Cryptocurrency laws and regulations in UAE

By Adil Shafi and Kajal Patel, Anjarwalla Collins & Haidermota


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The terms “Blockchain” or “Bitcoin” were alien to the general public in the United Arab Emirates (UAE) when Satoshi Nakamoto began the Bitcoin phenomenon in 2008. However, today with one of the world’s first cryptocurrency deep “cold storage” companies operating in Dubai, it is clear that tides have shifted and the UAE cryptocurrency is actively becoming part of this global trend.

Adil Shafi
Partner at Anjarwalla Collins & Haidermota in Dubai
Tel: +971 4452 9091

Blockchain technology is a decentralized public or private ledger that records transactions between two or more parties. It is this key feature of “decentralization” that makes this technology particularly attractive to investors globally. In particular, Nakamoto took advantage of the features of blockchain technology to create the most well-known cryptocurrency, Bitcoin. Cryptocurrency is an encrypted digital currency that operates using blockchain technology. Unlike fiat currency, which is regulated by a single entity such as a central bank, cryptocurrencies are validated through a decentralized system whereby any party participating in the process can verify the transactions that take place.

Regulatory framework in UAE

In a bid to become a pioneer in blockchain technology, the UAE has launched the UAE Blockchain Strategy 2021, pursuant to which 50% of government transactions will be conducted using blockchain technology by 2021. To solidify its vision, regulations on the use of crypto assets, including cryptocurrencies, have recently been issued.

The Financial Services Regulatory Authority (FSRA) – which is the financial regulator of the Abu Dhabi Global Markets (ADGM), a free zone in Abu Dhabi – has become the first regulator in the UAE to issue comprehensive guidance and regulations on carrying out activities relating to cryptocurrencies. The FSRA issued supplementary guidance on the regulation of Initial Coin/Token Offerings and Virtual Currencies (under its Financial Services and Market Regulations), under which it commented on initial coin offerings (ICOs), whereby cryptocurrencies are offered for sale to the general public.

Under this guidance, the FSRA will, on a case-by-case basis, determine whether a proposed coin token is a security or a commodity. If the FSRA finds the token to be the former, the ICO would be subject to the Financial Services and Market Regulations, but if the token is the latter, the ICO would be unregulated. In addition, the FSRA, on 25 June 2018, through its publication of the Regulation of Crypto Asset Activities in ADGM (ADGM regulations), introduced a regulated activity of “operating a crypto asset business” which includes operation of crypto assets exchange houses, but excludes issuances of ICOs.

Kajal Patel
Associate at Anjarwalla & Khanna Advocates in Mombasa, Kenya
Tel: +971 4452 9091

The ADGM regulations highlight mandatory requirements to carry out the regulated activity and aim to promote transparency and technology governance in order to ensure compliance with anti-money laundering and combating financial terrorism requirements. It should be noted that the ADGM regulations have recently been published and, as such, a concrete conclusion with respect to their implementation cannot be provided in this article.

Meanwhile, the Dubai Multi Commodities Centre (DMCC) has introduced a regulated activity known as “proprietary trading in crypto-commodities”, suggesting that the DMCC views cryptocurrency as commodities. However, businesses in the DMCC carrying this licence are only permitted to trade on their own behalf (that is, to use their own funds for trading), and establishment of exchange houses and conducting ICOs is still not covered under this licence. Another noteworthy development is the issuance by the DMCC of a licence to a DMCC company enabling such company to be among the world’s first cryptocurrency deep “cold storage” vaults.

Prior to the publication of the AGDM regulations and the steps taken by the DMCC, the UAE Central Bank, in January 2017, issued a Regulatory Framework relating to Stored Values and Electronic Payment Systems, stipulating that all virtual currencies, including virtual currency transactions, are prohibited. As expected, this regulatory framework raised an alarm in the UAE crypto-market.

Following uncertainty among market players as to the extent of the prohibition, the Governor of the UAE Central Bank published a statement clarifying that the regulations do not apply to cryptocurrencies, crypto exchanges, or underlying technology such as blockchain technology. The Governor added that virtual currencies were under review by the UAE government and that appropriate legal regulations would be issued in due course.

