditionally faced). The Kingdom of Saudi Arabia ("KSA") has also been welcoming of crypto companies and has pledged to invest in blockchain and the metaverse. It has been reported that NEOM (one of KSA's flagship megaprojects) is building a metaverse city which will incorporate crypto and NFTs. Across the continent other countries have imposed strict bans on financial institutions from dealing in cryptocurrencies such as China. The US and many European nations are slowly moving towards implementing their own regulatory regimes.
Crypto regulation is generally a controversial topic within the industry. It is suggested by some experts that greater regulation would enable the industry to evolve in a more responsible way which would result in a more stable marketplace for investors and that increased regulation would protect investors by reducing the levels of fraudulent activity within the crypto eco-system. However, many crypto enthusiasts still oppose new regulation as they believe it stifles innovation and it fundamentally conflicts with the concept of decentralization which sits at the heart of certain crypto assets.
The introduction of the VAL is an important development in the emerging virtual assets market in the UAE and will certainly add to the global regulatory drive that could eventually push the industry into mainstream adoption. However, much remains to be seen in relation to how the VAL and VARA will interact with the existing federal laws and authorities in Dubai. We expect further guidance to be issued in due course, although an exact time frame has not been prescribed in the VAL.
HOW CAN WE HELP?
For any questions or practical assistance about how to set up a business in this sector in Dubai, please do not hesitate to contact our experts.