The future of crypto asset regulation in the United Arab Emirates



Part of the complexity when looking at regulation is the rapid evolution of terminology. As an example, although many people use the terms “crypto assets” and “crypto currencies” interchangeably, a cryptocurrency is essentially just one type of crypto asset (and probably the most well-known). . The most recognized cryptocurrency is Bitcoin. A crypto asset is a generic term and refers to a digital asset that uses cryptographic technology to execute transactions. An ongoing question of debate globally is to what extent crypto assets are or should be regulated.

The extent of the regulation of crypto assets varies considerably from country to country. While most countries do not make the use of crypto assets themselves illegal, the regulatory implications of the various uses of them differ considerably from country to country. Using Bitcoin as an example, some countries have placed limits on how Bitcoin can be used, with regulators banning its citizens from performing cryptocurrency transactions, while other countries have banned the use of cryptocurrency altogether. cryptocurrencies with substantial penalties in place for anyone conducting crypto transactions.

A key factor in shaping the regulatory landscape around crypto assets will be a developed and mature understanding of the different types of crypto assets.

Currently, Algeria, Bolivia and Vietnam are some of the countries that have put in place substantial restrictions. As recently as September, China’s central bank announced that all cryptocurrency transactions were illegal, effectively banning digital tokens such as Bitcoin.

Conversely, there is no general ban or ban on cryptocurrencies in the UK. It also does not have a tailored financial regulatory regime for crypto assets, although crypto companies have been subject to anti-money laundering obligations under the Money Laundering Regulations 2017, including the obligation to register with the Financial Conduct Authority (“FCA”). The FCA also maintains a list of unregistered companies so the public can see that they are not complying with anti-money laundering regulations. There appears to be a belief that there will be more regulation by the FCA in the future on crypto assets.

Despite a number of protests and technical issues, El Salvador became the first country to adopt bitcoin as legal tender this year, so the US dollar and bitcoin are now recognized as legal tender. A month later, there still appear to be start-up issues – including Moody’s downgrade of the Salvadoran government’s rating due to uncertainty surrounding the possibility of new funding from the International Monetary Fund. (“IMF”) after El Salvador adopted bitcoin. as legal tender. It remains to be seen how successfully it will be tendered in the future and whether other regulations will be enacted.

The IMF noted that stricter regulations are needed to prevent the rapid growth of cryptocurrencies leading to financial instability, consumer fraud and terrorist financing.

The Central Bank of the United Arab Emirates (“Central Bank”) and the Securities and Commodities Authority (“SCA”) share responsibility for the regulation of the financial sector, activities and markets of the United Arab Emirates in the United Arab Emirates.

The United Arab Emirates (“UAE”) is a sovereign federal state comprising 7 Emirates. Each emirate retains jurisdiction over certain matters while others are ceded to the federal state. The matters that fall under the jurisdiction of the Federal State include matters of banking, financial and financial regulation. Individual free zones exist within the physical boundaries of the United Arab Emirates and are divided into financial free zones and non-financial free zones. The two financial free zones that currently exist are (1) the Dubai International Financial Center (“DIFC”) and (2) Abu Dhabi Global Market (“ADGM”).

At present, there is no express ban on crypto assets in the UAE, but they are regulated in the UAE “Onshore”, ADGM and most recently this month the DIFC .

DIFC

The Dubai Financial Services Authority (“DFSA”) is the regulator of the DIFC. Crypto assets have historically not been regulated in the DIFC and companies were historically not allowed to do business related to crypto assets, but that is starting to change. On October 25, 2021, the DFSA unveiled its regulatory framework for investment tokens, which reflects the proposals in its March 2021 consultation paper and is the first step in the DFSA’s digital asset regime.

Anyone carrying out certain investment token-related activities, in or from the DIFC, will need to obtain approval or authorization from the DFSA. Activities include, but are not limited to, providing a financial service related to an investment token (for example, operating a facility at which investment tokens are traded or cleared), performing a financial promotion linked to an investment token, the presentation of an offer to the public of an investment token, or requesting the admission of a security token to the official securities list.

An investment token will therefore belong, depending on the nature of the rights and obligations it confers, to one or more existing categories of security or derivative product. However, the main difference between a conventional security or derivative and an investment token is that an investment token grants rights to holders which are issued, stored and transferred using cryptography and technology from the digital ledger.

The DFSA notes that the key factors to consider in determining whether a token is an investment token and, if so, what particular type (or types) of security or derivative it constitutes include the rights and interests attributable to it. to holders of such a token. ; who is required to fulfill the corresponding duties and obligations arising from these rights and interests; how such a token can reasonably be perceived by investors; how the token is described in offering documents or other marketing material and how those tokens are generally defined in other jurisdictions.

United Arab Emirates

The DFSA is also making proposals for other tokens not covered by the investment token framework, which should include, among others, cryptocurrencies and utility tokens.

CAAR is designed to regulate and license key aspects of crypto asset trading, from their issuance and promotion, the provision of crypto asset custody services, mining exchanges, and fundraising platforms. CAAR applies to most forms of crypto assets, whether securities or otherwise, that are listed and available for trading on a recognized market. CAAR is not intended to include items regulated by the Central Bank such as currencies, virtual currencies, digital currencies, stored value units, payment tokens, and payment units.

The SCA has issued SCA Decision No. 23 of 2020 regarding the Crypto Assets Activities Regulation (the “CAAR”). This regulation aims to regulate the offering, issuance, listing and trading of crypto assets in the United Arab Emirates and related financial activities. The CAAR defines a crypto asset as “a record within an electronic network or a distribution database functioning as a means of exchange, storage of value, unit of account, representation of property, economic rights or rights of access or utility of any kind, when capable of being transferred electronically from one holder to another by means of computer software or an algorithm governing its use ”.

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