The Virtual Horizon

Dubai surprised many businesses earlier this year when it issued a new Virtual Assets Law. Dr Laura Voda, Of Counsel at Fichte Legal, examines this law’s most significant provisions and what could be next in this area in the UAE and other parts of the GCC.

“Dubai Law No. 4/2022 Regulating Virtual Assets in Dubai, which was issued on 28 February 2022 and came into force on 11 March 2022, is a landmark piece of legislation and could put Dubai in pole position compared to other jurisdictions, when it comes to virtual assets” states Dr Laura Voda. “Under this Law, a new Dubai Virtual Assets Regulatory Authority is established, affiliated with the Dubai World Trade Centre (DWTC) Authority; the Authority will serve as a hub for companies looking to operate in the virtual assets sector.”

“Having a legislative framework in place in this area, as well as other advantages such as the UAE taxation regime, the country becomes an attractive jurisdiction for transactions of this type, going forward”.

WHAT ARE VIRTUAL ASSETS?

“Dubai Law No. 4/2022 defines virtual assets as, ‘A digital representation of the value that can be digitally traded or transferred, or can be used as an instrument for exchange, payment or investment purposes, including Virtual Tokens, and any digital representation of any other value specified by the Authority in this regard’.  Under the Law, virtual assets include cryptocurrencies like Bitcoin and Ethereum, as well as Non-fungible Tokens (also known as NFTs)”, Dr Laura Voda explains. ”Cryptocurrencies are digital currencies which are secured by cryptography and based on Blockchain technology rather than by a centralised authority like banks. NFTs are tokens which can be used to represent ownership of unique items such as art or collectibles. As they are unique, they cannot be replicated, which means these tokens can only have one official owner at a time. Therefore, they differ from cryptocurrencies which are identical to each other and therefore can be traded and serve as a medium for commercial transactions”.

“However, it is important to note virtual assets do not include digital representations of fiat currencies, securities and other financial assets,” Dr Laura Voda states.

AUTHORITY POWERS

“Currently, virtual asset permits are limited to offering products and services to pre-qualified investors and professional financial service providers,”  Dr Laura Voda continues. “Permits granted by the Authority will be limited in scope and will be rigorously monitored before being issued to the retail sector.”

“In addition, it will not be possible for one of these permits to be assigned to any other entity unless the Authority’s approval has first been obtained,” Dr Laura Voda continues.

“The Authority will have a range of powers including the power to stop issuing permits, suspend activities of any virtual asset service provider, suspending any dealing in virtual assets for public interest reasons and to  regulating virtual asset dealing in Dubai.”

WHO AND WHAT DOES THE LAW APPLY TO?

“Dubai Law No. 4/2022 applies to virtual asset services provided across Dubai,” Dr Laura Voda states, “This includes services in the free zones, except for the DIFC. However, it does not apply at a Federal UAE level.”

“It means all entities operating in Dubai and conducting activities covered under this new Law must only do so with authorisation of the regulator.”

“Entities interested in obtaining a virtual asset licence under Dubai Law No. 4/2022 must also establish a corporate presence in Dubai and obtain a commercial business licence from the relevant commercial licencing authority in Dubai, by incorporating one of the approved legal forms of business.”

“However, the entity does have the option to set up their business either in the mainland Dubai or in any free zone that licenses the activities prescribed by the new Law,” Dr Laura Voda notes. “However, it should also be noted that approval from the relevant regulator, free zone or mainland, is a precondition to obtaining the licence to operate from the Virtual Assets Regulatory Authority.”

WHAT ACTIVITIES WILL NEED A PERMIT?

“Provision of Virtual Asset Platform operation, management services and provision of services of exchange between Virtual Assets and fiat currencies, will need to have a permit under Dubai Law No. 4/2022,” Dr Laura Voda states.

“A permit will also be needed to provide exchange services between one or more form(s) of Virtual Assets, to provide Virtual Asset transfer services or Virtual Asset custody, management or control services.”

“In addition, a permit under this law will be needed for those who wish to provide Virtual Asset Portfolios services or services which involve offering and trading in Virtual Tokens,” Dr Laura Voda continues.

“In this context, the most significant change is that invariably, strict compliance and licensing are needed to carry out transactions relating to digital assets,” Dr Laura Voda adds. “ It means any listed activity can only be carried out with a permit from the regulator and therefore activities carried out such a permit are banned.”

