Blockchain & Cryptocurrency Regulation in the United Arab Emirates
This article was first published in the First Edition of the Global Legal Insights Blockchain & Cryptocurrency Regulation 2019, issued in September 2018.
Government attitude and definition
The United Arab Emirates (“UAE”) is a staunch supporter of blockchain technology. The Emirates Blockchain Strategy 2021 was launched in April 2018 and aims to handle 50% of all federal government transactions over the blockchain platform within three years. The initiative is expected to result in some impressive savings of AED11billion, 398 million printed documents, 1.6 billion kilometres of driving and 77 million work hours annually.
In Dubai (one of the seven Emirates of the UAE), His Highness Sheikh Hamdan Bin Mohammed Al Maktoum launched the Dubai Blockchain Strategy back in October 2016 with the intention that Dubai should be the first city fully powered by Blockchain by 2020. The Dubai Blockchain Strategy is a collaboration between Smart Dubai Office and the Dubai Future Foundation, and has three pillars:
Government Efficiency: The intention is to increase efficiency by enabling a paperless digital layer for transactions such as visa applications, bill payments and licence renewals.
Industry Creation: This will introduce a system to enable citizens and partners to create new business using the technology across multiple sectors such as real estate, Fintech, banking, healthcare, transportation, urban planning, smart energy, digital commerce and tourism.
International Leadership: Dubai will open its blockchain platform for global partners to enhance safety, security and convenience for international travellers to Dubai. Visitors will benefit from faster entry, pre-approved passport and security clearance and visas, easier mobility by way of approved driver’s licence and car rental, wireless connectivity and pre-authenticated digital wallets and payments.
As highlighted by the third pillar above, Dubai is playing an integral role in the international development of blockchain, with the creation of the Global Blockchain Council. It was founded by the Dubai Future Foundation and consists of 46 members including government entities, international private companies, leading UAE banks, freezones and international blockchain technology firms.
There are already a number of private and public sector blockchain initiatives in the UAE including: Emirates NBD which is developing a service for validating bank cheques; the Dubai Roads and Transport Authority which is launching a vehicle lifecycle management system; and the Dubai Land Department which is in the process of migrating to a blockchain system.
Whereas the underlying blockchain technology has clearly been welcomed in the UAE with open arms, cryptocurrencies are experiencing more of a mixed reception here – at least from the regulators.
Generally speaking, there is currently a lacuna of specific legislation covering cryptocurrencies. Most of the financial regulatory authorities in the UAE have taken the position of issuing warnings of the risks inherent in certain cryptocurrencies and initial coin offerings (“ICO”) and are considering draft regulations. The position of the UAE Central Bank is somewhat uncertain because, as we look at in more detail below, the digital payment regulations expressly prohibit ‘virtual currencies’, but there was a subsequent statement made clarifying that these regulations do not apply to cryptocurrencies such as Bitcoin. Only a few of the freezones (out of the 45+ in the UAE) are known to have granted licences to cryptocurrency companies, and only one of the financial freezones has taken the ‘bull by the horns’ and issued a regulatory regime for cryptocurrencies and ICOs.
What is clear is that the UAE Government is committed to develop its own cryptocurrency. In Oct 2017, Dubai announced that it was developing emCash, a cryptocurrency which can be used as part of a payment system to pay for school fees and governmental services. It was launched in partnership with Emcredit Limited and UK-based Object Tech Group Limited. A couple of months later, in Dec 2017, the UAE Central Bank also announced it had been testing a new cryptocurrency for cross-border payments to Saudi Arabia. With the Government itself driving these initiatives, there is no doubt that the regulatory regime will be developed accordingly.
In the UAE, the financial regulatory framework can essentially be divided between: (i) the financial freezones (being the Abu Dhabi Global Markets (“ADGM”) and Dubai International Financial Centre (“DIFC”)) (“Financial Freezones”); and (ii) the rest of the UAE including onshore and the non-financial freezones (“Rest of the UAE”). The Financial Freezones essentially have their own laws, courts and jurisdiction and are only subject to a few federal-level laws such as criminal and anti-money laundering (“AML”) laws.
The exact treatment of cryptocurrencies will therefore depend upon: (i) the geographical location; and (ii) how they are categorised or viewed by the applicable regulator in that location.
In the Financial Freezones, the activities are regulated by their own regulator, i.e. Dubai Financial Services Authority (“DFSA”) in DIFC, and the Financial Services Regulatory Authority (“FSRA”) in ADGM. Accordingly, they will have discretion how to categorise and regulate cryptocurrency.
In the Rest of the UAE, if cryptocurrencies are deemed to be a commodity (such as oil or gold) or a security (such as equity in a company), they could fall within the remit of the UAE Securities and Commodities Authority (“SCA”), whereas if they are deemed to be a currency (such as AED or USD) they could fall under the UAE Central Bank (“Central Bank”). That said, there is always potential for an overlap in responsibilities and collaboration between the two regulators.