This statement was a step in the right direction. However, regulators other than FSRA are yet to publish any regulations, and there remains concern among UAE crypto-traders as to the legality of the activity. From a strict legal perspective, until the regulatory framework is amended or new regulations are issued to deal with virtual currencies, the regulatory framework remains valid, and technically speaking the UAE Central Bank can take action against existing and proposed businesses, (save for businesses licensed to carry out the regulated activity in ADGM) dealing in virtual currencies.

The Securities and Commodities Authority (SCA), the securities regulator of the UAE, and Dubai Financial Services Authority (DFSA), the financial regulator of Dubai International Financial Centre, recently announced that they have not issued regulations to govern ICOs and establish cryptocurrency exchange houses in the UAE. In their statements, both financial regulators emphasized the high risk associated with trading in cryptocurrencies, and that investors who carry out these investments do so at their own risk.

UAE market players

Despite having limited regulations, entities in the UAE have incorporated the use of blockchain technology in their operations. UAE Exchange, a leading UAE exchange house, recently partnered with San Francisco-based Ripple to enable real-time, cross-border payments using Ripple’s blockchain technology. By reducing the requirement to have third-party foreign exchange handlers, UAE Exchange has managed to cut its administrative costs.

The authors have also observed a rise in cryptocurrency exchange houses such as BitOasis, which offer services to the UAE public. The authors understand that BitOasis currently operates as an entity established in the British Virgin Islands. With the introduction of the ADGM regulations, it is anticipated that there will be a rise in licensed cryptocurrency exchange houses operating from the UAE.

The Government of Dubai has sought to promote the use of blockchain technology by introducing the “Dubai Blockchain Strategy”. Upon successful implementation of this strategy, Dubai aims to become the first “blockchain powered government”. Following on from this, the Dubai Land Department (DLD) is developing its own blockchain system to record all real estate contracts and link DLD with utility companies such as the Dubai Electricity & Water Authority. The blockchain system will also allow tenants to make payments electronically, resulting in such transactions being paperless and therefore cost-efficient.

The DLD aims to push all boundaries by allowing transactions to be completed without requiring parties to appear in person before any government entity. Interestingly, certain property developers in the UAE have announced that they now allow buyers to invest in their projects using One-Gram, the Shariah-compliant cryptocurrency.

Financial institutions such as banks are also turning to blockchain technology to not only improve efficiency (including reduced processing time and costs) of their Know Your Customer (KYC) processes but to also assist in complying with anti-money laundering requirements. The ADGM has launched an e-KYC utility project with a consortium of UAE financial institutions which aims to develop a governance framework to set out the requirements of the e-KYC utility using distributed ledger technology.

The legal sector may also witness another interesting development – smart contracts. A smart contract is a digital contract that automatically verifies fulfillment of conditions and then executes agreed terms. For instance, in a supply contract it is usual for the supplier to pay the price of goods upon delivery of the same. A smart contract in this area may therefore be programmed to automatically pay the supplier upon receipt of goods without involvement of either party to the contract. This will in turn contribute to Dubai’s aim to have paperless transactions.

Update on KSA

With the recent deal between the Saudi Arabian Money Authority (SAMA), the Central Bank of Kingdom of Saudi Arabia (KSA), and Ripple, banks in KSA are set to use Ripple’s xCurrent blockchain technology for instant cross-border payments, making it clear that KSA, too, is in the race to become a hub in advanced technology. However, it should be noted that the SAMA is still amidst developing regulations, and therefore at present no regulatory framework exists in relation to this digital space in KSA.

Keeping in line with its vision, the FSRA is the first and only regulator to publish regulations relating to operating a crypto business. However, as the ADGM regulations have been issued only recently, it remains to be seen how they will be used and implemented. Also, with talks of the UAE and KSA jointly working towards creating a cryptocurrency for cross-border transactions, it is evident that the two nations seek to be forerunners in this field of technological advances.

While the UAE Central Bank and the SAMA are yet to issue any regulatory framework to govern this sector, it is foreseeable from the initiatives taken by the UAE and KSA that regulators in these jurisdictions will soon break their silence and issue relevant regulations in order to enhance their bids to become the regional hubs for blockchain development and innovation.




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