A general introduction to the regulation of virtual currencies in United Arab Emirates

A general introduction to the regulation of virtual currencies in United Arab Emirates

An extract from The Virtual Currency Regulation Review, 5th Edition

Introduction to the legal and regulatory framework

The United Arab Emirates (UAE) comprises a federation of seven Emirates (Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain). UAE Federal Law is a civil law system that incorporates elements of Egyptian and French civil law, as well as the principles of Islamic Sharia.2 The Federal financial regulators are the UAE Central Bank and the Securities and Commodities Authority (SCA). In addition to the Federal jurisdiction, each of the Emirates is entitled to choose to maintain their own separate local courts to deal with matters that are not reserved to Federal jurisdiction in the Constitution. Abu Dhabi, Dubai and Ras Al Khaimah maintain their own independent judiciaries, which apply civil law and Sharia principles. This chapter refers to these jurisdictions collectively as ‘Onshore UAE’.

Article 121 of the UAE Constitution also permits the establishments of free zones. Federal Law No. 8 of 2004 specifically permits a subset of the free zones called ‘Financial Free Zones’. The key elements of a Financial Free Zone (set down in Article 3 of Federal Law No. 8 of 2004) are that they are exempt from all Federal civil and commercial laws, but they remain bound by Federal criminal laws, including Federal Anti-Money Laundering legislation.3 The UAE has established two Financial Free Zones: the Abu Dhabi Global Market (ADGM)4 and the Dubai Internal Financial Centre (DIFC).5

Within the ADGM, there is a separate financial regulator, the Financial Services Regulatory Authority (FSRA), and separately the ADGM Courts. The ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 make English Common Law directly applicable in the ADGM, marking a clear distinction from the civil law applicable at the Federal level and in Onshore UAE. Similarly, within the DIFC, there is also a separate financial regulator, the Dubai Financial Services Authority (DFSA), and separately the DIFC Courts. The DIFC Courts also apply a common law system (i.e., DIFC law) modelled on the English Common Law (with its court rules closely modelled on the English Civil Procedure Rules) albeit, unlike in the ADGM, English law is persuasive but not directly applicable. In both the ADGM and DIFC Courts, proceedings are conducted in English with judgments written in English. Both the ADGM and DIFC are dealt with separately in this chapter where appropriate.

In 2018, the FSRA published extensive regulations making the ADGM:

the first jurisdiction in the world to introduce a comprehensive and bespoke regulatory framework for the regulation of spot virtual asset activities, including those undertaken by multilateral trading facilities, brokers, custodians, asset managers and other intermediaries.6

These laws, regulations and guidance have since been regularly updated, with the latest iterations issued on 24 February 2020 (see Section II).

The period of 2020–2021 saw the onshore Federal regulators publish their first regulations affecting cryptoassets. The SCA passed Decision No. 23 of 2020 Concerning Crypto Assets Activities Regulation (the SCA Virtual Asset Regulation)7 (see Section II) and the UAE Central Bank published both its Stored Value Facilities Regulation8 and the Retail Payment Services and Card Schemes Regulation.9 These regulations cover Payment Tokens (or stablecoins)10 but expressly exclude Security and Commodity Tokens.11 In addition, following a public consultation launched in June 2021, the SCA, UAE Central Bank, DFSA and FSRA cooperated on compiling the Guidelines for Financial Institutions Adopting Enabling Technologies, which were published on 15 November 2021 (the Enabling Technologies Guidelines). The Enabling Technology Guidelines are to be followed by all financial institutions licensed and supervised by the UAE Central Bank, SCA, DFSA and FSRA, and relate to the use of Distributed Ledger Technologies (DLT) (more commonly referred to as ‘Blockchain’) (see Section II).

Also in 2021, the DFSA updated its Rulebook to include Investment Tokens, which it defined as:

the Security or Derivative in the form of a cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using DLT or other similar technology; or a cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using DLT or other similar technology.12

The definition of Investment Token does not cover cryptocurrencies or asset-backed tokens (such as stablecoins). However, this has not stopped players in the crypto and blockchain space from establishing themselves in the DIFC. For example, the regional headquarters for Ripple is located in the DIFC and as of 29 April 2022, Binance’s payments technology company, Bifinity, also has a presence in DIFC.

