Can you trade cryptocurrency such as Bitcoin in the UAE?
A new decision by the Securities and Commodities Authority (SCA), being ‘The Chairman of the Authority’s Board of Directors Decision No. (23/R.M) of 2020 Concerning Crypto Assets Activities Regulation’ dated 01 November 2020 (Decision), dealing with Crypto Assets in the UAE was published a few months earlier. For sake of brevity, we offer an outline of the decision in this piece.
Essentially the Decision offers guidance on how Crypto Assets may be regulated in the UAE, including who can offer services, who can be offered the services in the UAE, and operation and guidelines for Crypto Asset activities. Whilst the Decision sets out the federal regulatory framework to deal with Crypto Assets in the UAE (both mainland and financial free zones), the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) had launched the region’s first comprehensive crypto asset regulatory framework in June 2018. Since then, the ADGM has emerged as the preferred hub for crypto asset activities in the region.
Initially, the UAE did not adopt a system to regulate previously issued cryptocurrencies as the term ‘cryptocurrency’ was unknown to many UAE residents before 2008-2009. However, the UAE has since grown to become one of the best ecosystems today for cryptocurrency activities worldwide.
These changes have largely come about due to the UAE government’s Blockchain Strategy 2021, wherein the government plans to move 50% of government transactions into a blockchain platform by 2021 using cryptographic and open-source technologies. In pursuance of the Strategy, the government-owned licensing firm Kiklabb now allows clients to pay for their visa and trade license fees using cryptocurrencies.
The cryptocurrency (a form of Crypto Assets) market is currently valued at over USD 1T. Even at such a unique time in history characterised by the global pandemic and ambiguities in the financial sectors, cryptocurrencies continue to thrive, with Bitcoin recently growing past the USD 50,000-mark.
Now is the best time for intrepid investors to understand the laws surrounding crypto assets in the UAE. Sue to the progressive and innovation-driven outlook of the UAE’s government, the crypto assets’ space is fast changing.
SCA Decision for Regulations of Crypto Assets Activities:
The high-level outline of the Decision (available online) is below:
- Who these laws apply to
- What is defined as Crypto Assets
- Who can offer Crypto Assets
- Who can Receive Crypto Assets
- Key takeaways from the Decision
Who these laws apply to
- fundraising platforms
- custodian services
- any person who conducts financial activities in respect of crypto assets
What are defined as Crypto Assets
The Decision bases the definition of Crypto Assets broadly as ‘a record within an electronic network or a distribution network that acts as a medium of exchange, storage, unit of account representation of ownership, usufruct that can be transferred electronically from one person to another through the operation of a computer programme or an algorithm governing its use.’ Recognizing that there could be different forms of Crypto Assets in the market, SCA vide the Decision extends the definition of Crypto Assets to include commodity tokens and security tokens.
Who can offer Crypto Assets
To offer Crypto Assets (or any related services) there are two requirements:
- Provider must be incorporated onshore within the UAE or any of the UAE’s financial free zones.
- Providers must be Licensed by the SCA.
Who can Receive Crypto Assets
Two classes of people can be offered Crypto Assets in the UAE.
- Qualified Investors:
- Institutional investors such as federal government, local governments, government institutions and authorities, foreign governments and their institutions or the companies fully owned by any one of the aforementioned; international bodies and organizations, who meet at least two of the following requirements:
- Hold assets worth more than AED 75m.
- Have a net annual revenue of AED 150m.
- Have a net equity or paid-up capital with a minimum of AED 7m.
- Individuals who hold AED 4m in funds and have an annual income of no less than AED 1m, and can verify that they possess sufficient knowledge and understanding about the risks of investing in crypto assets.
- Others, those who do not meet the eligibility criteria as a Qualified Investor (with SCA’s prior approval).
Key takeaways from the Decision
- Before approaching a qualified investor, Licensees must file documents with the SCA in advance of offering crypto assets to Qualified Investors. In all other cases, licensees must request prior approval from the SCA before offering crypto assets to non-Qualified Investors.
- Licensees may ‘passport’ the listing of crypto assets on one or more cryptocurrency exchanges.
- Strict provisions govern the use of subcontractors and employees working for crypto asset providers, custodians, escrow companies and other contractors insofar that they must possess the requisite skills and experience to perform their roles.
- Licensees may appoint subcontractors but will bear the risks and liabilities stemming from any breach of the Decision committed by their subcontractors. For this reason, the Decision requires licensees and their subcontracts to formulate a detailed service level agreement spelling out the division of responsibilities between both parties relating to cybersecurity and data protection.
- According to computing and data residency rules, any computer systems or cloud computing facilities must be located by service providers onshore within UAE using international standards. Typically, this is to entail service providers (or their subcontractors) being able to demonstrate compliance, at the very least with ISO9001 and ISO27001 and cybersecurity standards laid down by the UAE’s Federal Government.
- In the case of service providers who use offshore servers or public cloud facilities to encrypt, store, process or transfer crypto assets, or personal data, the SCA’s Decision requires such providers to utilise onshore cloud computing services to provide parallel backup and disaster recovery facilities.
- The SCA clarified that it has full powers to audit licensees and to monitor online transactions. In the event of any breaches, the SCA has wide-ranging powers to impose fines, suspend or withdraw a licensee’s right to offer crypto assets and publish the names of violators.
For anti-money laundering compliance and ‘know your customer’ checks on potential investors, the Decision clarifies that all customers must be classified and assessed as if they were a ‘high risk’. This broadly translates into conducting ‘enhanced due diligence’ into a customers’ source of funds, ultimate beneficial ownership structure, political exposure risks, the potential risks of customers being used as conduits for money laundering activities and any geographical risks presented by customers, their directors, shareholders and associated suppliers and intermediaries.
For more information on Crypto Asset guidelines in the UAE please contact us at ADG Legal:
Contact number: +971 4 4441 2031
Written by Mahdi Eldaw and Kostubh Devnani.