June 1, 2023

Dubai Regulation of Virtual Assets

By Sarah Malik and Nicola Rayment

A comprehensive analysis of Dubai Law No. 4/2022 Regulating Virtual Assets in the Emirate of Dubai and the Virtual Assets and Related Activities Regulations issued on 7 February 2023.

Introduction
The Emirate of Dubai has made significant strides in governing the usage and trading of Virtual Assets through the establishment of Dubai Virtual Asset Regulatory Authority (VARA) and the issuance of Dubai Law No. 4/2022 Regulating Virtual Assets in the Emirate of Dubai, which came into effect on 11 March 2022. Accordingly, there is now an established legal framework of Virtual Assets within the region.

Virtual Assets, known for their rapid growth and overwhelming popularity, have prompted Dubai to introduce laws and regulations encouraging a more secure environment for all parties involved in the usage and trading of Virtual Assets. The long anticipated Virtual Assets and Related Activities Regulations, released on 7 February 2023, offer additional insight and understanding on the practical application of Dubai Law No. 4/2022 and how Virtual Assets will be managed in Dubai. Dubai Law No. 4/2022 is applicable to all businesses operating in the Virtual Asset space and provides the first comprehensive guidance of how the area is to be regulated. Undoubtedly, this is the first of various laws and regulations which will need to be considered and adopted as the area enjoys rapid growth globally and especially within the UAE.

Analysis
Definition and significance of virtual assets

Dubai Law No. 4/2022 defines a “Virtual Asset” 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.”

The definition encompasses cryptocurrencies (including Bitcoin and Ethereum), non-fungible tokens (NFTs) and other digital assets that may be known in the future.

Dubai Law No. 4/2022 establishes VARA as the authority to supervise any Virtual Asset-related activity in Dubai and decreases the likelihood of financial instability, consumer fraud and terrorism financing in the region and further aims to regulate an industry that is currently unregulated. The Virtual Assets and Related Activities Regulations released on 7 February 2023 offer further guidance and understanding on the practical application of Dubai Law No. 4/2022.

Both Dubai Law No. 4/2022 and the Virtual Assets and Related Activities Regulations aim to regulate and oversee Virtual Asset Service Providers (VASPs) in Dubai, with the exception of those in the Dubai International Financial Centre (DIFC). VASPs are individuals or entities that offer services related to Virtual Assets, such as virtual asset trading platforms, wallet providers, and custodial services. The primary focus is to safeguard investors, foster sustainable market growth, and invite stability into the Virtual Asset industry. The Virtual Asset industry has traditionally been an autonomous and decentralised industry, which in itself has caused issues. It is therefore inevitable that laws will be introduced as the industry develops in order to provide credibility and assurance to those who are involved in investment or ownership of Virtual Assets.

Aim of the Law and Regulations
Prior to Dubai Law No. 4/2022 being introduced, there was no specific law governing Virtual Assets in Dubai. The Securities and Commodities Authority Decision No. 23/RM/2020 Concerning Crypto Assets Activities Regulation was issued in 2020 and was applicable to those offering financial services relating to crypto assets in the UAE; however, it was not a comprehensive code. The ADGM has provided a framework by way of the Guidance on Regulation of Virtual Asset Activities in the ADGM. Dubai Law No. 4/2022 and the establishment of VARA represent the current definitive guide and regulatory body for Virtual Assets within Dubai. Dubai Law No. 4/2022 aims to ensure that VASPs and any person engaging in Virtual Asset Activities or Activities related to Virtual Asset must obtain prior authorisation from VARA to operate responsibly and transparently by governing activities, as per Article 16 of Dubai Law No. 4/2022. This includes:

  • Offering services for operating and managing Virtual Asset platforms.
  • Supplying exchange services between Virtual Assets and national and foreign currencies.
  • Supplying exchange services between various forms and types of Virtual Assets.
  • Offering Virtual Asset transfer services.
  • Supplying Virtual Asset custody, management or control services.
  • Offering services in association with Virtual Asset portfolios.
  • Providing services concerning the offering and trading of virtual tokens.

In addition, the Virtual Assets and Related Activities Regulations identify (in Schedule 1 of the Virtual Assets and Related Activities Regulations) seven Virtual Asset Activities which can be licensed under VARA, namely:

  1. Advisory services.
  2. Broker-Dealer services.
  3. Custody services.
  4. Exchange services.
  5. Lending and Borrowing services.
  6. Payments and Remittances services.
  7. Virtual Asset Management and Investment services.

