I INTRODUCTION TO THE LEGAL AND REGULATORY FRAMEWORK

The United Arab Emirates (UAE) has a developing legal system that has rapidly modernised in recent years. The overall legal system is a civil law system influenced by shariah (Islamic law), of which the major legal codes include the Civil Transactions Law, the Commercial Transactions Law, the Penal Code and the Commercial Companies Code. In addition to UAE federal law, each of the seven emirates of the UAE (Dubai, Abu Dhabi, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah) have their own laws and regulations in areas where there is no federal law. In the field of financial and capital markets, the UAE Central Bank and the Securities and Commodities Authority (SCA) are, however, the federal regulators.

Each emirate also has its own free zones, which have limited independence from the emirate and federal law that applies to foreign investment restrictions and customs. There are, however, two financial free zones established pursuant to the UAE Constitution and federal law that are entirely separate jurisdictions in the sense that they have a regime of civil and commercial laws separate from the remainder of the UAE. The two free zones are the Dubai International Financial Centre (DIFC), where the regulator is the Dubai Financial Services Authority (DFSA), and the Abu Dhabi Global Market (ADGM), where the regulator is the Financial Services Regulatory Authority (FSRA). The DIFC applies a common law system modelled on English common law, while the ADGM applies English common law itself. UAE federal criminal laws do, however, apply in the DIFC and the ADGM (e.g., the federal anti-money laundering laws). Where necessary, the onshore UAE, the DIFC and the ADGM are dealt with separately in this chapter.

Although distributed ledger technology is presented as a government priority, the regulation of virtual currencies in the UAE remains limited, apart from in the ADGM, which has recently issued extensive regulation and consequently attracted significant interest by industry players. Although virtual currencies are not prohibited, the SCA and the DFSA have issued circulars to caution investors on virtual currencies, without, however, taking a firm regulatory position.

II SECURITIES AND INVESTMENT LAWS

i Onshore UAE

In the onshore UAE, the UAE Central Bank and the SCA share responsibility for the regulatory oversight of the UAE's financial and capital markets. This includes the non-financial free zones, such as the Dubai Multi Commodities Centre (DMCC) and the Dubai Silicon Oasis (DSO).

Although the SCA announced on 9 September 2018 that it would issue a regulation to govern ICOs and determine the status of coins and tokens in mainland UAE, at the time of writing, neither the Central Bank nor the SCA have issued or amended any securities, financial, investment or commodities laws to take account of the rise of virtual currencies. This may be considered surprising giving the large-scale overhaul of the UAE's banking laws and its Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Framework in 2018 and 2019, as well as the enthusiasm professed for distributed ledger technology and blockchain in the country.

However, even without regulatory action, depending on the technology underlying or rights attaching to a coin or token, UAE securities, investment or financial laws may potentially apply to coins and tokens. Persons or entities issuing or dealing in or with tokens should exercise caution, particularly following the SCA's warning in a circular of 3 February 2018: while the primary focus of the circular was cautionary and mainly focused on initial coin offerings, it is noteworthy that the SCA requested all issuers, intermediaries facilitating initial coin offerings and trading platforms to ensure that they comply with all applicable laws.2

Securities and related investments are primarily governed by Federal Law No. 4 of 2000 Concerning the Emirates Securities and Commodities Authority and Market (the Securities Law),3 and regulations issued thereunder and relating thereto.4 The Securities Law established the SCA as a second federal regulator and includes basic rules on the offering of securities.5 Under the Securities Law, any securities or commodities market or exchange must be in the corporate form of a local public institution or public corporation and must be licensed by the SCA.6 This requirement was relaxed in 2014, permitting the listing of securities in private joint-stock companies on regulated exchanges.7 The licensing requirement also applies to brokers. The Securities Law and (most) regulations issued thereunder define securities as 'shares, bonds and notes . . . and any other domestic or non-domestic financial instruments accepted by the Authority'.8 The definition leaves room for the Authority (the SCA) to subsume virtual currencies or tokens within its definition. The Law defines commodities as '[a]gricultural produce and natural resources extracted from under the ground and the seas after being processed and prepared for commercial use', which would not appear to cover virtual currencies. However, later regulation defines commodities to include 'and any other commodities traded in contracts'.9

Highly relevant to trading platforms of virtual currencies, the activity of market making requires a licence from the SCA. Market making is defined as 'the activity which mainly depends on providing continuous prices for the purchase and sale of certain securities to increase the liquidity of such securities'.10 Where coins or tokens are considered securities, the provision of trading bots to ensure liquidity of the token may therefore potentially amount to a regulated activity in onshore UAE.

ii DIFC

The DFSA, the DIFC's competent regulator, has stated that it currently does not regulate digital coins or tokens and considers them to be high risk. 11 It also currently does not license any firms in the DIFC to carry out activities related to virtual currency investments.

The core laws regulating licensable businesses in the DIFC and administered by the DFSA are:

  1. the Regulatory Law 2004;
  2. the Markets Law 2012;
  3. the Law Regulating Islamic Financial Business 2004;
  4. the Collective Investment Law 2010; and
  5. the Investment Trust Law 2006.12

The DFSA has issued a Rulebook that contains subsidiary legislation made under the Regulatory Law 2004 by the board of directors of the DFSA.13

The DIFC prohibits people from performing financial services, including dealing in and advising on investments such as securities and derivatives, unless authorised to do so.14 An activity constitutes a financial service under the Regulatory Law 2004, subject to various exemptions, if it amounts to:

