Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Ruler of Dubai, adopted Law No. 4 of 2022 on the Regulation of Virtual Assets in the Emirate of Dubai (the “Virtual Assets Law”) on February 28, 2022. The groundbreaking Virtual Assets Law is an innovative and major legislative breakthrough in Dubai, and it applies to virtual asset services delivered within the Emirate of Dubai and Dubai’s special development and free zones (excluding the Dubai International Finance Centre (“DIFC”). The Virtual Assets Law is a crucial step in defining the Emirate of Dubai’s position in the virtual assets sector, and it will surely have significant ramifications for Dubai’s future virtual asset environment. The new Virtual Assets Law reflects the growing interest in virtual assets in the United Arab Emirates (“UAE”) and the region as a whole.
The essential components of the new Virtual Assets Law and its consequences for virtual assets and associated activities in the Emirate of Dubai are outlined below.
The Virtual Assets Law’s Key Features
Establishment of a New Regulatory Authority: The Dubai Virtual Assets Regulatory Authority (“VARA”), an institution linked with the Dubai World Trade Centre Authority (“DWTC Authority”), is established as Dubai’s principal virtual assets regulator under the Virtual Assets Law. VARA intends to enhance Dubai’s position as a regional and worldwide destination in the virtual assets domain, as well as to grow Dubai’s digital economy, under the Virtual Assets Law. VARA also aims to raise investor awareness of the virtual assets sector, encourage investment and enterprises working in the virtual assets field to set up shop in Dubai, and offer the regulations, rules, and standards required to govern, monitor, and manage all aspects of virtual assets.
The Virtual Assets Law comes into effect on March 11, 2022, the date of its publication in the Official Gazette. Any provisions in other laws that are opposed to or in contradiction with the requirements of the Virtual Assets Law are effectively abolished. While the Virtual Assets Law is an essential first step in Dubai’s legal framework for virtual assets, further explanation and specificity are needed. The Director General of the DWTC Authority is charged with making the decisions required to implement the Virtual Assets Law, albeit the particular timeline for issuing such decisions is not specified in the Virtual Assets Law.
The New Law’s Scope: The Virtual Assets Law’s scope is broad, with “virtual assets” broadly defined as “a digital representation of value that can be digitally traded, transferred, or used as an exchange or payment instrument or for investment purposes”; this would therefore include cryptocurrencies, tokens, non-fungible tokens, and any other virtual asset determined by VARA.
While the Virtual Assets Law applies across the Emirate of Dubai and the other special development and free zones (with the exception of the DIFC), it does not regulate virtual asset services at the federal level. Entities operating in Dubai that are subject to the Virtual Assets Law are banned from participating in certain regulated activities in Dubai unless approved to do so by VARA; any permissible operations must then be carried out within the boundaries of the permission provided. Under the Virtual Assets Law, a wide variety of operations, including the operation and administration of a virtual asset platform and the custody and management of virtual assets, need authorisation from VARA. The Virtual Assets Law states that VARA may create rules and conditions for the practice of regulated activities and may increase the list of activities subject to VARA’s authorisation and regulation.
Licensing and Ongoing Requirements: In order to receive a license, applicants must establish Dubai as their firm’s headquarters and secure a commercial business license from the applicable licensing body in Dubai. The particular licensing process, as well as extra continuing requirements for anti-money laundering, disclosure, transparency, and know-your-client (“KYC”) processes, are likely to be outlined in the rules and judgments that complement the Virtual Assets Law.
Coordination with Other Authorities: VARA is expected to work with the UAE Central Bank to implement measures to protect and stabilize the financial system, which may result in an increase in the number of bank transactions involving virtual assets, as well as the regulation of decentralized finance (“DeFi”) applications and virtual asset lending, both of which have evolved significantly in recent years.
Responsibilities of the New Regulatory Authority: According to the Virtual Assets Law, the VARA will have a broad mandate, including regulating the operation and management of virtual asset platforms, service providers, and everything else related to virtual assets, as well as authorizing exchange services between virtual assets and currencies or between one or more types of virtual assets. Furthermore, under the Virtual Assets Law, VARA is tasked with organizing, supervising, and controlling the issuance and offering of virtual assets, as well as preventing illegal practices, increasing transparency, and developing and implementing the regulations required to protect both virtual asset investors and dealers. Indeed, all people subject to the Virtual Assets Law are obligated to fully collaborate with VARA, including supplying the information and documentation needed for VARA to execute its authorities and accomplish its goals.
Penalties & Sanctions: Under the Virtual Assets Law, VARA has the authority to stop the issuing of authorizations, the operations of any virtual asset service provider, and transactions with any virtual assets in specific instances. In due course, the DWTC Authority’s Board of Directors shall issue a resolution outlining the conduct that constitute a breach of the requirements of the Virtual Assets Law, as well as the accompanying sanctions. In addition to any penalties imposed, the Virtual Assets Law specifies that VARA may suspend or withdraw an authorization issued for a term of up to six months (in addition to coordinating with the competent commercial licensing authority in the Emirate of Dubai to cancel the trade license of the entity). As a result, the possible penalties for violating the Virtual Assets Law may be severe and have far-reaching consequences.
The Bigger Picture
The Virtual Assets Law comes at an excellent moment for the UAE, which has the Middle East’s third-largest crypto market, following only Turkey and Lebanon, with a transaction volume of around $26 billion. Various additional recent changes in the regulation of virtual assets have occurred in line with the UAE’s aim to enable business while providing sufficient investor safeguards. For example, it was reported in February 2022 that the federal Securities and Commodities Authority (“SCA”) is changing regulations to enable virtual asset service companies to establish themselves in the UAE. Furthermore, the Financial Services Regulatory Authority (“FSRA”) of the Abu Dhabi Global Market (a financial free zone in the Emirate of Abu Dhabi) has licensed a number of crypto exchanges. Furthermore, three firms were undergoing FSRA clearance as of November 2021, while many additional companies (including suppliers of custody services to investors) were in the process of commencing operations. In partnership with the SCA, the Dubai Multi Commodities Centre (“DMCC”), the biggest free zone in the UAE, established a legal framework for crypto companies in March 2021. The recent implementation of the Virtual Assets Law, as well as these and other events, demonstrate the UAE’s rising interest in virtual assets.