Dubai's Digital Assets Aspirations
The Situation: On 11 March 2022, Dubai Law No. 4 of 2022 Regulating Virtual Assets in the Emirate of Dubai (the "Law") came into effect. The Law establishes the foundation of a regulatory regime for virtual assets in Dubai with the goals of protecting investors and promoting responsible business growth. To achieve those goals, the Law: (i) creates a virtual assets regulator; (ii) empowers the regulator to create appropriate laws and regulations; (iii) defines "Virtual Asset"; and (iv) identifies services that will require a license.
The Result: The first six months of this Law have seen Dubai's dedicated virtual assets regulator, the Dubai Virtual Assets Regulatory Authority ("VARA"), take two important steps. First, it has issued administrative orders governing the marketing, advertising, and promotion of Virtual Assets. Second, it has issued provisional approval to operate in Dubai—referred to as a Virtual Asset Minimum Viable Product License ("MVP License")—to several global crypto, blockchain, and digital asset market participants.
Looking Ahead: We expect the regulations and orders to be established by VARA to cover a broad range of matters, including: (i) detail around the classification of different virtual assets and tokens; (ii) the issuance of a code of professional ethics binding on virtual asset service providers; (iii) a regime establishing embargos on specific virtual assets and/or virtual asset-related activities; and (iv) the development of rules and regulations related to KYC, anti-money laundering, and financial crime. In the medium-term, we hope to see regulations defining the extent and scope of cooperation as between the United Arab Emirates' ("UAE") federal pan-emirate, individual emirate, and financial free zone regulators. This should enable market participants to offer digital asset-related products and services across the UAE without seeking approvals from multiple authorities.
VARA has been established as an independent entity with financial and administrative autonomy to achieve the goals of the Law. VARA's jurisdiction spans across the Emirate of Dubai, including in all its free zones other than in the DIFC. Once the Law's implementing regulations are adopted, industry participants must establish a presence in Dubai, register with VARA, and obtain a license prior to engaging in any of the virtual assets activities identified in the Law.
VARA is mandated to protect investors and dealers in Dubai by monitoring transactions and preventing price manipulation of virtual assets. It has a broad range of powers to classify, define, regulate, expand, and prohibit these activities. Its responsibilities include:
- Issuing and enforcing the applicable rules in Dubai (excluding the DIFC) and developing a code of ethics;
- Establishing additional controls for conducting virtual assets-related activities, such as the provision of management, clearing, and settlement services for virtual assets;
- Assessing, classifying, and specifying the different types of virtual assets;
- Preparing the general policy and strategic plans related to the regulation of virtual assets services;
- Supervising, licensing, and regulating the sector across Dubai's mainland and the free zone territories (again, excluding the DIFC); and
- Providing anti-money laundering support and raising public awareness on dealing in virtual assets and their associated risks.
VARA undertakes its regulatory responsibilities in coordination with the Dubai Digital Authority, as well as with UAE federal regulators such as the Central Bank of UAE and the Securities and Commodities Authority. These regulators' oversight somewhat overlaps, and therefore, market participants in Dubai need to carefully consider all relevant regulations and engage with all three regulators at an early stage of any enterprise.
Definition of the Term "Virtual Assets" Under the Law
The Law broadly defines "Virtual Assets" as:
"digital representation[s] of value that can be digitally traded, transferred or used as an exchange or payment tool or for investment purposes, including virtual tokens, and any digital representation of any other value as determined by VARA."
Not only is this a broad definition, but its final limb empowers VARA to determine what may constitute a virtual asset, giving the regulator an element of control over the asset class. This reinforces the importance of market participants proactively engaging with regulators and advisors at an early stage.
The definition contains elements that are common to the legislative approach in other jurisdictions. For example, under the Law, "Virtual Assets": (i) are "created electronically/digitally"; (ii) "confer digital representation of value"; and (iii) are "digitally traded or transferred". Legislation in the United States, England, Singapore, and the European Union use similar elements when setting the parameters for what constitutes virtual or digital assets. Of course, this should not be taken to mean that "Virtual Assets" under the Law would by default constitute virtual or digital assets in these other jurisdictions. This is a fast-developing area of law, and these salient elements can change as the asset class evolves.