  1. accepting deposits;
  2. providing credit;
  3. providing money services;
  4. dealing in investments as principal;
  5. dealing in investments as an agent;
  6. arranging deals in investments;
  7. managing assets;
  8. advising on financial products;
  9. managing a collective investment fund;
  10. providing custody;
  11. arranging custody;
  12. effecting contracts of insurance;
  13. carrying out contracts of insurance;
  14. operating an exchange;
  15. operating a clearing house;
  16. insurance intermediation;
  17. insurance management;
  18. managing a profit-sharing investment account;
  19. operating an alternative trading system;
  20. providing trust services;
  21. providing fund administration;
  22. acting as the trustee of a fund;
  23. operating a representative office;
  24. operating a credit rating agency;
  25. arranging credit and advising on credit; and
  26. operating a crowdfunding platform.15

The DIFC also prohibits financial promotions, which covers any communication 'which invites or induces a Person to (a) enter into, or offer to enter into, an agreement in relation to the provision of a financial service; or (b) exercise any rights conferred by a financial product or acquire, dispose of, underwrite or convert a financial product'.16

While there is extensive room for virtual currency transactions to fall within financial services or promotions, the statement of the DIFC indicates that at this point in time it does not consider the issuance of or dealing in digital tokens to fall within its wide regulatory framework.

iii ADGM

The competent regulator in the ADGM is the FSRA. In summer 2018, the FSRA issued a far-reaching framework regulating the operation of cryptoasset businesses, which was updated in May 2019.17

The FSRA considers coins and tokens 'digital assets'.18 As further expanded on in Section VII, the FSRA classifies those digital assets as digital securities, cryptoassets (e.g., Bitcoin, Ether), fiat tokens (i.e., digital tokens that are fully backed by fiat), derivatives and funds (i.e., derivatives over any digital assets and collective investment funds investing in digital assets) and other digital tokens (e.g., utility tokens).19 Only the latter remain unregulated. Where the FSRA classifies digital assets as digital securities or derivatives or funds, dealing in them and their issuance must fully comply with the provisions applying to securities, derivatives and funds as set forth in the Financial Services and Market Act (as amended) (FSMR) and ancillary rules issued by the FSRA. Where the digital asset is a cryptoasset, those operating a cryptoasset business, including cryptoasset exchanges, wallet providers or other intermediaries are required to hold a financial service provider licence to operate a cryptoasset business under the FSMR. Where fiat tokens are involved, activities may constitute money services under the FSMR.

III BANKING AND MONEY TRANSMISSION

The Central Bank is the UAE's banking, credit and monetary regulator, and:

  1. provides general regulation of banking-related matters;
  2. oversees the issuance of currency;
  3. supervises banking and other licensable financial activities;
  4. advises the government on financial issues;
  5. maintains foreign exchange reserves; and
  6. acts as a bank for the government and other banks in the UAE.

In September 2018, the UAE government overhauled its financial service and banking laws through the issuance of Federal Law No. 14 of 2018 concerning the Central Bank and Organisation of Financial Institutions and Activities (the Financial Services Law).20 The Financial Services Law replaced Federal Law No. 10 of 1980 concerning the Central Bank, the Monetary System and the Organisation of Banking as the main legal framework for banking in the UAE.21 The law regulates financial services within and from the UAE as well as the proceedings of the Central Bank. Despite its recent issuance, the Financial Service Law does not refer to cryptocurrencies or tokens.

However, in January 2017, the Central Bank issued the regulatory framework for stored values and electronic payment systems (the Stored Value Regulation) to regulate different types of electronic payments and stored value.22 The Stored Value Regulation applies in the UAE but does not apply in the DIFC and the ADGM. The Regulation defines virtual currencies as 'any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value'.23 The definition goes on to stipulate that virtual currencies are not covered by the Stored Value Regulation, but confusingly also suggests that their usage (and any transactions with them) is prohibited.24 In February 2017, the Central Bank Governor reportedly clarified that it is not prohibiting virtual currency transactions, and that they do not fall under the Stored Value Regulations.25

In the past, local banks in the UAE have adopted inconsistent and changeable restrictions on remitting funds to or receiving funds from cryptocurrency exchanges, typically without prior notice. The basis for such restrictions is typically the know your customer (KYC) and AML obligations applicable to banks (as further considered in Section IV). In May 2018, BitOasis, a virtual currency exchange serving UAE customers, suspended fiat-to-crypto transactions on its trading platform because of issues with its bank.26 In June 2018, the company was able reinstate that feature.27 As is the case elsewhere in the world, UAE banks have hesitated opening bank accounts for blockchain companies, although the position has improved recently.

IV ANTI-MONEY LAUNDERING

The UAE has enacted numerous laws at the federal level to prevent and punish money laundering and the financing of terrorism. In the course of 2018 and 2019, and just in time for the Financial Action Task Force (FATF) evaluation of the UAE's AML/CFT regime as part of FATF's 2nd mutual evaluations of member states in the MENA Region, the UAE tightened its AML regime considerably. The updates enshrine the risk-based approach to AML/CFT in the UAE in line with international standards. The main piece of legislation is Federal Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism And Financing of Illegal Organisations (the New AML Law)28 together with Cabinet Resolution No. (10) of 2019 Concerning the Executive Regulation29 of Federal Law No. 20 of 2018 (the AML Executive Regulation).30 The New AML Law and the AML Executive Regulation apply in all emirates, including the DIFC and ADGM. The New AML Law repealed the older Federal Law No. 4 of 2002 concerning Combating Money Laundering and Terrorism Financing Crimes. The overhaul of the UAE's AML/CFT regime went hand in hand with the issuance of the Central Bank Law complementing the New AML Law.

The New AML Law defines the crimes of money laundering and terrorist financing and details the sanctions for such activities. Additionally, Law No. 7 of 2014 on Combating Terrorism Offences (the CTO Law), which was not repealed by the New AML Law, addresses the combating of terrorism crimes.31

The main money laundering offence is defined in Article 2 of the New AML Law. The offence renders a person a perpetrator of money laundering who:

  1. conducts any transaction aiming to conceal the funds' illegal source;
  2. conceals the true nature, origin, location, way of disposition or ownership of rights with respect to the proceeds of a transaction;
  3. acquires, possesses or uses the proceeds upon receipt; or
  4. assists the perpetrator of the office to escape punishment.