UAE Securities and Commodities Authority
The UAE’s federal financial services and securities regulator issued a warning on 4 February 2018 in relation to ICOs, stating:
"At present, SCA does not regulate or mandate or recognise any ICO. ICOs involve the issuance of digital tokens created using distributed ledger technology and sold to investors by action or through subscription in return for cryptocurrency. The terms and features of ICOs differ in each case, as does the nature of the rights or interest (if any) that is acquired by the investor. ICOs are highly speculative and characterised by high volatility in the prices of tokens,"the statement said. The SCA went on to warn that “no legal protection is currently offered and investors are entering into these investments at their own risk."
The warning from the SCA followed a similar warning by the International Organisation of Securities Commissions (“IOSCO”), which sets global securities regulation standards. One example of the international reach of this organisation was the case taken by one of its members, the US Securities and Exchange Commission (“SEC”), which obtained an order to freeze assets of AriseBank in the USA during their ongoing ICO in January 2018. This case has a Dubai connection because one of the founders lived in Dubai. AriseBank was alleged to have illegally raised up to US$600m from investors without registering with the regulators.
This highlights the willingness of financial regulators around the world to intervene to protect investors where the cryptocurrencies fall within the category of securities.
UAE Central Bank
The Central Bank issued the Regulatory Framework for Stored Values and Electronic Payment Systems on 1 January 2017 (“E-Payment Regs”). The stated objective of the E-Payment Regs is to facilitate the adoption of digital payments across the UAE in a secure manner.
The E-Payment Regs acknowledge and define a ‘virtual currency’ as “any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value”. The definition then goes on to state that “virtual currency is not recognised by this regulation except digital units that (a) can be redeemed for goods, services and discounts for goods, services and discounts as part of a user loyalty or rewards program with the issuer and (b) cannot be converted into a fiat currency or a virtual currency”.
The E-Payment Regs then go on to expressly state that “all virtual currencies (and all transactions thereof) are prohibited”.
This obviously raised some major concerns about the general legality of cryptocurrencies in the UAE. However, a month later, the Central Bank Governor, His Excellency Mubarak Rashed Khamis Al Mansouri, issued a statement that “these regulations do not apply to bitcoin or other cryptocurrencies, currency exchanges or underlying technology such as blockchain”. Some commentators have questioned the enforceability of these informal statements by the Governor, whereas others point to provisions in the E-Payment Regs stating that “the Central Bank’s interpretation of this regulation shall be deemed final”. Either way, we anticipate that there will be some more formal statement or regulation soon. In fact, the Governor commented that “the area is currently under review by the Central Bank and new regulations will be issued as appropriate”.
Later that year in October, the Governor issued a warning against cryptocurrencies. At the Islamic Financial Services Board Summit he was quoted as saying, “[S]ome nations have announced that they are not using Bitcoin, and consequently its value sharply plummeted. In addition, it can be easily used in money laundering and in funding terror activities”.
The regulatory regime for cryptocurrencies in the UAE from a Central Bank perspective is therefore somewhat of a grey area at present, with some commentators suggesting that whilst the use of cryptocurrencies as a currency or for digital payments by licensed payment service providers (“PSP”) may be prohibited under the E-Payments Regs, the ownership or trading of cryptocurrency appears to be tolerated.
Dubai Financial Services Authority
The DFSA, the regulator of the DIFC issued a ‘General Investor Statement on Cryptocurrencies’ on 13 Sept 2017. The statement concluded that:
"The DFSA wishes to highlight that these types of product offerings, and the systems and technology that support them, are complex. They have their own unique risks, which may not be easy to identify or understand; such risks may increase where offerings are made on a cross-border basis. These offerings should be regarded as high-risk investments. The DFSA would like to make it clear 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. Accordingly, before engaging with any persons promoting such offerings in the DIFC, or making any financial contribution toward such offerings, the DFSA urges potential investors to exercise caution and undertake due diligence to understand the risks involved.”
We understand that the DFSA is considering the regulation of cryptocurrencies and we expect that we may see regulatory developments in due course.
The Financial Services Regulatory Authority
The FSRA is the only regulator in the UAE that has issued a regulatory framework specifically dealing with cryptocurrencies. It went through a consultation exercise in May 2018 and then issued the Guidance on Regulation of Crypto Asset Activities on 25 June 2018 (“Crypto Regs”). The Crypto Regs regulate spot crypto-assets activities including those undertaken by exchanges, custodians and other intermediaries in the ADGM.
Amendments to a key piece of legislation, the Financial Services and Market Regulations 2015, introduced the definition of a ‘Crypto Asset’ as:
“a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction. A Crypto Asset is (a) neither issued nor guaranteed by any jurisdiction, and fulfilsthe above functions only by agreement within the community of users of the Crypto Asset; and (b) distinguished from Fiat Currency and E-money.”