Presence and Licensing Requirements for Certain Service Providers
The Law requires service providers to establish a presence in Dubai, register with VARA, and obtain a license prior to conducting any of the following virtual assets activities in Dubai or any of its free zones:
- Operating and managing virtual assets platform services;
- Exchange services between virtual assets and currencies, whether national or foreign;
- Exchange services between one or more forms of virtual assets;
- Virtual assets transfer services;
- Virtual assets custody, management, or control services;
- Services related to the virtual assets' portfolio; and
- Services related to the offering and trading of virtual tokens.
VARA has been empowered to expand, classify, and/or further define the above activities and to set prohibitions on such practices.
Although the Law does not apply in the DIFC, as a practical matter, industry participants who wish to operate in the DIFC can at present do so from their onshore Dubai presence, given that neither the DIFC nor its regulator, the DFSA, have established a presence requirement.
It remains to be seen what VARA's presence requirement will mean for truly decentralized technologies, as the Law does not provide an exception for such technologies. However, with both the gift of giving and the power to revoke licenses, VARA is now the ultimate gatekeeper into Dubai's digital asset economy—with this in mind, prudent operators wishing to target consumers in Dubai would be well-advised to comply with the Law.
Implementing Regulations and Administrative Orders
The Law grants the Director General of the Dubai World Trade Centre Authority, of which VARA is a part, the power to adopt implementing regulations proposed by VARA and for VARA to issue administrative orders.
The timeframe for the issuance of any implementing regulations is not prescribed in the Law, and VARA has not disclosed its intended timeframe for proposing regulations. But under the Law, the Director General is empowered to issue regulations by publishing them on VARA's website, without the need to publish in the Official Legal Gazette. We expect the initial package of implementing regulations will set out, among other things, the administrative procedures related to the procurement of licenses, as well as the information and documents required of applicants for VARA to grant its approval. Ultimately, VARA's role in proposing these regulations gives it a high degree of influence over the future direction of Dubai's virtual assets regulatory regime.
On 25 August 2022, VARA issued its first two administrative orders. These orders establish: (i) the rules on marketing, advertising, and promotions related to virtual assets (the "Marketing Regulations"); and (ii) the fines applicable for breaches of the Marketing Regulations (the "Penal Regulations"). They are designed to ensure consumers, and in particular less sophisticated retail consumers, are safeguarded from unscrupulous actors in the industry.
The Marketing Regulations provide a nonexhaustive list of activities that constitute advertising and promotion. They also set out prescriptive guidelines on the nature of any advertising materials and how the promotion of virtual assets must be made in Dubai. Specifically, all marketing relating to virtual assets and/or virtual assets activities must:
- Be fair, clear, not misleading and clearly identifiable as marketing or promotional in nature;
- Not mislead in relation to the real or perceived advantages of virtual assets;
- Include a prominent disclaimer with respect to the volatility and unpredictability of the value of virtual assets;
- Not advocate that investments are safe, low risk, or that returns are guaranteed;
- Not imply that investment decisions are trivial, simple, easy, or suitable for all (without due diligence);
- Not imply that past performance of investments is an effective guide for, or guarantee of, a future return;
- Not imply an urgency to buy virtual assets in anticipation of future gains, or create a fear of missing out on future gains, by not buying now;
- Not advocate the purchase of virtual assets using credit or other interest accruing facilities;
- Ensure that any targeted marketing is undertaken responsibly by licensed entities, to present only appropriate products or services to the audience, including but not limited to defined criteria on investor qualification, and event attendance; and
- Otherwise comply with all applicable laws, regulations, guidelines, or other rules applicable across the UAE.