In March 2022, the Emirate of Dubai and the DIFC’s DFSA both took significant steps towards regulating virtual currency.

On 8 March 2022, the DFSA issued Consultation Paper No. 143, which sets out its proposed regulatory framework for cryptocurrencies. The consultation states that ‘the development of these proposals was prompted by the need to introduce appropriate investor protection requirements in this area, while also facilitating the development of this market in a responsible and prudent manner.’

On 9 March 2022, Dubai Law No. 4 of 2022 Concerning the Regulation of Virtual Assets (the Virtual Asset Law) established the (onshore) Dubai Virtual Asset Regulatory Authority (VARA). VARA’s remit includes:

  1. regulating the issuance and release of virtual assets and NFTs;
  2. regulating and licensing virtual assets service providers;
  3. protecting personal data of users and beneficiaries;
  4. regulating and monitoring the platforms offering cryptocurrencies and digital wallets;
  5. monitoring digital transactions;
  6. preventing the manipulation or modification of prices of virtual assets;
  7. operating and managing virtual assets platforms services;
  8. exchange services between virtual assets and currencies, whether national or foreign;
  9. exchange services between one or more forms of virtual assets;
  10. virtual asset transfer services;
  11. virtual asset custody and management services;
  12. services related to the virtual asset portfolio; and
  13. services related to the offering and trading of virtual tokens.

Under Article 15(a), the effect of the Virtual Assets Law is to prohibit, in lieu of a licence issued by VARA, any activity in respect of virtual currencies (among other operations) that falls under Article 16. The ‘activities requiring permits’ listed at Article 16 include:

  1. provision of virtual asset platform operation and management services;
  2. provision of services for the exchange between virtual assets and national or foreign currencies;
  3. provision of services for the exchange between one or more forms of virtual assets;
  4. provision of virtual asset transfer services;
  5. provision of virtual asset safekeeping, management, or control services;
  6. provision of services related to virtual asset wallets; and
  7. provision of services related to offering, and trading in, virtual tokens.

VARA’s jurisdiction does not extend to the DIFC and only covers activities in respect of virtual currencies that are carried out in onshore Dubai (but outside of the DIFC). At present, no passporting regime exists between Onshore UAE and the DIFC, meaning that companies must choose in which jurisdiction to become licensed. Companies who wish to operate in both Onshore UAE and the DIFC need to be licensed in both jurisdictions.

In December 2021, the DIFC Courts announced the launch of the Digital Economy Court (DEC), which is a specialised court for the resolution of disputes arising out of the digital economy. On 21 March 2022, the DIFC Courts published its public consultation on the proposed Rule Amendment No.1 of 2022, which will incorporate a new section, Part 58, into the DIFC Court Rules (i.e., the civil procedure rules governing the conduct of proceedings before the DIFC Courts). These rules will be specific to disputes before the DEC. Part 58.7 sets out that a DEC claim can involve digital assets, including the digital environment, platform or system in which a digital asset exists or may exist (Part 58.7(1)), or claims relating to blockchains (Part 58.7(1)). Part 58.5(3) defines ‘a digital asset’ as cryptoassets, digital tokens, smart contracts or other digital or coded representation of an asset or transaction.13 The consultation closed on 20 April 2022 and, at the time of writing, the DIFC Courts have made no further announcements concerning the outcome of the consultation. However, it is understood that the DIFC hopes that the DEC will prove to be a key attraction for virtual asset businesses looking to establish themselves in the region, particularly since the jurisdiction of the DIFC Courts has extended beyond the DIFC, allowing commercial parties in any geographic location to ‘opt-in’ to the jurisdiction of the DIFC Courts.

Questions remain as to how the overlapping jurisdictions of the UAE Central Bank, SCA and VARA over virtual currencies will be reconciled in practice, the extent to which VARA will issue regulations and make decisions that are specific to virtual currencies within its jurisdiction or that have wider, national effect, and whether general securities, investment and banking laws, for instance, will be issued with specific applicability to virtual currencies.

