In brief
The United Arab Emirates’ (“UAE”) federal-level financial services regulator relevant to securities, commodities and now Virtual Assets Service Providers (“VASPs“), the UAE Securities and Commodities Authority (“SCA“), has just issued two new regulations relevant to Virtual Assets (“VAs“):
- SCA Chairman of the Board of Director’s Decision No. (26/RM) of 2023 in relation to Virtual Assets Platform Operators (the “SCA VA Exchange Regulations“); and
- SCA Chairman of the Board of Director’s Decision No. (27/RM) of 2023 amending SCA Chairman of the Board of Director’s Decision No. (13/RM) of 2021 in relation to the SCA Rulebook (the “SCA Rulebook Amendments Regulations“).
This follows the end of the grace period under UAE Cabinet Resolution 111 (that ended on 14 September 2023) for those conducting VASP activities within Onshore UAE (see Annex) to register with the SCA.
Both the SCA VA Exchange Regulations and the SCA Rulebook Amendments Regulations (together the “New SCA Regulations“) are only currently available in Arabic (which is the official and authoritative version of the regulations). As such, all English translations of provisions mentioned herein are the unofficial Baker McKenzie English translations of the authors. SCA’s own unofficial English language translations of the New SCA Regulations will likely be available in due course.
To download the full client alert including the Annex, which sets out an overview of the UAE’s financial regulatory framework, please click here.
In more detail
Following a number of key regulatory developments in the UAE’s VA space, in particular UAE Cabinet Resolution 111 (see Annex) where the SCA was established as the UAE’s federal-level VASP regulator, the SCA has now issued new regulations relevant to VA exchanges (outlining an ‘Accepted Virtual Asset’ approach, similar to that found in the DIFC and ADGM). This is a positive development for the UAE and helps clarify what the relevant VA regulations are at a federal level at the SCA (with the SCA VA Exchange Regulations now formally repealing the previous SCA Crypto Regulations). This sets the tone for what the SCA will likely do in the following months in terms of potential and anticipated subsequent VA-related regulations across additional activities.
Although VARA has its own VA issuance regime within the Emirate of Dubai (excluding the DIFC), and whilst UAE Cabinet Resolution 112 outlines that VARA’s decisions shall be consistent with the decisions issued by the SCA, it has yet to be seen whether there will be joint cooperation and coordination between the SCA, the DFSA (in the DIFC) and the FSRA (in the ADGM), particularly whether differences will emerge between the SCA’s ‘Accepted Virtual Asset’ List, the DFSA’s ‘Recognized Crypto Token’ List, and the FSRA’s ‘Accepted Virtual Asset’ List. Whilst the methodologies for review appear to be similar, a joint VA regulatory committee could avoid such differences and help ensure uniformity across all three financial services regulatory jurisdictions.
Additionally, in light of new rules and capital requirements for those seeking to engage in VASP-related activities, as well as technical requirements relevant to VA wallets, the New SCA Regulations continue the UAE’s development as a virtual assets friendly jurisdiction.
The SCA VA Exchange Regulations
The SCA VA Exchange Regulations define VAs as a “digital representation of a value that can be traded or digitally transferred and can be used for investment purposes, and does not include digital representations of fiat currencies, securities, or other funds”.
The SCA VA Exchange Regulations clarify that VA Exchange Platform Operators will be subject to certain provisions of:
- the SCA Board of Director’s Decision No. (2/R) of 2001 concerning the Regulations as to Trading, Clearing, Settlement, Transfer of Ownership and Custody of Securities, as amended (the “SCA Trading & Settlement Regulations“); and
- the SCA Rulebook (SCA Chairman of the Board of Director’s Decision No. (13/RM) of 2021).
The SCA have taken a similar approach to that of the DIFC’s DFSA and the ADGM’s FSRA (both of which have taken a ‘Recognized Crypto Token’ / ‘Accepted Virtual Asset’ approach) in that no VAs may be traded on such platforms unless approved on the SCA’s Official List of Virtual Assets.
With the exception of the UAE’s Financial Free Zones (the DIFC and ADGM, which constitute separate financial services jurisdictions under both the UAE’s Constitution and UAE Federal Law), VA’s may only be traded in the UAE upon being licensed by the SCA, or by the “competent authority”, which is reference to VARA’s ability to register VAs within the Emirate of Dubai (excluding the DIFC) under VARA’s VA Issuance Rulebook, VARA’s Exchange Services Rulebook, and VARA’s Virtual Assets and Related Activities Regulations 2023.
The SCA VA Exchange Regulations outline a number of duties and obligations for licensees, including but not limited to technology-related governance, stress-testing of systems and controls, relevant disclosures, short selling and trading-related controls, and compliance with the UAE’s federal anti-money laundering (“AML“) and Combatting the Financing of Terrorism (“CFT“) law – UAE Federal Decree-Law No. 20/2018 on Combating Money Laundering Crimes, the Financing of Terrorism and the Financing of Unlawful Organizations, which was updated in September 2021 (by virtue of UAE Federal Decree-Law No. (26) of 2021) to specifically include and add VASPs within the full scope of the law’s obligations in the same way as regulated financial institutions.
The SCA Rulebook Amendments Regulations
The second of the New SCA Regulations, the SCA Rulebook Amendments Regulations, amends certain provisions of the SCA Rulebook in relation to VAs and includes VAs to the list of products that may be dealt or brokered by SCA-regulated financial institutions.
For example, the definition of ‘Brokers’, ‘Dealers of Financial Products’, ‘Financial Consultation’, ‘Portfolio Management’ and ‘Custody’ services, all now extend to and cover VAs, with relevant compliance-related obligations.
Additionally, a new Category 7 License in relation to VASPs has been added to the SCA Rulebook, outlining the following capital requirements:
- a capitalization of AED 1 million plus six months of operating expenses if the activity is operating a VA Exchange Platform only;
- a capitalization of AED 2 million if the activity is the Brokerage of VAs;
- a capitalization of AED 4 million plus six months of operating expenses if the activity is the Custody of VAs; and
- a capitalization of AED 5 million plus six months of operating expenses if the operator of a VA Exchange Platform provides any other VA service.
Finally, further to the “Guidelines for Financial Institutions adopting Enabling Technologies” document jointly issued in November 2021 by the SCA, the DFSA, the FSRA and the CBUAE, the SCA Rulebook Amendments Regulations outline a robust technical framework for VA wallets, including provisions relevant to private keys, third-party outsourcing, risk management, the origin and destination of VA funds, and safeguarding mechanisms.
Baker McKenzie have advised extensively on a whole range of virtual assets, crypto, and other FinTech-related regulatory and compliance issues. From exchanges and AI in financial services, to NFTs, Web3, DAO, metaverse projects, and blockchain-enabled gaming, our team in the UAE cover the entire Midde East and North Africa (MENA) region, and work within a global team of FinTech and blockchain legal experts, and have expertise in coding and computer science.
To speak to us in relation to the New SCA Regulations, virtual assets, cypto and FinTech matters, or financial regulatory issues more generally, please reach out to the Baker McKenzie contacts below.
