On the 28 February 2022, the Emirate of Dubai issued Dubai Law No. 4 on Regulating Virtual Assets in the Emirate of Dubai (“Dubai Virtual Assets Regulation” or “DVAR”) in an exciting development demonstrating Dubai’s commitment to being a leading hub for the crypto and distributed ledger technology industries.
DVAR Within Existing Legal Framework
DVAR shall apply to “Virtual Asset” services provided throughout the Emirate of Dubai, including special development zones and free zones, with the exception of the Dubai International Financial Centre (“DIFC”). This means that DVAR will supplement and amend existing legislation applicable in Dubai issued by the “onshore” UAE financial regulators, the UAE Central Bank (“Central Bank”) and Securities and Commodities Authority (“SCA”), in relation to crypto assets and stored value facilities (“SVFs”). By “onshore” in this context we mean outside the special financial free zones of the DIFC and Abu Dhabi Global Market (“ADGM”). These regulators have already issued:
SCA Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation (“CAAR”): CAAR regulates the offering, issuing, listing and trading of “Crypto Assets” and related financial activities. CAAR defines a crypto asset 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 from one holder to another through the operation of computer software or an algorithm governing its use”.
Central Bank Circular No. 6/2020 - Stored Value Facilities Regulation (the “SVF Regulation”): The SVF Regulation regulates SVFs in onshore UAE. SVFs are defined by the Central Bank as non-cash facilities into which users pre-pay money (which includes values, reward points, crypto-assets, or virtual assets) so that users can use that method to pay for goods and services.
DVAR repeals any provision of these instruments to the extent they contradict with the provisions of DVAR.
The DIFC legal framework will not be impacted by DVAR, nor will DVAR impact the laws in other emirates. The Dubai Financial Services Authority (“DFSA”) is the relevant financial regulator in the DIFC, and the DFSA published its Regulatory Framework for Investment Tokens on 25 October 2021. More recently on 8 March 2022, DFSA published Consultation Paper No. 143 for the Regulation of Crypto Tokens. This consultation ends 6 May 2022.
In ADGM, the Financial Services and Markets Regulations 2015 (“FSMR”) published by the ADGM financial regulator, Financial Services Regulatory Authority (“FSRA”) regulates virtual assets. Various supplementary guidance statements under FSMR have been published since, such as the “Guidance on Regulation of Initial Coin/Token Offerings and Financial Services and Markets Regulations Crypto Assets”.
Effective Date of DVAR
DVAR came into force on the date of its publication in the Official Gazette, 11 March 2022.
Key Aspects of DVAR
Activities Captured: Article 3 specifies that DVAR applies to “Virtual Asset” services provided throughout the Emirate of Dubai.
Key Definitions: “Virtual Asset” is defined very broadly, as a “digital representation of 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.” “Virtual Token” is defined as “a digital representation of a set of rights that can be digitally offered and traded through the Virtual Asset Platform”. A ”Virtual Asset Platform” is a centralized or decentralized digital platform, managed by a licensed provider, through which Virtual Assets are sold, bought, traded, offered, issued, kept, and settled.
Dubai Virtual Assets Regulatory Authority (the “Authority”): DVAR establishes the Authority to oversee the regulation and authorisation of Virtual Asset activities in Dubai. The Authority shall be affiliated to the Dubai World Trade Centre (“DWTC”) which is to act as a hub for newly licensed Regulated Virtual Asset Businesses.
Obtaining Permit for Virtual Asset Services: Article 15 specifies that it is prohibited for any person to carry out any of the activities regulated by the Authority in Dubai, unless such person has obtained a permit for such activities from the Authority. Article 16 lists some of the activities which will be regulated by the Authority, and which will require a permit. These include the provision of any services related to:
Virtual Asset Platform operation and management;
exchange between Virtual Assets and currencies, whether national or foreign; and
Virtual Asset custody, management or control.
It is notable that creation or offering of a Virtual Asset itself does not seem to be a regulated activity (although provision of “services related to offering” is a regulated activity), suggesting that businesses will be able to potentially undertake capital raising through such activities provided that they engage with a licensed Virtual Asset Business for the platform management, exchange, safekeeping and so on of the underlying assets.
Application for Permit: The application process will be specified in the controls, procedures, and executive decisions of the Authority, however Article 15(b) specifies that any person seeking to obtain a permit must be headquartered in Dubai and have a trade licence from an authorised commercial authority in Dubai.
Penalties for Breach of DVAR: Articles 18-22 provide the Authority with broad enforcement powers for breaches of DVAR including the ability to issue fines, suspend an operator’s permit for 6 months, cancel a permit and carry-out an audit of a licensed operator. The value of fines is to be determined by the Authority.
In what seems a “virtual asset regulatory race”, DVAR follows the signing by President Biden on 9 March 2022 of Executive Order on “Ensuring Responsible Development of Digital Assets” and moves by regulators in the UK and European Union to also adopt legislation in this area. The introduction of DVAR makes Dubai one of the few jurisdictions to have finalised and adopted a Virtual Asset law. The Authority has already granted a virtual asset licence to Binance, which has pledged to become an anchor tenant of the DWTC crypto technology hub and which is apparently seeking to recruit for over 100 roles in Dubai. Only days before, Binance secured a crypto-asset service provider licence in Bahrain as well.
As the competition for investment continues to warm up, we look forward to further decisions being issued by the Authority on the implementation of DVAR with interest.