From ADGM to DIFC: Crypto Regulations in the UAE
The United Arab Emirates region experiences significant growth in digital assets, which is driven by proactive measures and a strong DeFi presence. This article explores the regulatory environment in Abu Dhabi and Dubai in the backdrop of the UAE’s accelerated digital asset expansion.
A Magnet for Crypto Innovation in Dubai
The United Arab Emirates, particularly Dubai, has emerged as a significant hub for cryptocurrency innovation with its open and progressive regulatory stance. Recently, Dubai has rolled out a substantial 90% subsidy on commercial licenses for AI and Web3 enterprises, aiming to foster a dense cluster of next-generation tech firms in the MENA region. Combined with Dubai’s recent move to grant operational licenses to crypto entities, it reflects the emirate’s commitment to attracting global talent and becoming a magnet for diversified investors in the crypto sector.
Middle Eastern Crypto Status
Chainalysis’ recent report indicates that the Middle East & North Africa region occupies the sixth spot in the global crypto economy, accounting for 7.2% of the global transaction volume over the past year. Notably, the UAE has shown strong engagement in the DeFi sector, with 48.4% of its activities in DeFi protocols, just edging out its 45.7% involvement in CEX. The UAE’s DeFi activity is only slightly behind that of Israel, another significant player in the region, which boasts a 49.3% participation rate.
Furthermore, Statista anticipates robust growth for the UAE’s cryptocurrency market, expecting an 11.59% increase from 2023 to 2027, reaching a market volume of US$372.0 million. The growth potential is considered to be driven by its proactive regulatory frameworks and the rapid adoption of DeFi in the region.
Crypto Authorities and Frameworks in the UAE
Within the UAE, the virtual asset services landscape is governed by a multi-tiered regulatory framework. At a federal level, the overarching guidance comes from Cabinet Resolution Law №111. Delving deeper into the individual emirates, Dubai and Abu Dhabi each have distinct regulatory frameworks. In Dubai, the Dubai International Financial Centre (DIFC) provides its own guidelines, and there’s an additional layer of regulation from the Virtual Assets Regulatory Authority (VARA). Meanwhile, Abu Dhabi’s regulatory landscape is shaped by the Abu Dhabi Global Market (ADGM).
While there are other notable entities, such as the Dubai Multi Commodities Centre Free Zone (DMCC), this article will primarily discuss the regulatory environments of ADGM in Abu Dhabi, the VARA, and DIFC in Dubai.
ADGM’s Comprehensive Regulatory Approach
The Abu Dhabi Global Market (ADGM) ‘s comprehensive regulatory framework specifically addresses activities surrounding virtual assets. This framework offers guidance on various operations, from brokerage and custody to asset management within crypto assets.
The proactive approach adopted by the ADGM targets market operators, custodians, and intermediaries dealing in crypto assets, imposing an activities-based regulatory perspective. This method considers the inherent risks of each virtual asset activity, aiming to shield investors and the general public from potential fraud and other related risks.
ADGM’s initiatives extend to their recent proposals regarding Distributed Ledger Technology (DLT). In April, the ADGM proposed “DLT Foundations Regulations 2023,” which signaled a move to establish a tailored legislative framework for the decentralized economy. The framework is poised to provide clarity and guidance on governance structures, project disclosures, and critical operational issues such as liquidation processes.
This regulatory advance seeks to attract developers and firms operating with DLT and decentralized autonomous organizations (DAOs) by offering a clear and appealing governance structure. The consultation paper released indicates a concerted effort to engage industry participants and legal advisors, potentially sparking a surge in DLT projects within the region.
VARA’s Comprehensive Rulebook
In Dubai, the Virtual Asset Regulatory Authority (VARA) stands as the principal entity responsible for the oversight and regulation of Virtual Asset services. For any Virtual Asset Service Providers (VASPs) keen on conducting crypto-related activities within the emirate, obtaining a license from VARA is mandatory. Moreover, VASPs must satisfy various criteria, from capital requirements and corporate governance to risk management, audit provisions, and compliance with anti-money laundering and counter-financing of terrorism (AML/CFT) mandates.
VARA has a detailed rulebook that all licensed VASPs must follow, encompassing mandatory and activity-specific modules, and addresses various areas of operation, such as risk management, cybersecurity, audit, reporting, and customer due diligence. One critical directive involves managing FIAT Referenced Virtual Assets (FRVAs). Providers issuing these assets must hold a Category 1 VARA license and maintain 100% fiat reserves, ensuring that redemption remains swift and efficient. Moreover, to maintain stability, VASPs are barred from offering any incentives to FRVAs.
Recently, VARA published an updated Custody Services Rulebook, allowing VASPs licensed for Custody Services to offer staking services to their clientele. This permission is contingent on acquiring specific additional approval from VARA.
DIFC’s Crypto Regulations and Token Categorization
As the DIFC’s financial services regulator, the Dubai Financial Services Authority (DFSA) has advanced its cryptocurrency regulations. In 2021, the DFSA launched a unique framework specifically for investment tokens. By their description, these investment tokens resemble traditional securities or derivatives. A significant stride by the DFSA is its endorsement of businesses undertaking financial and related services concerning these investment tokens.
The DIFC’s regulatory approach is focused on the tokens. In 2022, the DFSA published a “Public List,” which officially recognizes only Bitcoin, Ethereum, and Litecoin. In November 2023, the DFSA approved and included two more tokens, Ripple (XRP) and Toncoin (TON), to the list, enabling financial institutions within the DIFC to transact with them.
If any of these coins undergo a fork, DFSA could reevaluate the new coin’s position on this list. In addition, crypto tokens that are absent from this list, or those not awarded special acknowledgment by the DFSA, set boundaries for businesses. Such businesses are restricted from offering related financial services, advertising offerings, and conducting ICOs, among other activities unless they secure explicit permissions.
Conclusion
The UAE is taking proactive steps as a formidable player in the global crypto landscape. The multi-tiered regulatory frameworks by VARA, ADGM, and DIFC reflect a vision of crafting a balanced ecosystem where growth and security coexist, fostering a secure and robust environment for investors and providers. Stay tuned for our upcoming article to explore the crypto regulatory developments in other Middle Eastern nations.
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Disclaimer
This content is not financial advice and it is not a recommendation to buy or sell any financial instruments, FX trading, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks.We strongly advise our readers to conduct their own independent research before engaging in any such activities. GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader's location. It is the reader's responsibility to know the applicable laws in their country.