Crucially, it is not required to prove the illicit source of the funds to convict a person for money laundering. It is, however, only money laundering if the person is fully aware that such funds are derived from a felony or a misdemeanour.

For the purposes of virtual currencies, funds refer to any assets whatsoever including assets in digital or electronic form.32 Virtual currencies do fall within the scope of the UAE's AML/CFT regime.

Sanctions for money laundering include prison sentences of up to 10 years, monetary fines for individuals of between 100,000 dirhams and 5 million dirhams. Where a representative of a legal person commits any of the New AML Law's money laundering offences, monetary fines range from 500,000 dirhams to 50 million dirhams.33 Where the entity is convicted of terrorist financing, it is dissolved. In all cases, tainted funds are to be forfeited or, where this is not possible, equivalent funds seized.34 Forfeiture also applies to virtual currencies. Again, while cryptocurrencies are not specifically mentioned in the legislation, any virtual funds will be considered assets the court may confiscate if those funds are tainted by money laundering. Other offences include intentionally failing to report a suspicious activity or to provide additional information upon request, deliberately concealing information35 and tipping off.36 Failing reporting duties because of gross negligence also attracts prison sentences or fines, or both.37 Breaches by obliged entities may attract penalties ranging from warnings, revocation of licences, fines to arrest of responsible personnel.38

The New AML Law broadly applies to financial institutions, and in contrast to previous regulation, now also explicitly designates non-financial businesses and professions and non-profit organisations as obliged entities.39 The term 'financial institutions' includes anyone who does any of the following on behalf of a customer:

  1. receives deposits and other funds that can be paid by the public;
  2. provides private banking services, credit facilities, cash brokerage services, currency exchange and money transfer services, stored value services, electronic payments for retail and digital cash, and virtual banking services;
  3. conducts financial transactions in securities, finance and financial leasing;
  4. issues and manages means of payment, guarantees or obligations;
  5. trades, invests, operates or manages funds, option or future contracts, and exchange rates;
  6. conducts interest rate transactions, other derivatives or negotiable financial instruments;
  7. participates in issuing securities and providing related financial services;
  8. manages fund portfolios;
  9. manages saving funds;
  10. prepares or markets financial activities;
  11. conducts insurance transactions; or
  12. conducts any other activity or financial transaction determined by a supervisory authority.40

Designated non-financial businesses and professions include brokers when they conclude operations for the benefit of customers concerning a real estate transaction, dealers in precious metals or stones in any related transactions of 55,000 dirhams or more, lawyers, notaries and accountants when preparing, conducting or executing financial transactions for clients in respect of certain transactions, and providers of corporate and trust services or anyone so determined by a supervisory authority.41 Non-Profit organisations include 'any organised group, of a continuing nature set for a temporary or permanent time period, comprising natural or legal persons as well as not-for-profit legal arrangements for the purpose of collecting, receiving or disbursing funds for charitable, religious, cultural, educational, social, communal or any other charitable activities'.

The definitions are wide and non-exhaustive. The definition for activities rendering an entity a financial institution includes the provision of 'digital cash', without any further explanation as to whether this definition includes any or all forms of crypto or whether only fiat-like tokens such as stablecoins, particularly those pegged to a fiat currency42 are caught by the definition. However, the definition of assets taken together with the scope of obliged entities is wide enough to cover establishments dealing in or with virtual currencies, including blockchain ventures structured as foundations.

The New ALM Law and its Executive Regulation also expands the powers of institutions, units and committees charged with supervision and enforcement of the UAE's AML/CTF regime.43 These include, among others, the Central Bank, which operates the Financial Intelligence Unit and is to receive suspicious activities report filings from obliged entities, the DMCC Authority within its free zone, the DFSA in the DIFC and the FSRA in the ADGM.44

In June 2019, the UAE government announced that regulated entities, including financial institutions, would be required to use 'goAML', a UN-developed software platform, to file any suspicion activity report of money laundering to the Central Bank's Financial Intelligence Unit.45 The initiative underscores the UAE's commitment to meet international best standards in AML and CTF and digitise its economy.

i DIFC

The AML Law, the CTO Law and their implementing regulations apply in the DIFC by virtue of Article 3 of the Regulatory Law. Violations of the mainland UAE AML/CTF regime may also be punished in the DIFC.46 Additionally, the DIFC has its own AML/CFT regime contained in Chapter II of Part IV of the DIFC Regulatory Law and the Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Module (the AML Rules) of the DFSA Rulebook. Until the issuance of the New AML Law in mainland UAE, the DIFC regime went beyond UAE requirements. After some amendments in October 2018, they are now largely in line and ensure compliance with the FATF's 2012 recommendations.47

The AML Rules apply a risk-based approach to authorised firms (other than credit rating agencies), authorised market institutions, designated non-financial businesses or professions, and auditors. If a blockchain or virtual currency business were licensed by the DFSA, it would be obliged to comply with its AML Module, which includes extensive customer due diligence and continuing AML monitoring. Decentralised cryptocurrency exchanges may have difficulty complying.

ii ADGM

The mainland UAE AML/CTF regime also applies in the ADGM. Like the DIFC, the FSRA maintains a AML Rulebook, which complements the federal regulations and puts detailed requirements on regulated entities, including for risk-based KYC and AML controls.48 The FSRA overhauled the ADGM's framework in 2018 and 2019 to bring it in line with the New AML Law and implementing regulations.49 The Rulebook applies to all FSRA-regulated entities, including those regulated under the 2018 amendments to the FSMA relating to cryptoassets businesses.50

