According to reports, the United Arab Emirates is set to issue federal licenses for virtual assets service providers (VASPs), by the end the first quarter 2022. This move is part of a complex regulatory system that the Middle Eastern country is trying to establish to make it one of the most crypto-friendly countries in the world. What does this mean for the UAE?
The proposed regime
According to reports, the UAE’s Securities and Commodities Authority has finalized rules that will allow digital asset companies to open a shop in the country. The SCA considered both the Financial Action Task Force guidelines as well as the latest legislative developments in the United States and UK when drafting the legislation.
The “hybrid approach” described by the SCA is to oversee the digital asset market in dialogue with the Central Bank of the United Arab Emirates. It will not directly interfere with the licensing procedures of financial institutions in the country’s major financial centers such as Abu Dhabi and Dubai. According to reports, the government is also planning to regulate crypto mining.
The United Arab Emirates is a Federation that includes seven Emirates: Abu Dhabi, Dubai, Fujairah Ras Al Khaimah Sharjah and Umm Al Quwain. The federal government usually has final say in financial matters. The UAE Central Bank (SCA) and Sharjah are the main bodies that determine financial regulation. However, there are many free zones within the Federation that have some autonomy in drafting financial rules.
There are actually around 30 VASPs operating in the country’s fem zones. Dubai Multi Commodities Centre, (DMCC), houses 22 VASPs. Abu Dhabi Global Market (ADGM has six, and Dubai Silicon Oasis Authority, (DSOA) one.
Each center is overseen independently by its regulatory body. ADGM stands for the Financial Services Regulatory Authority. Dubai zones fall under different agencies’ jurisdiction: Dubai International Financial Centre (DFSA) is responsible for regulating the Dubai Financial Services Authority (DFSA), DMCC falls directly under the national SCA.
A patchwork of regulations
The current rules, which are quite natural given the regulatory diversity, present a diverse picture. The DFSA has been releasing its rules since 2021. They state that any entity running a crypto exchange must seek approval from the DFSA. Currently, however, this regulation only covers digital assets that are eligible for investment token status. At a later stage, the DFSA will include cryptocurrencies as well as utility tokens within its framework.
The SCA, which oversees DMCC, and “onshore UAE,” provides a more detailed framework titled “Crypto Assets Activities Regulation.” This regulation contains a clear definition and covers most forms of crypto assets.
The UAE seems to have a crypto-friendly legal system, despite having to navigate the regulatory complexity. Kokila Alagh (founder and CEO of Karm Legal Consultants) previously stated to Cointelegraph that “the regulations provided certainty and have open new opportunities in UAE, which makes SCA an progressive regulator in global landscape.”
Dec 2021 saw the announcement that Dubai World Trade Centre would be a new zone of regulated digital assets activity. It will have strict standards for investor protection, Anti-Money Laundering, and Counter-Terrorist Financing.
The main question regarding the federal legislation that is coming soon is how it will unify all of these rules.
Path to Crypto oasis
The UAE government began its crypto-friendly journey many years ago. In 2018, the first regulations for digital assets were created in ADGM. According to statements made by Mohammed bin Rashid Al Maktoum, Vice President, and Prime Minister, the nation also put into effect its “Emirates Blockchain Strategy 2021”, which sought to use blockchain technology to “save effort, time and resources and allow individuals to conduct most transactions in a timely fashion that suits their lifestyles and work.”
It set out impressive goals such as reducing government paperwork spending by $3 billion annually and securing millions of hours.
There were several other declarations of specific intentions in the strategy, including a blockchain-based vehicle management system to launch by Dubai’s Roads and Transport Authority and a platform that allows local hotels and tourism businesses to transact business with each other.
The United Arab Emirates’ postal operator, in celebration of the 50th anniversary of the Federation, announced that it would be the Middle East’s first to issue nonfungible token stamps (NFT) in November 2021. The UAE Central Bank had already announced that it would begin trials for a national digital currency several months prior.
A move to restrict decentralized digital currencies is often associated with the launch of a central banking digital currency project. However, in the UAE, the announcement about a CBDC did not seem to have any effect on the country’s willingness to embrace innovation from the private sector.
Why are they so friendly?
Brad Yasar (co-founder and CEO at EQIFi), described UAE’s openness towards crypto as a pragmatic approach by its leadership in order to diversify its wealth sources.
“The country’s history of dependence on oil and commodities could be seen as a major driver for its move into digital assets. The government quickly recognized the benefits of digital assets for both institutions and retail users and acted swiftly to put in place the support measures necessary to enable financial innovation to thrive.
Christian Borel is a senior executive officer at SEBA Bank in Switzerland and a branch manager. He highlighted the huge opportunities presented by the UAE’s approach to financial regulation as well as the strategic geographic advantages.
“The UAE is a hub for digital assets and blockchain. It has many unique features. It has the best business networks in order to benefit from connectivity between India, the West, and Northern Africa.
Both experts are positive about the country’s digital asset prospects. Yasar emphasizes the importance of Yasar’s newly proposed nationwide licensing system to virtual-asset companies.
Borel anticipates that the UAE will be “at the forefront” of regulation in the sector, anticipating that the new framework will be integrated into the country’s legal system within 12 months.
While some jurisdictions place severe restrictions and bans on crypto, Europe and the U.S. are treading carefully and slowly, the UAE is quickly moving to establish clear and safe rules for the digital assets industry.