Securities and investment laws

i Onshore UAE

A notable development in 2020–2021 was the issue of the SCA Virtual Asset Regulation,14 which regulates the ‘Offering, issuing, listing and trading of Crypto Assets in the State and related Financial Activities’ (Article 2(1)) by creating a licensing regime, issuing directives and facilitating (and responding to) inquiries relating to the licensing regime (Article 2(2)). The scope of the regulation is set out in Articles 3 to 5. ‘General Obligations in respect of Crypto Assets’ are set out in Chapter 2, including the Offering of Crypto Assets (Article 6) and the Offering of Security Tokens (Article 7) in the State, and Crypto Assets listing on a Crypto Asset Exchange (Article 8).

In the Emirate of Dubai, Article 6(1) of the Virtual Assets Law empowers VARA to, among other duties, ‘develop the general policy and the strategic plans related to regulating Virtual Asset services in the Emirate’. Amendments to Dubai laws relating to securities and investment that are specific to the creation, trade and storage of virtual currencies will be forthcoming.

In Cabinet Resolution No. 36 of 2022 issued on 11 April 2022,15 the UAE Federal Cabinet issued its resolution ‘Concerning Regulated Activity of the Crowdfunding Platform Operator’ (the Crowdfunding Regulations). Pertinent to securities and investment law, the Crowdfunding Regulations prohibit joint stock companies, investment funds, entities that operate activities within the securities, insurance or banking sectors, companies that intend to use crowdfunding to grant loans or invest in other companies or companies that have a paid-up capital of more than 6 million dirhams from applying for crowdfunding, thereby limiting the use of crowdfunding in a virtual currency context by the finance industry (Article 3). Although there is no specific prohibition on the use of virtual currencies in crowdfunding, certain provisions of the Crowdfunding Regulations create barriers to that activity, such as the limits on investments in crowdfunding prescribed in dirhams in Article 6(5).

Following a public consultation launched in June 2021, the UAE SCA, Central Bank, DFSA and FSRA have cooperated on the Enabling Technologies Guidelines.16 An ‘enabling technology’ is any technology encompassing an application programming interface (API), cloud computing, biometrics, big data analytics, artificial intelligence or a distributed ledger technology (DLT, as above). Specifically, blockchain is classified ‘as a type of DLT which stores and transmits data in packages called “blocks” that are connected to each other in a digital “chain”.’ Section 2 of the Enabling Technologies Guidelines contains key principles for all enabling technologies and for each of the specific enabling technologies defined in Section 1. Specific guidance (notably on Distributed Ledger Technology as defined in the Enabling Technology Guidelines at Section 1) is covered below (see Section V).


After its initial flurry of activity in 2018, which saw the ADGM become the first jurisdiction globally to produce a regulatory framework for cryptoassets, followed by extensive updates to its framework in 2020, the past 12 months have been comparatively quiet. The current framework comprises:

  1. the Financial Services and Markets Regulations (FSMR);
  2. Guidance on Regulation of Digital Securities Activities in ADGM;
  3. Guidance on Regulation of Digital Security Offerings and Virtual Assets under the FSMR; and
  4. Guidance on Regulation of Virtual Asset Activities in ADGM.

The table below provides a helpful summary of the position as set out on page 7 of the Guidance on Regulation of Digital Securities Activities in the ADGM:17

