On 28 February 2022, the Ruler of Dubai issued Law No.4 of 2022 on the Regulation of Virtual Assets (the "DVAL") in Dubai, which came into effect on 11 March 2022. The DVAL is the first law in Dubai, which specifically regulates virtual assets and shall apply throughout Dubai (including free zones and special development zones, but excluding the Dubai International Financial Centre ("DIFC")).
The DVAL envisions the establishment of the Dubai Virtual Assets Regulatory Authority ("VARA"), a public entity mandated to authorize virtual asset related activities in Dubai and to establish the rules and controls governing the conduct of such activities. The VARA will be affiliated with the Dubai Word Trade Centre Authority ("DWTCA"), the public entity that oversees the Dubai World Trade Centre free zone.
Under the DVAL, it is prohibited for any person in Dubai to engage in virtual asset related activities (the "Activities") without prior authorization from the VARA (the "DVAL Prohibition"). The Activities include:
- Operating and managing virtual assets platforms services;
- Exchange services between virtual assets and currencies, whether national or foreign;
- Exchange services between one or more forms of virtual assets;
- Virtual asset transfer services;
- Virtual asset custody and management services;
- Services related to the virtual asset portfolio; and
- Services related to the offering and trading of virtual tokens.
Moreover, the DVAL stipulates that any person wishing to conduct the Activities in Dubai must be incorporated in Dubai in one of the legal forms approved by the relevant Dubai commercial licensing authorities.
Separate Implementing Decisions will be released in due course, which are expected to provide further detail on the scope of the DVAL, the procedures for licensing and the role of the VARA.
Prior to the release of the Implementing Decisions and the establishment of the VARA, interested persons will be required to enter into a memorandum of understanding (the "MoU") with the DWTCA. We understand that the MoU will set out high level details on the proposed legal framework for the regulation of the Activities and is expected to include, amongst other provisions, requirements relating to collaboration and information sharing with the DWTCA, transaction monitoring and the establishment of a fully operational legal entity with an adequate "economic presence" within the Dubai World Trade Centre free zone.
We outline below several key considerations arising from the introduction of this new law.
Broad scope of the DVAL Prohibition
The seemingly broad scope of the DVAL Prohibition could mean that all persons wishing to provide virtual asset services in Dubai, including those already licensed under United Arab Emirates ("UAE") federal laws and those providing services on a cross-border basis, may still be required to secure separate authorization from the VARA. The DVAL Prohibition, if interpreted and enforced in such a broad manner, may present significant challenges for businesses that are already incorporated in the UAE outside of Dubai who intend to provide services to clients based within Dubai.
However, the DVAL states that the VARA may, at its discretion, consent to the waiver of the requirement for authorization. It therefore remains to be seen whether a broad interpretation of the DVAL Prohibition will be applied or consistently enforced. We expect that the Implementing Decisions of the DVAL will provide for clarity on the scope of the DVAL Prohibition and any associated exemptions.
The licensing requirements for the Activities regulated by the VARA will be set out in detail upon the issuance of the relevant Implementing Decisions. However, we expect that the VARA will, at a minimum, request the following from an applicant for authorization under the DVAL:
- Completion of a prescribed application form;
- Submission of an organization chart;
- Preparation of a business plan;
- Signing the MoU with the DWTCA;
- On-going compliance with a code of professional ethics, which is yet to be released; and
- Payment of any fees associated with the application for authorization to the VARA.
Interaction with federal regulations
The Activities to be regulated by the VARA under the DVAL include substantial overlaps with the activities regulated by the Securities and Commodities Authority ("SCA") and the Central Bank of the UAE ("CBUAE") under existing UAE federal laws.
In 2021, the SCA issued the Financial Activities Rulebook and Mechanisms of Adjustment (the "SCA Rulebook") which prohibits any person from conducting specified financial activities ("Financial Activities") inside the UAE without a licence or approval from the SCA. Based on our review of proposed amendments to the SCA Rulebook, we understand that the definition of Financial Activities may soon include (i) Digital brokerage; (ii) Digital custody; and (iii) Digital service provider services. Whilst these activities are not yet defined, we anticipate a degree of overlap with those regulated by the VARA and we understand that the SCA intends to develop a new license category within the SCA Rulebook that will cover these new activities. As a result, it is expected that activities falling within the extended scope of the definition of Financial Activities set out above will soon require a licence from the SCA in order to be carried out in the UAE.
In 2021, the CBUAE issued the Retail Payment Services and Card Schemes Regulation ("RPSCS Regulation") which regulates activities relating to payment tokens (i.e., stable coins) in the UAE. Moreover, in 2020, the CBUAE issued the Stored Value Facilities Regulation ("SVF Regulation") which regulates businesses that issue or operate a stored value facility within the UAE, whereby crypto and virtual assets may be accepted in exchange for the storage of value.
Whilst the DVAL states that all provisions which are contrary to, or are in conflict with its provisions "shall be repealed", we note that within the UAE, federal laws have supremacy over the laws issued by individual emirates. As the DVAL is not a UAE federal law, we expect that any regulations issued by the SCA and the CBUAE will remain applicable unless stated otherwise by the respective federal entities. It therefore remains to be seen, what interaction, if any, the DVAL will have with the existing UAE federal laws issued by the SCA and the CBUAE as outlined above.
Coordination with existing regulators
The DVAL highlights that the VARA will be linked to the DWTCA and shall coordinate with the CBUAE "in all matters to ensure the protection and stability of the financial system" in Dubai. Separately, we understand that both the SCA and the DWTCA have entered into a MoU in September 2021 to support the offering, regulation, issuance and trading of virtual assets within the DWTCA's free zone.
The precise nature and extent of the VARA's association with the DWTCA, the SCA and the CBUAE remains to be determined. It is also unclear at this stage, what the VARA's relationship with the SCA and the CBUAE will be in coordinating the regulation of the Activities, and whether overlapping or consolidated licensing regimes will be imposed with respect to virtual asset activities in Dubai.
The DVAL is a timely development to the emerging virtual assets market and regulatory framework in the UAE. Whilst the DVAL sets out a progressive framework aimed at introducing industry defining standards for virtual asset services in Dubai, key questions still exist regarding: (i) the interaction between the DVAL and current federal law; (ii) the intended relationship between the VARA, the DWTCA, the SCA and the CBUAE; and (iii) the scope of the authorization obligation under the DVAL and its impact on the offering and provision of cross-border products and services in the UAE.
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