V REGULATION OF EXCHANGES

i Onshore UAE

At the time of writing, the SCA has not issued any regulations specifically addressing cryptocurrency exchanges and no cryptocurrency exchange fully operated out of the UAE. BitOasis, which was marketed as the 'first cryptocurrency exchange in the Middle East', was originally incorporated as an entity in the DSO, a Dubai free zone. BitOasis thereafter transferred to an entity incorporated in the British Virgin Islands and is now understood to seek licensing in the ABGM as a cryptoasset exchange.51

In December 2017, the DMCC announced that it added proprietary trading in crypto commodities as a licensable regulated activity.52 The DMCC has stated that it considers virtual currencies a commodity, and therefore considers activity concerning them to be within the free zone's jurisdictional and regulatory scope. This licence is restricted to buying and selling of crypto commodities on a licensee's own account. Importantly, it does not allow the holder of the licence to act as a cryptocurrency exchange. However, the licence appears to be suitable for the operation of trading bots that ensure liquidity on a trading platform. We are aware that at least one licence application to that effect has been granted. To receive a licence, an applicant must have a minimum issued share capital of 50,000 dirhams, present a business plan and reply to a questionnaire. In 2018, the DMCC issued a licence to Regal RA DMCC (Regal), a precious metal trader incorporated in the DMCC.53 Regal provides physical (cold) storage of virtual currencies it considers commodities on behalf of clients in its headquarters' vault.54

ii DIFC

Although the DIFC is home to NASDAQ DUBAI, one of the largest stock exchanges in the Middle East, and Dubai Mercantile Exchange, a major energy futures and commodities exchange, the DFSA has thus far not issued regulations specifically addressing cryptocurrency exchanges. Nor has it issued any full licences to businesses operating to that effect. Operating an exchange, a multilateral trading facility or an alternative trading platform are, among other things, licensable activities in the DIFC, and are regulated. However, given the DFSA announcement that it does not currently regulate tokens or coins, operating a virtual currency platform does not appear to fall within any such definition. The DFSA's regulatory sandbox, which issues 'innovation testing licences', has been reported to have issued a licence to TokenMarket Capital Limited to operate as a Category 4 adviser for issuers of or investors in security token offers in or from the DIFC. The company aims to establish a DFSA-licensed and regulated authorised market institution to operate a tokenised securities exchange in or from the DIFC.55 The development indicates that the DIFC may in due time adapt its regulatory regime to account for crypto businesses including exchanges.

iii ADGM

In contrast to the onshore UAE and the DIFC, a business must be licensed as a financial service provider to operate a cryptocurrency exchange in the ADGM if the exchange's activities fall within the ambit of operating a cryptoasset business under the regulations and guidance issued by the FSRA in June 201856 and updated in May 2019.57

The Financial Services and Markets (Amendment) Regulation 2018 defines a regulated cryptoasset business to include operating a cryptoasset exchange trading, converting or exchanging fiat currency or other value into accepted cryptoassets, accepted cryptoassets into fiat currency or other value, or one accepted cryptoasset into another accepted cryptoasset.

The ADGM thus regulates both fiat-to-crypto and crypto-to-crypto exchanges. Importantly, however, the transmission of cryptoassets is specifically excluded from the ambit of cryptoasset business.58 Accordingly, depending on the structure of an exchange, some decentralised non-custodial exchanges appear to fall outside the definition.

The Regulation allows cryptoasset exchanges to trade in what is termed accepted cryptoassets only. The FSRA decides which virtual currencies are accepted cryptoassets. No public register is maintained, because the determination as to what constitutes an accepted cryptoasset is specific to the applicant.59 The Regulation envisages a licensed cryptoasset exchange to be regulated like a multilateral trading facility, and is required to have in place the full gamut of oversight processes, such as:

  1. market surveillance;
  2. KYC and AML procedures;
  3. settlement processes;
  4. transaction recording;
  5. transparency and public disclosure mechanisms; and
  6. exchange-like operational systems and controls.60

Businesses hoping to operate a cryptoasset exchange out of the ADGM must pay an initial application fee of US$125,000 and an annual supervision fee of US$60,000.61 This compares to an initial application fee for other cryptoasset businesses of US$20,000 and an annual supervisory fee of US$15,000, which is to reflect the heightened regulatory burden of the FSRA supervising a cryptoasset exchange.62 Where the cryptoasset exchange also operates other licensable business, the fee is cumulative. Moreover, a trading levy between 0.0006 per cent and 0.0015 per cent is to be paid to the ADGM calculated on a sliding scale dependent on the average daily trading volume.63 A licensed cryptoasset exchange is required to maintain minimum regulatory capital in fiat at the standard of a recognised investment exchange, which is equivalent to 12 months' operational expenses.64 It may be higher, where the FSRA determines that the cryptoasset exchange is high-risk.65

At the time of writing, it is understood that BitOasis,66 Arabian Bourse (ABX)67 and DEX,68 among others, have been issued with an in-principle approval by the FSRA to operate their centralised cryptoasset exchanges and custodial wallets. Bithumb, the South Korean centralised cryptocurrency exchange, was also reported to be working towards opening a centralised cryptocurrency exchange in the ADGM through a partnership with Abu Dhabi-based N-VELOP.69 Abu Dhabi-based MidChains70 is also reported to have applied for a licence.

VI REGULATION OF MINERS

The mining of virtual currencies is not a regulated practice in the UAE, or in any of the free zones within the UAE. The activity of mining is also not covered in any previous legislation that would be applicable.