Category of Digital Assets or Instruments Regulatory Approach
Digital securities(e.g., digital/virtual tokens that have the features and characteristics of a security under the FSMR (such as shares, debentures and units in a collective investment fund)). Deemed to be securities pursuant to Paragraph 58(2)(b) of FSMR. All financial services activities in relation to digital securities, such as operating primary or secondary markets, dealing, trading or managing investments in or advising on digital securities, are subject to the relevant regulatory requirements under the FSMR. Market intermediaries and market operators dealing or managing investments in digital securities need to be licensed or approved by FSRA as FSP holders (including as multilateral trading facilities), recognised investment exchanges or recognised clearing houses, as applicable.
Virtual assets(e.g., non-fiat virtual currencies, virtual asset ‘exchange tokens’). Treated as commodities and therefore not deemed specified investments under the FSMR. Market intermediaries (e.g., broker dealers, custodians, asset managers) dealing in or managing virtual assets, and multilateral trading facilities using virtual assets, need to be licensed or approved by the FSRA. Only activities in accepted virtual assets will be permitted. Capital formation activities are not provided for under the virtual asset framework, and such activities are not envisaged under the Market Rules (MKT).
Derivatives and collective investment funds of virtual assets, digital securities and utility tokens. Regulated as specified investments under the FSMR. Market intermediaries and market operators dealing in such derivatives and collective investment funds will need to be licensed 8 VER02.240220 or approved by FSRA as FSP holders, recognised investment exchanges or recognised clearing houses, as applicable.
Utility tokens(e.g., tokens that can be redeemed for access to a specific product or service, typically provided using a DLT platform, do not exhibit the features and characteristics of a regulated investment or instrument under the FSMR). Treated as commodities and therefore not deemed specified investments under the FSMR. Unless such utility tokens are caught as accepted virtual assets, spot trading and transactions in utility tokens do not constitute regulated activities, activities envisaged under a recognition order (e.g., those of a recognised investment exchange or recognised clearing house), or activities envisaged under MKT.
Fiat tokens(e.g. stablecoins whose value are fully backed by underlying fiat currencies). Treated as a form of digital representation of fiat currency. Where used as a payment instrument for the purposes of money transmission as defined under the FSMR, the activity will be licensed and regulated as providing money services.

iii DIFC

Currently, the core laws regulating licensed business in the DIFC and administered by the DFSA are as follows:

  1. the Regulatory Law 2004, as amended;
  2. the Law Regulating Islamic Financial Business 2004;
  3. the Investment Trust Law 2006;
  4. the Collective Investment Law 2010; and
  5. the Markets Law 2012.

Under the Regulatory Law 2004, the DFSA has also issued its Rulebook, which contains further subsidiary legislation.

The DFSA has adopted a two-phase approach to its Digital Assets Regime. For several years the DFSA had maintained a wait-and-see approach to the question of whether it should regulate cryptoassets. However, in March 2021, the DIFC launched a consultation on its proposed framework for security tokens (Consultation Paper No. 138 – Regulation of Security Tokens).18 This Consultation ended in the second quarter of 2021 and, in October 2021, the DFSA announced the introduction of its regulatory framework for investment tokens (referred to in Section I above), marking the first phase of its Digital Assets Regime.19

As part of the second phase of its Digital Assets Regime, in March 2022, the DFSA launched Consultation Paper No. 143 on the Regulation of Crypto Tokens, which sets out its proposed framework for crypto tokens.

Consultation Paper No. 143 proposes the following broad definition of a crypto token:

A Crypto Token is a Token that is used, or is intended to be used, as a medium of exchange or for payment or investment purposes but excludes and Investment Token, or any other type of Investment, or an Excluded Token. A Crypto Token includes a right or interest in the relevant Crypto Token.20

Notably, utility tokens (i.e., tokens that have a specific use case within a closed ecosystem), NFTs and Central Bank Digital Currencies are expressly designated as excluded tokens.21 Furthermore, it is also proposed that entities intending to offer financial services in relation to crypto tokens must establish in the DIFC as a body corporate and be incorporated under DIFC law.22

The DFSA’s proposals also aim to allow for the following services to be provided in relation to crypto tokens:

  1. dealing in investments as principal;
  2. dealing in investments as agent;
  3. arranging deals in investments;
  4. managing assets;
  5. advising on financial products;
  6. operating an exchange;
  7. providing custody;
  8. arranging custody;
  9. operating a clearing house; and
  10. operating an alternative trading system.23

The consultation remained open until 6 May 2022 and, at the time of writing, the DFSA has made no further announcements concerning the outcome of the consultation.