We expect these rules will apply to marketing and promotional materials or activities in a broad set of circumstances, ranging from coin/product launches to crypto-related events and conferences. Stakeholders across the digital asset industry should be aware of their application. Interestingly, the Marketing Regulations are intended to apply to any entity that seeks to target or cater for UAE residents and customers, even if the promoter is a foreign entity that is not licensed by VARA. How VARA will interpret the extent to which foreign entities "cater for residents" and therefore fall within the scope of the regulations is not yet clear. Even if a foreign entity falls within scope and is found to breach the regulations, it remains to be seen whether or how VARA will enforce its rules on an extraterritorial basis.
Enforcement and Penalties
Violations of the Law or of its future regulations can result in penalties and fines, including the suspension or revocation of a license to engage in virtual assets activities or the revocation of the violating party's commercial license.
In enforcing the Law and its related regulations, VARA has the capacity and powers of a judicial officer and can collaborate with the relevant local and federal authorities to access and seize records, documents, devices, and properties as needed. All persons, including virtual assets service providers, must cooperate with VARA and meet its requests in accordance with the provisions of the Law and its implementing regulations.
Penalties for noncompliance with the Marketing Regulations are set out in the Penal Regulations. Fines start from AED 20,000 and go up to AED 500,000 per offence for repeat offenders. VARA reserves the right to revoke any VARA-issued license, rescind any approvals, and/or suspend any commercial trade license in coordination with the relevant regulatory authorities.
VARA in Action
The first six months of this Law have seen VARA issue MVP Licenses to a number of global crypto, blockchain, and digital asset exchange applicants. The initial interest from global institutions is a positive step for Dubai's digital asset ecosystem and reinforces the value of regulating the industry. Applicants will be required to apply for full VARA licenses in due course.
Given the breadth of powers granted to VARA, we expect its future implementing regulations and administrative orders could cover a broad range of matters, including: (i) detail around the classification of the different types of virtual assets and tokens; (ii) the issuance of a code of professional ethics binding on virtual asset service providers; (iii) a regime establishing embargos on specific virtual assets and/or virtual asset-related activities; and (iv) the development of rules and regulations related to KYC, anti-money laundering, and financial crime. However, the extent to which virtual asset industry players with MVP Licenses actually establish long-term, meaningful operations in Dubai as a result of this new framework will depend very much on the details of the regime.
Given the ever-evolving nature of digital assets and the underlying technologies which underpin the asset class, we expect more laws and regulations regulating the industry to be adopted in the UAE in the short to medium-term. For example, we would not be surprised to see regulations defining the extent and scope of cooperation as between the UAE's federal pan-emirate, individual emirate, and financial free zone regulators. This should enable market participants to offer digital asset-related products and services across the UAE without potentially requiring multiple approvals. As the regulatory framework develops, investors and technology developers will benefit from the certainty afforded by an established regime, creating further opportunities for innovation and growth.
Contact us if you have any questions about the Law or would like more information about our capabilities on digital asset-related matters. Our international fintech team regularly advises businesses operating in the digital asset industry on complex matters, often requiring cross-border collaboration across disciplines ranging from regulatory compliance; banking, finance, and securities; corporate M&A and joint ventures; and fraud, anti-money laundering, and investigations.
Three Key Takeaways
- The virtual asset sector and efforts to regulate it are in the nascent stages, but Dubai is among the jurisdictions moving virtual asset regulation into the mainstream. Under its new Law, service providers engaging in virtual assets activities in Dubai or any of its free zones (except DIFC) must now: (i) obtain a valid license from VARA; (ii) establish a presence in the Emirate; and (iii) comply with provisions of the Law and its implementing regulations. For the time being, entities with a presence in onshore Dubai can operate in the DIFC without duplicating their presence there.
- The Law empowers VARA to propose regulations and gives the Director General of the Dubai World Trade Centre Authority the authority to issue such regulations by publishing them on VARA's website. While implementing regulations have not been published yet, VARA has issued two administrative orders that ultimately seek to protect consumers in relation to the marketing and promotion of virtual assets.
- VARA's powers are broad and include enforcement authority. Because of the penalties associated with violation of the Law or its implementing regulations, industry participants subject to the Law should engage early with VARA, other regulators in the UAE, and their advisors.
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