Even within the ADGM, the FSRA does not consider the mining of cryptocurrencies to be a regulated activity. The amended FSMA specifically excludes 'the development, dissemination or use of software for the purpose of creating or mining a Crypto Asset' from its regulated activities.71

VII REGULATION OF ISSUERS AND SPONSORS

i Onshore UAE

On 9 September 2018, the SRA announced that the issuance of a regulation governing ICOs was imminent. However, as at 29 June 2019, no regulations to this effect have been issued. In its warning issued in February 2018, the SCA reiterated that it does not regulate, mandate or recognise any ICO.72 At the same time, it urged that 'all issuers of digital tokens, intermediaries facilitating or advising on an offer of digital tokens, and platforms facilitating trading in digital tokens should therefore seek independent legal advice to ensure they comply with all applicable laws, and consult SCA where appropriate'.73

In the UAE, as in other jurisdictions, ICOs could be deemed to amount to a sale of a security, units in investment funds, commodities or other assets, depending on the underlying technology or rights attaching to the token. Where tokens have features like securities, ICOs can be anticipated to be subject to onshore UAE securities laws and would have to be licensed by the SCA.

ii DIFC

The DFSA has also taken a wait-and-see approach to explicitly regulating the issuance of ICOs and their issuers and sponsors. In September 2017, the DFSA issued a warning to investors and clarified that 'it does not currently regulate these types of product offerings or license firms in the Dubai International Financial Centre (DIFC) to undertake such activities'.74 However, the warning has not prevented the DFSA from accepting at least one company advising in the field of security token offerings into its regulatory sandbox.75

iii ADGM

In October 2017, the FSRA issued guidance applicable to those considering an ICO or transacting in virtual currencies.76 The guidance has been regularly updated (including in June 201877) and most recently in May 2019.78 The FSRA considers on a case-by-case basis whether an ICO is to be regulated under the FSMR.79 This would be the case where the FSRA determines that tokens exhibit the characteristics of securities under Section 58(2)(b) of the FSMR. In that case, the FSRA considers tokens to be securities, and an ICO must comply with the FSMR if it is issued to the public in or from the ADGM.80 Accordingly, where an ICO is issued abroad but offered to the public in the ADGM, a decision by the FSRA needs to be sought, unless buyers located in the ADGM are excluded from participation.

Further, a FSRA decision to consider a token to be a security triggers the prospectus obligations under Section 61 of the FSMR, other obligations under Chapter 4 of the FSMR Markets Rules, as well as AML and KYC requirements. The usual prospectus exemptions may apply where an offer is only made to professional clients (as defined in the FSMR) or fewer than 50 persons in any 12-month period, or where the consideration to be paid by a single person to acquire tokens is at least US$100,000.81 Classification as a digital security also triggers requirements for market intermediaries or operators, such as virtual currency exchanges, who trade in those tokens, to be regulated as financial services permission holders, recognised investment exchanges or recognised clearing houses.82 Additionally, the FSRA may consider tokens used by firms to build an investment fund on the blockchain as units in a collective investment fund (as defined in Section 106 of the FSMR) to which the ADGM's fund rules apply.83 This classification also triggers extensive regulatory requirements.

Where the token to be issued is a stablecoin, it may only be issued in the ADGM, where it is one-to-one backed by fiat currency.84 The FSRA then characterises the token as a fiat token. Its issuer is considered a money services business that must hold a financial services permission for the regulated activity of 'providing money services' pursuant to Schedule 1, Section 52 of the FSMR.85 Other requirements under the Operating a Crypto Asset Business framework also apply.

Only where the FSMR does not consider digital tokens to be digital securities, fiat tokens or derivatives is an ICO unlikely to constitute a regulated activity under the FSMR.86

VIII CRIMINAL AND CIVIL FRAUD AND ENFORCEMENT

Various UAE authorities have raised concerns about fraud related to cryptocurrency transactions. The SCA has warned UAE residents about and advised them to avoid trading in virtual currencies. The DFSA has advised potential investors to exercise caution and undertake due diligence to understand the risks involved.87 One reason for the FSRA's decision to regulate cryptoassets was to prevent significant financial crimes and other risks.88 The Dubai police has also raised the matter.89

Reports have surfaced about virtual currency-related frauds in the UAE, mainly in relation to over-the-counter transactions to buy and sell virtual currencies,90 investment schemes and scam cryptocurrencies91 and about the embezzlement of cryptocurrencies by an employee of a cryptocurrency exchange.92 We are also aware of instances where UAE commercial banks have halted cryptocurrency-related transactions pending approval from the Central Bank.

Owing to a lack of legislation on the federal level, there are no specific criminal or civil penalties in place for the misuse of cryptocurrencies in the onshore UAE or the DIFC, and prima facie outside of the scope of standard criminal provisions such as fraud, embezzlement or theft. However, this no longer appears to be the case for money laundering and terrorist financing offences following the overhaul the UAE's AML/CFT regime. In the FSRA, operators of a cryptoasset business may be found guilty of the full gamut of financial crimes and administrative offences and misdemeanours, including market abuse, and making misleading statements and impressions.93

IX TAX

The UAE established the Federal Tax Authority in 2016, introduced an excise tax on certain goods in October 2017 and introduced a value added tax on all good and services in the UAE, with some limited exemptions, from January 2018.94 A sale of virtual currencies could be a taxable transaction under the value added tax laws, but the Federal Tax Authority has not issued any regulations on virtual currencies.

There is no corporate or income tax in the UAE. There are also no withholding tax or foreign exchange controls that impact cross-border payments involving virtual currencies.

X LOOKING AHEAD

A major topic in the UAE is the different regulatory positions that will be adopted by the UAE federal regulators (the Central Bank and SCA) and free zone regulators (the DFSA and FSRA). With the usage of cryptocurrencies and tokens becoming more popular in the Middle East, and the aspiration of the UAE to be at the forefront of new business regulations, we anticipate that the UAE will seek to adopt regulatory measures that are perceived as being pro-business. Regulators in the UAE are most likely to follow standards developed by international best practices and are likely to follow the recent FATF guidelines on cryptocurrencies.95

The SCA has announced the formation of a fintech team for the purpose of implementing fintech initiatives and updating the SCA with the latest fintech developments.96 The SCA stated that it would issue ICO regulations in autumn 2018, but as at 25 June 2019 no regulations have been issued. Moreover, the Dubai government has launched the Dubai Blockchain Strategy, under which blockchain technology is being studied and assessed to put all transactions with governmental authorities onto a blockchain by 2020.97 Using such technology may, in suitable instances, be cost-effective and more efficient for all the parties involved. In 2018, it was announced that the DIFC was exploring ways to transform into a blockchain-powered judiciary.98 In June 2019, the Dubai Land Department announced that it had signed an memorandum of understanding with Du, one of the state's telecoms operators, to launch blockchain-based real estate services, on a Du-developed blockchain said to be interoperable with both the Hyperledger and Ethereum blockchains.99 As the government's main goal is a high level of customer satisfaction across the board, it will prioritise exploring this technology, which will trigger the need to develop respective regulations.