”In addition, an investor may consider the other incentives the UAE provides to the business community, like the taxation regime. Income, capital gains, dividends are not taxed in the UAE and these aspects may make a difference in making the UAE a good choice in this respect,” Dr Laura Voda explains.

PREVIOUS STEPS

“Prior to Dubai Law No. 4/2022’s enactment, the UAE Government had taken various indicating their interest in promoting the use of digital currencies and virtual assets in a regulated environment,” Dr Laura Voda continues.

“For example, the DWTC Authority has signed a cooperation agreement with the UAE Federal Securities and Commodities Authority to regulate crypto assets in the DWTC and expand the scope of licenses in DWTC. “In addition, a similar agreement has been signed by the Securities and Commodities Authority with the Dubai Multi Commodities Centre (DMCC) and Dubai Airport Free Zone Authority (DAFZA)”.

ELSEWHERE IN THE UAE

“There have been other developments in this area,” Dr Laura Voda states. “For example, the ADGM took the lead  and in 2017 issued the Guidance on Regulation of Initial Coin/Token Offerings and Virtual Currencies which was followed in 2018 by Guidance on Regulation of Crypto Asset Activities in the Global Market.”

“The ADGM was also one of the first jurisdictions to regulate spot virtual asset activities, including those undertaken by multilateral trading facilities, brokers, custodians, asset managers and other intermediaries. Since then, the ADGM’s Financial Services Regulatory Authority has also been licensing various relevant businesses, including crypto exchanges or custody service providers.”

“The UAE Federal Securities and Commodities Authority has also issued Securities and Commodities Authority Decision No. 23/RM/2020 Concerning Crypto Assets Activities Regulation and Securities (“Decision”) and Commodities Authority Decision No. 11/2021 Concerning Guidance for Crypto Asset Regulations which provides detailed guidance on the rules applicable to various activities categorised based on the type of investor which is involved. The aim of this 2020 Regulation is to codify the offering, issuing, listing and trading of crypto assets and related financial activities in the UAE. Licensing applications which relate to crypto assets are classified into Exchange, Fundraising Platform Operator, Custody services and Brokerage, and there are minimum capital requirements for each category”.

“In this context the definition of crypto assets in the Decision is more specific” Dr Laura Voda continues.

“While a Crypto asset is defined 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’, the Decision further regulates the possibility that a Crypto asset can be offered as security for commercial transactions.”

“A similar approach can be found in the ADGM’s framework, regulating Crypto assets, digital securities, Derivatives and Collective Investment Funds of Crypto or even utility tokens,” Dr Laura Voda states.

“This suggests market intermediaries and market operators dealing in these Derivatives and Collective Investment Funds will need to be licensed or approved by the ADGM Financial Services Regulatory Authority as Financial Service Provider Holders in these cases,” Dr Laura Voda states.

“In addition, in March 2022, the DFSA published a Consultation on the Regulation of Crypto Assets, which is a positive development in Dubai International Financial Centre (DIFC).  KIRKLABB, another free zone in Dubai, has also provided investors with an option to pay for their visas and licence fees in digital currencies, including Bitcoin, Ethereum and Tether.”

ELSEWHERE IN THE GCC

“Across the GCC, the approach being taken has varied. Some countries like Qatar have opted for an outright ban on cryptocurrency trading as it violates the country’s anti money laundering legislative framework.”

“While in Saudi Arabia there is a ban on banks processing transactions involving cryptocurrencies, no major penalties or actions were imposed or taken against individuals who traded in digital assets.”

“An NFT marketplace has also been established there to showcase digitally tradeable art. Meanwhile in Bahrain Binance has been awarded a crypto-asset service provider license, and in furtherance, a similar permit was issued to them in Dubai”.

WHAT’S LIKELY TO HAPPEN NEXT?

“The wheels have been set in motion for growth of this sector,” states Dr Laura Voda. “We may see more developments across the UAE and in other GCC countries. Meanwhile in Dubai, with a new regulator in place, we can expect further implementing decisions on areas likes licensing, associated fees and charges,” Dr Laura Voda concludes.

 

Credit: published in Lexis Nexis Middle East Law Alert