On February 28, 2022, the Ruler of Dubai enacted the Virtual Assets Regulation Act No. 4 of 2022 (the “DVAL”) in Dubai, which came into effect on March 11, 2022. Dubai, which specifically regulates virtual assets and applies to all of Dubai (including Free Zones and Special Development Zones, but excluding the Dubai International Financial Center (“DIFC”)).
Insight
The DVAL is considering the creation of the Dubai Virtual Assets Regulatory Authority (“VARA“), a public entity mandated to authorize activities related to virtual assets in Dubai and to establish the rules and controls governing the conduct of such activities. VARA will be affiliated with the Dubai Word Trade Center Authority (“DWTCA“), the public entity that oversees the Dubai World Trade Center Free Zone.
Under the DVAL, anyone in Dubai is prohibited from engaging in activities related to virtual assets (the “Activities“) without prior authorization from VARA (the “DVAL ban“). Activities include:
- virtual asset platform operation and management services;
- Exchange services between virtual assets and currencies, national or foreign;
- Services for exchanging between one or more forms of virtual assets;
- virtual asset transfer services;
- virtual asset custodial and management services;
- Virtual Asset Portfolio Services; and
- Services relating to the offering and trading of virtual tokens.
In addition, the DVAL stipulates that anyone wishing to carry on business in Dubai must be incorporated in Dubai in one of the legal forms approved by the relevant Dubai business licensing authorities.
Separate implementing decisions will be issued in due course, which should provide further details on the scope of the DVAL, the licensing procedures and the role of VARA.
Before the publication of the implementing decisions and the establishment of the VARA, the interested persons will have to conclude a memorandum of understanding (the “Protocol of agreement“) with the DWTCA. We understand that the MoU will set out high-level details of the proposed legal framework for the regulation of activities and should include, among other provisions, requirements for collaboration and information sharing. together with the DWTCA, the transaction monitoring and the creation of a fully operational legal entity with an adequate “economic presence” in the Dubai World Trade Center free zone.
We outline below several key considerations arising from the introduction of this new law.
Wide scope of the DVAL ban
The seemingly broad scope of the DVAL ban could mean that anyone wishing to provide virtual asset services in Dubai, including those already licensed in the UAE (“United Arab Emirates“) Federal laws and those providing services on a cross-border basis, may still be required to obtain separate authorization from the VARA. The DVAL prohibition, if interpreted and applied so broadly, may present challenges important for companies that are already incorporated in the UAE outside of Dubai that intends to provide services to clients based in Dubai.
However, the DVAL clarifies that the VARA may, at its discretion, consent to the waiver of the authorization requirement. It therefore remains to be seen whether a broad interpretation of the DVAL ban will be applied or applied consistently. We expect DVAL enforcement decisions to clarify the scope of the DVAL prohibition and any associated exemptions.
Licensing requirements
The authorization requirements for activities regulated by VARA will be defined in detail when the relevant implementing decisions are published. However, we expect VARA to request, at a minimum, the following from an applicant for authorization under the DVAL:
- Complete a prescribed application form;
- Submission of an organization chart;
- Preparation of a business plan;
- Signature of MoU with DWTCA;
- Continued compliance with a code of professional ethics, which has not yet been published; and
- Payment of any costs related to the request for authorization from the VARA.
Interaction with Federal Regulations
The activities to be regulated by the VARA under the DVAL have substantial overlaps with the activities regulated by the Securities and Commodities Authority (“SCA“) and the Central Bank of the United Arab Emirates (“CBUAE“) under the existing federal laws of the United Arab Emirates.
The SCA
In 2021, the SCA published the Financial Activities and Balancing Mechanisms Regulations (the “SCA rulebook“) which prohibits any person from engaging in specified financial activities (“Financial activities“) inside the UAE without a license or approval from the SCA. Based on our review of the proposed changes to the SCA Rules, we understand that the definition of financial activities may soon include (i) digital brokerage (ii) Digital Custody; and (iii) Digital Service Provider Services Although these activities are not yet defined, we anticipate some overlap with those regulated by VARA and understand that the SCA intends to develop a new category of license in the SCA Rules that will cover these new As a result, it is expected that activities falling within the expanded scope of the definition of financial activities set out above will soon require a license from the SCA in order to be exercised in the UAE.
The CBUAE
In 2021, the CBUAE published the Regulation on Retail Payment Services and Card Schemes (“RPSCS Regulation“) which regulates activities related to payment tokens (i.e. stablecoins) in the United Arab Emirates. Additionally, in 2020, the CBUAE issued the Regulations on Stored Value Facilities (“SVF Regulation“) which regulates companies that issue or operate a facility of stored value in the UAE, whereby crypto and virtual assets may be accepted in exchange for the storage of value.
While the DVAL states that all provisions which are contrary or conflict with its provisions “shall be repealed”, we note that in the UAE, federal laws have supremacy over laws issued by individual emirates. Since the DVAL is not UAE federal law, we expect that any regulations issued by the SCA and CBUAE will remain applicable unless otherwise specified by the respective federal entities. It therefore remains to be seen what interaction, if any, the DVAL will have with existing UAE federal laws issued by the SCA and CBUAE, as noted above.
Coordination with existing regulators
The DVAL stresses that the VARA will be linked to the DWTCA and will coordinate with the CBUAE “in all areas to ensure the protection and stability of the financial system” in Dubai. Separately, we understand that the SCA and the DWTCA entered into a Memorandum of Understanding in September 2021 to support the offering, regulation, issuance and trading of virtual assets in the DWTCA Free Zone.
The precise nature and extent of association of VARA with DWTCA, SCA and CBUAE remains to be determined. It is also unclear at this stage what VARA’s relationship will be with the SCA and CBUAE in coordinating the regulation of activities, and whether overlapping or consolidated licensing regimes will be imposed with respect to activities. of virtual assets in Dubai.
Comment
The DVAL is a timely development for the emerging virtual asset market and regulatory framework in the UAE. While the DVAL establishes a phased framework to introduce industry-defining standards for virtual asset services in Dubai, key questions remain regarding: (i) the interaction between the DVAL and current federal law; (ii) the intended relationship between VARA, DWTCA, SCA and CBUAE; and (iii) the scope of the authorization requirement under the DVAL and its impact on the offer and supply of cross-border products and services in the UAE.
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