VASPs with a VARA licence are obliged to adhere to Dubai Law No. 4/2022 , the Virtual Assets and Related Activities Regulations and all relevant rulebooks accompanying the Virtual Assets and Related Activities Regulations. The Virtual Asset Issuance Rulebook provide rules that govern the issuance of Virtual Asset licences and related activities. It includes requirements that all entities in the Emirate must abide by if they wish or intend to issue a Virtual Asset.

All VASPs must comply with mandatory Rulebooks which include:

  1. The Company Rulebook.
  2. The Compliance and Risk Management Rulebook.
  3. The Technology and Information Rulebook.
  4. The Market Conduct Rulebook

VASPs must also comply with activity specific rulebooks to the extent it relates to the activity or activities the VASP is licensed to carry out.

Licensing and registration
Dubai Law No. 4/2022 and the Virtual Assets and Related Activities Regulations aim to manage risk by requiring VASPs to meet requirements to recure a licence issued by VARA. As per Part IV of the Virtual Assets and Related Activities Regulations, entities that proceed to carry out Virtual Asset Activities in Dubai are required to obtain authorisation from VARA. This approval must be obtained prior to conducting any Virtual Asset Activity.

In accordance with the Virtual Asset Issuance Rulebook (Part I – Approval Requirements and D – Virtual Assets subject to VARA approval), in order to apply for a VARA licence, VARA will require the following information and may require additional information:

  • The nature and purpose of the business and/or activities for which the Virtual Asset is to be used.
  • The Whitepaper.
  • The identity and ownership details of the Issuer, including a description of its experience and whether any relevant individuals have been the subject of any claims in the past ten years which involve dishonesty, fraud, financial crime or an offence under laws relating to companies, banking, insolvency, money laundering and insider dealing.
  • How the Issuer’s business is financed (including financial statements, if any).
  • Whether the Virtual Asset is to be the basis for funding another business venture.
  • The manner in which proceeds or other considerations (whether monetary or value in kind) received from issuing the Virtual Asset are to be used.
  • The recipient of any proceeds or other consideration and the proportion they are to receive.
  • Any identifiable risks in relation to the business or activities to which the Virtual Asset will be issued.
  • The proposed governance structure and quality control plan for the business or activities and the entities involved.

All licences require the payment of a licence fee and the payment is to be made at the time of application of the license. The VARA licence fees range between AED 40,000 and AED 100,000, depending on the regulated activity. If an entity applies for more than one Virtual Asset Activity, the fee for the subsequent activities will be reduced by 50% of the initial licence application fee. The licensed entity will also be subject to an annual supervision fee for each licensed activity ranging between AED 80,000 and AED 200,000, depending on the regulated activity.

Restrictions
As per Part III of the Virtual Assets and Related Activities Regulations, entities in Dubai are prohibited from conducting any Virtual Asset-related Activity in business, by way of advertisement, promotion or claim to do so, unless:

  • they have obtained licensing and authorisation by VARA for the relevant activity;
  • they are an employee executing such activities on behalf of an employer licensed by VARA; or
  • the entity is an exempt entity under the Law and Regulations and has obtained the relevant exemptions.

Exempt entities
Exempt entities are entities that are not bound by the licensing prerequisites imposed by VARA. As per Part III of the Virtual Assets and Related Activities Regulations, these entities can claim exemption on the condition that they have notified VARA and have received confirmation of their status as an Exempt Entity. The VARA confirmation is by way of a no-objection certificate, which must be obtained before engaging in any Virtual Asset Activity and this certificate may include restrictions or conditions. Exempt Entities are obliged to adhere to all regulations, rules, directives and other conditions communicated by VARA.

VARA will always retain a reservation of right in relation to its exclusive and absolute discretion in determining whether an entity qualifies as exempt and granted a no-objection confirmation under the Virtual Assets and Related Activities Regulations.

Professional exemption for specific Practitioners
As per Part IV of the Virtual Assets and Related Activities Regulations, there are exemptions from obtaining a VARA license for duly registered practicing lawyers, accountants, and other professionally licensed business consultants that carry out and engage in Virtual Asset Activities that are circumstantial and contributory to their respective professions.

Such professionals are required to maintain proper authorisation from a competent professional body to operate within Dubai and must carry professional indemnity insurance applicable to their profession at all times.

VARA has the sole discretion to determine whether a professional is entitled to an exemption concerning any Virtual Asset Activity they have conducted.