Footnotes

1 Silke Noa Elrifai is of counsel and Christopher Gunson is a partner at Amereller.

2 SCA, Public Warning Statement on Initial Coin Offerings (ICO) (3 February 2018), available at
https://www.sca.gov.ae/English/Opendata/pages/warning/4.aspx (last accessed 25 June 2019).

3 Federal Law No. 4 of 2000 Concerning the Emirates Securities and Commodities Authority and Market (Securities Law) available in Arabic at http://www.dubaided.ae/English/DataCenter/BusinessRegulations/pages/federallaw4of2000.aspx (last accessed 25 June 2019).

4 See, for example, Council of Ministers' Decision No. 12 of 2000 concerning the Regulations as to the Listing of Securities and Commodities; Council of Ministers Decision No. 3/R of 2000 concerning the Regulations as to Disclosure and Transparency; UAE Central Bank Board of Directors' Resolution No. 164/8/94 regarding the Regulation for Investment Companies and Banking, Financial and Investment Consultation Establishment or Companies; Federal Law No. 2 of 2015 concerning Commercial Companies; Administrative Decision No. 3/RT of 2017 regulating venture capital funds; SCA Board of Directors Decision No. 1 of 2014 concerning the Regulation of Investment Management; SCA Board of Directors Decision No. 27 of 2014 on the Regulation of Securities Brokerage; and SCA Board of Directors Decision No. 18 of 2015 Amending Certain Articles of the Regulation as to Disclosure and Transparency, Administrative Decision No. (39/R.T) of 2017 concerning the Investment Policy of Open-ended Public Mutual Funds, Decision No. 18 of 2018 Concerning the Regulations as to Licensing Credit Rating Agencies.

5 Article 2, Securities Law.

6 Article 20, Securities Law.

7 SCA Board of Directors Decision No. 10 of 2014 Concerning the Regulation of Listing and Trading of Shares of Private Joint Stock.

8 Article 1 (Definitions), Securities Law.

9 See, for example, SCA Board Decision No. (157/R) of 2005 Concerning The Regulations As To Listing And Trading Of Commodities And Commodities Contracts available at https://www.sca.gov.ae/mservices/api/regulations/GetRegulationByIdAsPdf/105 (last accessed 25 June 2019).

10 SCA Board Decision 46 of 2012 concerning the regulations as to Market Makers.

11 DFSA, DFSA Issues General Investor Statement on Cryptocurrencies (13 September 2017), available at https://www.dfsa.ae/MediaRelease/News/DFSA-Issues-General-Investor-Statement (last accessed 24 June 2019).

12 DFSA administrative laws available at http://dfsa.complinet.com/en/display/display.html?rbid=1547&record_id=7475 (last accessed 25 June 2019).

13 DFSA rules available at http://dfsa.complinet.com/en/display/display.html?rbid=1547&record_id=1840 (last accessed 25 June 2019).

14 Article 41, DIFC Law No. 1 of 2004 (Regulatory Law).

15 DFSA General Rules, Rule 2.2.1 available at http://dfsa.complinet.com/net_file_store/new_rulebooks/d/f/DFSA1547_1843_VER420.pdf (last accessed 9 June 2019).

16 Article 41A, Regulatory Law.

17 See 73B of Schedule 1, Financial Services and Markets (Amendment No 2) Regulations 2018 available at http://adgm.complinet.com/net_file_store/new_rulebooks/f/i/Financial_Services_and_Markets_Amendment_No_2_Regulations_25_June_2018.pdf (last accessed 25 June 2019).

20 Federal Law No. (14) of 2018 Regarding the Central Bank and Organisation of Financial Institutions and Activities available at https://www.mof.gov.ae/en/lawsAndPolitics/govLaws/Documents/Decretal%20Federal%20Law%20No.%20%2814%29%20of%202018%20Regarding%20the%20Central%20Bank.pdf (last accessed 26 June 2019).

21 Federal Law No. 10 of 1980 concerning the Central Bank, the Monetary System and Organization of Banking available at https://www.centralbank.ae/pdf/OffGazetteB.pdf (last accessed 5 August 2018).

22 UAE Central Bank, Regulatory Framework for Stored Values and Electronic Payment Systems (1 January 2017).

23 ibid., A.1.

24 ibid., D.7.3.

25 Gulf News, 'UAE Central Bank clarifies virtual currency ban', available at https://gulfnews.com/business/sectors/banking/uae-central-bank-clarifies-virtual-currency-ban-1.1971802 (last accessed 9 June 2019).

26 Gulf News, 'BitOasis confirms suspension of dirham transactions from June 4', (20 May 2018) available at https://gulfnews.com/business/sectors/technology/bitoasis-confirms-suspension-of-dirham-transactions-from-june-4-1.2224349 (last accessed 9 June 2019).

27 Arabian News, 'Dubai crypto exchange BitOasis reinstates AED deposits and withdrawals' (4 June 2018), available at https://www.arabianbusiness.com/banking-finance/398141-dubai-crypto-exchange-bitoasis-reinstates-aed-deposits-withdrawals (last accessed 9 June 2019).

