Overview of Law No. 4 of 2022 on the Regulation of Virtual Assets in the Emirate of Dubai

• UAE

• Financial services and markets regulation
• Technology

24-03-2022

On 28 February 2022, Law No. 4 of 2022 on the Regulation of Virtual Assets in the Emirate of Dubai (the "RVA") was issued. It governs the use of Virtual Assets, which are defined in the RVA as “a digital representation 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 determined by the Authority in this respect.”

This definition of Virtual Assets under the RVA is expansive, and essentially includes any trade, exchange, transfer of use which is permitted by the Dubai Virtual Assets Regulatory Authority (the “Authority”).

For the most part, the RVA concerns the roles, powers and duties of the Authority. We expect that the Authority will in due course issue more detailed regulation in furtherance of the objectives intended by the RVA, and as such this law should be viewed as Dubai’s first big step in regulating the world of Virtual Assets.

The RVA is a Dubai-specific Regulation, and we await news on how other Emirates propose to deal with Virtual Assets. The RVA also stipulates that we are to expect implementing regulations from the Director General in order to facilitate its application.

Scope of the RVA

The scope of the RVA goes beyond previous federal legislation which covered similar areas, such as the Securities and Commodities Authority Decision No. 23/RM/2020 Concerning Crypto Assets Activities Regulation (the “Crypto Law”). The Crypto Law was drafted in such a way so as to not to overreach the mandate of the UAE Central Bank.

The RVA, on the other hand, sets out to regulate payments, exchanges and asset management, custody, trading, and transfers concerning Virtual Assets (see more on Activities below). Indeed, it even provides, under Article 6, that the Authority is to coordinate with the Central Bank on the all matters relating to the protection and stability of the country’s financial system, thereby indicating that Dubai will coordinate closely with the Central Bank on all such matters.

Virtual Tokens are also identified as being a form of Virtual Asset, where activities related to them are limited to trading on a Virtual Asset Platform, which is defined as a platform which is managed by a Virtual Asset Service Provider where Virtual Assets are sold, purchased, offered, issued, safeguarded and cleared and settled through the Distributed Ledger Technology, i.e. blockchain.

The Roles and Duties of the Authority

The Authority boasts extensive rights under the RVA and indeed its roles and powers constitute almost half of the law. The primary aim of the Authority under Article 5 of the RVA is to develop Dubai’s digital economy in such a way as to become the regional hub for all digital transactions concerning Virtual Assets.

The Authority is expected to raise investment awareness of the Virtual Asset sector, attract investment companies to establish themselves in Dubai, provide the necessary systems to protect investors and limit illegal activity, and provide the necessary rules, standards and regulations to enable control and oversight of “everything related to Virtual Assets”.

We expect the Authority to make large strides in this sector in short course.

Article 6 provides the Authority with very general powers of oversight and control, including, but not limited to, the classification and identification of Virtual Assets according to the standards and rules it is expected publish; regulating, and authorizing the operation of, Virtual Asset Service Providers, Distributed Ledgers Technology and Virtual Asset Portfolios regarding all matters concerning Virtual Assets; and establishing companies and firms alone or in association with others in order to achieve the objectives that the Authority will set.

The CEO of the Authority is specifically identified as a person with significant powers, to be exercised under the supervision and approval of the Director General. Such powers and duties are contained within Article 9 of the RVA and include, but are not limited to, preparing the Authority’s general policies and plans concerns strategy, operations and developments; preparing a code of professional ethics for all Virtual Asset Service Providers; and supervising the executive body of the Authority and appointing specialized personnel therein.

The RVA at Article 9.1 provides that all employees of the Authority, including the CEO, must declare any Virtual Assets which are owned by them personally or by their family members, presumably in order to avoid conflicts of interests and insider trading. Article 9 goes on to specifically highlight the confidential obligations placed upon all employees of the Authority as regards the work they do, and prevents any disclosure of such confidential information in any way.

Article 13 reinforces the restrictions placed on conflicts of interest by providing that the Authority may not conduct any business or activity or otherwise contribute to any project that would give rise to a conflict of interest or affect the discharge of its obligations under the RVA.

Under Article 18 the RVA provides the Authority with the power to suspend, restrict or re-operate any or all activities related to Virtual Assets in Dubai for reasons of public interest or as required under applicable regulation to be issued by the Authority. While the RVA does not provide for specific penalties other than a 6-month suspension to be issued at the discretion of the Authority, Article 20 states that the Authority will determine what constitutes a breach of the RVA and the specific penalties applicable thereto.

Undoubtedly, the provisions of Article 18 will dovetail nicely with the UAE Central Bank’s obligation to monitor suspicious transactions relevant to virtual asset service providers (under Federal Law by Decree No. (26) of 2021 Amending Certain Provisions of Federal Law by Law No. (20) of 2018 On Anti-Money Laundering, Combating the Financing of Terrorism and financing of Illegal Organisations to form a Financial Intelligence Unit).

The Regulation of Activities Concerning Virtual Assets

The current, non-exhaustive list, of activities to be regulated by the Authority are: Virtual Asset Platform operation and management; transfers of Virtual Assets; exchanges between various forms of Virtual Assets or between Virtual Assets and currencies; custody, management or control over Virtual Assets; Virtual Asset portfolio services; and Virtual Token offering and trading services (together the “Activities”)

The controls under Article 15 include limiting all Activities to those who are authorised to do so by the Authority. A person wishing to conduct any of the Activities must be based in Dubai and be licensed to work in the Emirate. Any commercial license issued from the Emirate for the intention of carrying out one of the Activities should be obtained only after receiving the necessary approvals from the Authority.

Therefore, we expect the Authority to implement a licencing regime upon its formation.

Conclusion

The RVA is an exciting step for the Emirate of Dubai in terms regulating Virtual Assets. We understand that the Dubai government are working closely with industry experts, there seems little in the way of barriers to achieving the stated aim of making Dubai a regional hub for the proliferation of Virtual Asset Activities.