Anti-money laundering (AML) and Counter-terrorist financing (CFT)
VARA bears the responsibility of supervising and regulating VASPs and all Virtual Asset-related Activities, as well as overseeing regulation related to money laundering and terrorist financing in Dubai for all VASPs and virtual asset activities. As the Virtual Asset landscape continues to grow, VARA will continue to play a crucial role as the supervisory authority for virtual assets in Dubai, in order to implement the required robust measures to combat money laundering and terrorist financing.

The Virtual Assets and Related Activities Regulations take into account of Federal Decree-Law No. 20/2018 On Combating Money Laundering Crimes, the Financing of Terrorism and the Financing of Unlawful Organisations and Federal Law No. 7/2014 On Combating Terrorism Offences and any other federal legislation relating to money laundering, terrorist financing and sanction compliance (the “AML-CFT Laws”).

VASPs are required to comply with Federal Decree-Law No. 20/2018, Federal Law No. 7/2014, and any other legislation, regulatory requirements, rules and directives concerning AML and CFT that may apply to their Virtual Asset Activities, businesses, or operations in any jurisdiction at all times.

Market offences
The Virtual Assets and Related Activities Regulations set out certain offences under Part VIII.A.2, which are described as Market Offences. Insider dealing, unlawful disclosure, and market manipulation either conducted in Dubai or affecting the price of virtual assets traded in Dubai are considered a Market Offence. This may well be viewed as an attempt to impose extraterritorial application to the Virtual Assets and Related Activities Regulations by bringing entities who do not provide service to or from Dubai within the ambit of the Virtual Assets and Related Activities Regulations. VARA also has the sole discretion to classify other activities or conduct as a Market Offence in addition to the above.

Enforcement, fines and penalties
Nominated VARA employees will have the authority to record and report breaches of Dubai Law No. 4/2022 and the Virtual Assets and Related Activities Regulations. In order to investigate the VASPs and entities authorities by VARA to undertake activities or services in relation to Virtual Assets, the nominated employees of VARA will be provided with access to all records and documentation and if necessary, to seek assistance from the police.

Anyone in breach of Dubai Law No. 4/2022 , the Virtual Assets and Related Activities Regulations, any rules or directives, and all Rulebooks issued by VARA may be subject to significant penalties. Penalties may also be issued for good cause (as defined under the Virtual Assets and Related Activities Regulations) or other grounds determined by VARA to exercise its power or perform and fulfil its obligations and objectives. In the event an entity violates any law, the Virtual Assets and Related Activities Regulations, rules or directives, or is in breach of other grounds as identified by VARA, enforcement actions may be taken.

In respect of violation of rules under the Compliance and Risk Management Rulebook, the Market Conduct Rulebook, the Virtual Assets and Related Activities Regulations and directives related to Market Offences (as set out in Schedule 3 of the Virtual Assets and Related Activities Regulations – fines of the Regulations) one or more fines, as set out below, may be imposed:

  • Forfeiture of the profits acquired or losses averted.
  • Up to AED 20,000,000 for any individual.
  • Up to AED 50,000,000 or 15% of annual revenue of any VASP.
  • 300% of the profits gained or losses avoided (if such values are greater than the above values).

For violations of rules on all other Rulebooks one or more of the below fines may be imposed per violation (as set out in Schedule 3 of Virtual Assets and Related Activities Regulations – fines of the Regulations):

  • Up to AED 8,000,000 for an individual.
  • Up to AED 20,000,000 or 5% annual revenue for a VASP.
  • 200% of the profits gained or losses avoided (if such values are greater than the above values).

In the event that AML or CFT laws are violated by an entity, fines shall be determined in accordance with local and federal law.

Conclusion
The introduction of VARA and the recently issued accompanying Virtual Assets and Related Activities Regulations demonstrate Dubai’s continuing commitment to establishing itself and being recognised as a leader in innovation and set a benchmark for the Virtual Assets industry globally. With the establishment of VARA and the Virtual Assets and Related Activities Regulations, Dubai is well-positioned in displaying its dedication to establishing a strong regulatory framework for Virtual Assets, which in turn enhances its reputation and credibility in the industry and promotes public confidence in the market. These developments allow and foster a growing interest from global businesses seeking to enter the virtual assets industry in the region.

For business and individuals operating in this space, it is essential to remain up to date on the evolving legal landscape and to ensure compliance with all VARA and non-VARA rules and regulations governing Virtual Assets.

The progressive regulatory landscape established in the region sets the stage for a thriving and more secure future for the industry and is likely to inspire and motivate other jurisdictions to develop their own rules and regulations in this industry.

This publication is not intended to offer legal advice and is solely for informational purposes.

Also published by LexisNexis Middle East