28 Federal Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organisations (New AML Law) available at https://www.mof.gov.ae/en/lawsAndPolitics/govLaws/Documents/EN%20Final%20AML%20Law-%20Reviewed%20MS%2021-11-2018.pdf (last accessed 25 June 2019).

29 Cabinet Resolution No. (10) of 2019 Concerning the Executive Regulation of the Federal Law No. 20 of 2018 concerning Anti-Money Laundering and Combating Terrorism Financing available at https://www.mof.gov.ae/en/lawsAndPolitics/CabinetResolutions/Documents/Cabinet%20Decision%20No%20%20(10)%20of%202019%20CONCERNING%20THE%20IMPLEMENTING%20REGULATION%20%20%20.pdf (last accessed 26 June 2019); see also SCA Board Chairman's Decision No. (21/Chairman) of 2019 procedures of Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations.

30 The SCA Board Chairman's Decision No. (21/Chairman) of 2019 Procedures of Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations available at https://www.sca.gov.ae/english/regulations/pages/default2.aspx (last accessed 26 June 2019).

31 Federal Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organisations available at https://www.mof.gov.ae/en/lawsAndPolitics/govLaws/Documents/EN%20Final%20AML%20Law-%20Reviewed%20MS%2021-11-2018.pdf (last accessed 27 June 2019).

32 Article 1, Federal Law 9 of 2014.

33 Article 23, New AML Law.

34 Article 26, New AML Law.

35 Article 30, New AML Law.

36 Article 25, New AML Law.

37 Article 24, New AML Law.

38 Article 14, New AML Law.

39 Article 30, New AML Law.

40 Article 1, New AML Law read together with Articles 1 and 2, AML Executive Regulation.

41 Article 1, New AML Law together with Articles 1 and 3, AML Executive Regulation.

42 As for example the Gemini Dollar, Tether and True USD.

43 See Cabinet Resolution No. 38 of 2014 concerning the Executive Regulation of Federal Law No. 4 of 2002 Concerning Anti-Money Laundering and Combating Terrorism Financing.

44 See, for example, Section 7(6), Financial Services and Markets Regulations 2015, ADGM FSMR.

45 Khaleej Times, 'UAE financial firms to register on new platform or face penalties', available at https://www.khaleejtimes.com/news/crime-and-courts/uae-first-to-launch-un-developed-anti-money-laundering-platform (last accessed 26 June 2019).

46 See Article 71(1) of the Regulatory Law.

47 DFSA, The DFSA Rulebook Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Module, available at http://dfsa.complinet.com/net_file_store/new_rulebooks/d/f/DFSA1547_20015_VER130.pdf 

48 FSRA, Anti‐Money Laundering and Sanctions Rules and Guidance (AML), available at http://adgm.complinet.com/net_file_store/new_rulebooks/a/m/AML_VER03.150419.pdf (last accessed 26 June 2019).

49 ibid.

50 FSRA, Guidance – Regulation of Crypto Asset Activities in ADGM (25 June 2018), available at https://www.iosco.org/library/ico-statements/Abu%20Dhabi%20-%20FSRA%20-%20Guidance%20-%20Regulation%20of%20Crypto%20Asset%20Activities%20in%20ADGM.pdf (last accessed 25 June 2019), p. 8; see also Chapter 17.1.2 of the FSRA Conduct of Business Rulebook.

51 The company operating BitOasis is operated by BO Technologies Ltd, information available at
https://bitoasis.net/en/front/privacy-policy (last accessed 25 June 2019).

53 Arabian Business, Dubai's first licensed Bitcoin trader: 'It's a commodity not a currency' (13 February 2018), available at https://www.arabianbusiness.com/banking-finance/389854-dubais-first-licensed-bitcoin-trader-its-commodity-not-currency (last accessed 27 June 2019).

54 https://regalassets.ae/cryptocommodities/ (last accessed 27 June 2019).

55 https://livecryptonews.info/the-impact-of-regulatory-licences-on-blockchain/; see also https://www.dfsa.ae/MediaRelease/News/DFSA-Regulatory-Sandbox-accepts-seven-new-firms-in; https://www.difc.ae/public-register/tokenmarket-capital/ (last accessed 27 June 2019).

56 73B of Schedule 1, Financial Services and Markets (Amendment No. 2) Regulations 2018 available at http://adgm.complinet.com/net_file_store/new_rulebooks/f/i/Financial_Services_and_Markets_Amendment_No_2_Regulations_25_June_2018.pdf (last accessed 25 June 2019).

57 73B of Schedule 1, Financial Services and Markets (Amendment No. 2) Regulations 2018 available at http://adgm.complinet.com/net_file_store/new_rulebooks/f/i/Financial_Services_and_Markets_Amendment_No_2_Regulations_25_June_2018.pdf (last accessed 25 June 2019); Guidance – Regulation of Crypto Asset Activities in ADGM available at https://www.adgm.com/-/media/project/adgm/legal-framework/documents/guidance-and-policy/guidance-for-applicants/fsra-guidance/guidance-regulation-of-crypto-asset-activities-in-adgm_v20_20190514.pdf (last accessed 25 June 2019) (FSRA Crypto Asset Guidance).

58 32C(3) of Schedule 1, Financial Services and Markets (Amendment No. 2) Regulations 2018.

59 258(1) Financial Services and Markets (Amendment No. 2) Regulations 2018. See also, Guidance – Regulation of Crypto Asset Activities in ADGM available at https://www.adgm.com/-/media/project/adgm/legal-framework/documents/guidance-and-policy/guidance-for-applicants/fsra-guidance/guidance-regulation-of-crypto-asset-activities-in-adgm_v20_20190514.pdf (last accessed 25 June 2019), Para. 30.

60 FSRA Crypto Asset Guidance.

61 FEES Rule 3.14.1 and FEES Rule 3.14.2; see also FSRA Crypto Asset Guidance, p. 34.

64 See also, FSRA Crypto Asset Guidance, Paras. 30 to 33.

65 ibid.

66 Coindesk, 'BitOasis Clears Hurdle in Bid to Launch Regulated Crypto Asset Exchange' (13 May 2019) available at https://www.coindesk.com/bitoasis-clears-hurdle-in-bid-to-launch-regulated-crypto-asset-exchange (last accessed 29 June 2019).

67 Funds Global Mena, 'Crypto exchange gets approval in Abu Dhabi' (14 June 2019), available at http://www.fundsglobalmena.com/news/crypto-exchange-gets-approval-in-abu-dhabi (last accessed 27 June 2019).

68 Zawya, 'DEX Secures In Principle Approval For Crypto Asset Exchange From ADGM's Financial Services Regulator' (24 June 2019), available at https://www.zawya.com/mena/en/press-releases/story/DEX_Secures_In_Principle_Approval_For_Crypto_Asset_Exchange_From_ADGMs_Financial_Services_Regulator-ZAWYA20190624093627/ (last accessed 27 June 2019).

69 Cointelegraph, 'Bithumb Partners With Blockchain VC Firm Nvelop to Launch Exchange in UAE: Report' (12 February 2019), available at https://cointelegraph.com/news/bithumb-partners-with-blockchain-vc-firm-nvelop-to-launch-exchange-in-uae-report (last accessed 26 June 2019).

70 https://midchains.com/ (last accessed 27 June 2019).

71 73C(2) of Schedule 1, Financial Services and Markets (Amendment No. 2) Regulation 2018.

72 SCA, Public Warning Statement on Initial Coin Offerings (ICO) (3 February 2018), available at
https://www.sca.gov.ae/English/Opendata/pages/warning/4.aspx (last accessed 25 June 2019).

73 ibid.

74 DFSA Issues General Investor Statement on Cryptocurrencies (13 September 2017), available at
https://www.dfsa.ae/MediaRelease/News/DFSA-Issues-General-Investor-Statement (last accessed 25 June 2019).

75 Livecryptonews, 'The Impact of Regulatory Licences on Blockchain' (19 June 2019), available at
https://livecryptonews.info/the-impact-of-regulatory-licences-on-blockchain (last accessed 27 June 2019).

76 FSRA, Supplementary Guidance – Regulation of Initial Coin/Token Offerings and Virtual Currencies under the Financial Services and Markets Regulations (October 2017), available at http://adgm.complinet.com/net_file_store/new_rulebooks/i/c/ICOs_and_Virtual_Currencies_Guidance_VER01.08102017.pdf

77 Guidance – Regulation of Initial Coin/Token Offerings and Crypto Assets under the Financial Services and Markets Regulations (June 2018) available at http://adgm.complinet.com/net_file_store/new_rulebooks/i/c/ICOs_and_Virtual_Currencies_Guidance_VER02.24062018.pdf (last accessed 29 June 2019).

78 FSRA, Regulation of Digital Security Offerings and Crypto Assets under the Financial Services and Markets Regulations (May 2019) available at http://adgm.complinet.com/net_file_store/new_rulebooks/g/u/Guidance_ICOs_and_Crypto_Assets_13052019.pdf (last accessed 29 June 2019) [FSRA ICO Guidance].

79 FSRA ICO Guidance, Article 3.3.

80 ibid.

81 FSRA ICO Guidance, Article 3.6.

82 FSRA ICO Guidance, Article 3.7.

83 FSRA ICO Guidance, Article 3.9.

84 FSRA Crypto Asset Guidance, Para. 161.

85 ibid.

86 FSRA ICO Guidance, Article 3.10.

87 See footnote 14.

88 FSRA Crypto Asset Guidance, p. 6.

89 CCN, 'Dubai Police Warns Against Crypto Scams, Predicts Electronic Money Will Replace Cash' (18 September 2018), available at https://www.ccn.com/dubai-police-warns-against-crypto-scams-predicts-replacement-of-cash-with-electronic-money/ (last accessed 29 June 2019).

90 Khaleej Times, 'Man arrested in UAE for Dh2 million Bitcoin fraud' (13 February 2018), available at https://www.khaleejtimes.com/news/crime/man-arrested-in-uae-for-dh2-million-bitcoin-fraud 

91 Gulf News, ''Serial' entrepreneur in Dubai accused of being serial scammer' (11 April 2019), available at https://gulfnews.com/uae/serial-entrepreneur-in-dubai-accused-of-being-serial-scammer-1.63241099 (last accessed 26 June 2019).

92 Khaleej Times, 'Dubai employee embezzles Dh800,000 in cryptocurrency fraud' (12 March 2018) available at https://www.khaleejtimes.com/news/crime/dubai-employee-embezzles-dh800000-in-cryptocurrency-fraud 

93 Sections 92, 102 and 103, FSMA (as amended).

95 FAFT, 'Guidance For A Risk-Based Approach Virtual Assets And Virtual Asset Service Providers' (21 June 2019), available at http://www.fatf-gafi.org/media/fatf/documents/recommendations/RBA-VA-VASPs.pdf (last accessed 29 June 2019).

96 See footnote 3.

97 Smart Dubai, 'Dubai Blockchain Strategy', https://smartdubai.ae/en/Initiatives/Pages/DubaiBlockchain
Strategy.aspx (last accessed on 29 June 2019).

98 Arabian Business, 'Smart Dubai, DIFC Courts to launch world's first Court of the Blockchain' (30 July 2018), available at https://www.arabianbusiness.com/technology/401774-smart-dubai-difc-courts-to-launch-worlds-first-court-of-the-blockchain (last accessed 29 June 2019).

99 Cointelegraph, 'Dubai Real Estate Department Signs MoU With Telecoms Firm to Implement Blockchain' (10 June 2019), available at https://cointelegraph.com/news/dubai-real-estate-department-signs-mou-with-telecoms-firm-to-implement-blockchain (last accessed 29 June 2019).