The Crypto Regs make a clear distinction between:
‘Security Tokens’ e.g. virtual tokens which have the characteristics of a Security, such as shares, which are regulated as Securities by the FSRA;
‘Crypto Assets’ e.g. no fiat virtual currencies which are treated as commodities and therefore not regulated by the FSRA as Specified Investments (although market intermediaries and those dealing in or managing Crypto Assets will need to be approved);
‘Utility Tokens’ e.g. virtual tokens that do not have the characteristics of a regulated instrument, which are treatment as commodities and therefore not regulated by the FSRA as Specified Investments; and
‘Derivatives and Collective Investment Funds’, which are regulated as Specified Investments.
Not all Crypto Assets will be able to be dealt with from the ADGM. Only those deemed to be ‘Accepted Crypto Assets’ by the FSRA will be allowed. It is understood that this is to protect against higher-risk crypto activities. Although the ADGM has stated it does not intend to make a list of Accepted Crypto Assets publicly available, it will however provide information to applicants, and it has a non-exclusive list of factors that it will take into consideration. These include security, traceability, exchange connectivity, market demand/volatility, type of distributed ledger, innovation and practical application.
The ADGM also issued a Guidance on the Regulation of Initial Coin / Token Offerings and Crypto Assets on 9 October 2017 (which was updated on 25 June 2018 in line with the new Crypto Regs).
ADGM therefore appears to offer an attractive option for a cryptocurrency business in the UAE, as it has the framework in place to provide regulatory compliance comfort to the company and its investors.
Pursuant to DFSA’s statement above, no companies in the DIFC are licensed to sell cryptocurrencies in the DIFC.
Under the Crypto Regs, a new Regulated Activity of ‘Operating a Crypto Asset Business’ (“OCAB”) has also been introduced. As a Regulated Activity, OCAB is widely drafted and includes:
buying, selling or exercising any right in Accepted Crypto Assets (whether as principal or agent);
managing Accepted Crypto Assets belonging to another person;
making arrangements with a view to another person (whether as principal or agent) buying, selling or providing custody of Accepted Crypto Assets;
marketing of Accepted Crypto Assets;
advising on the merits of buying or selling Accepted Crypto Assets or any rights conferred by such buying or selling; and
operating a “Crypto Asset Exchange” or operating as a “Crypto Asset Custodian”.
Accordingly, any entities wishing to sell cryptocurrencies or carry out any of the other OCAB activities in ADGM may do so provided that they obtain an OCAB licence from the FSRA.
Rest of the UAE
Other than the provision in the E-Payment Regs discussed above, there are no express regulations prohibiting or regulating the sale of cryptocurrencies in the Rest of the UAE.
Indeed, the use of cryptocurrencies appears to be a tolerated practice and there are a number of companies in the UAE reportedly accepting payment in Bitcoin or other cryptocurrencies. These apparently include properties in City Walk that accept Bitcoin for rental payments and a real estate project in Dubai Science Park where you can purchase property with Bitcoin. There were even claims of an ATM in Dubai Media City which allowed you to withdraw cash in exchange for Bitcoins, but the location remains elusive.
There have also been a couple of Bitcoin exchanges set up in the UAE such as Igot and BitOasis in 2014. BitOasis commenced operating from Dubai Silicon Oasis freezone but in May 2018 it was reported that a number of banks (including Emirates NBD, Noor Bank and Mashreq) blocked AED deposits and withdrawals from BitOasis accounts. We understand that subsequently BitOasis moved its platform to the British Virgin Islands, which may have resolved some of the payment issues with UAE bank accounts. However, the BitOasis website terms and conditions still anticipate and cover what happens if customers face issues with banks processing fiat withdrawals in the UAE or GCC.
There have also been a number of ICOs in the UAE such as the Islamic financial services and technology company OneGram in partnership with GoldGuard, a gold trading platform licensed by the Dubai Airport Free Zone. OneGram’s coin is backed by one gram of gold and claimed to be the world’s first Sharia-compliant cryptocurrency. Other ICOs include Afterschool which, in October 2017, voluntarily suspended sale of the tokens (of which it had sold 11 million by that time).
The value added tax (“VAT”) regime was only recently introduced into the UAE on 1 January 2018. As such, the current position on taxation of cryptocurrencies is untested and it will depend on the view the UAE Federal Tax Authority (“FTA”) takes on cryptocurrencies pursuant to the Federal Law No. 8 of 2017 (“VAT Law”) and the implementing regulations.
If cryptocurrencies are deemed to be ‘Goods’ or ‘Services’ for the purposes of the VAT Law, then the value of the purchase would be subject to VAT. It is unlikely that cryptocurrencies would fall within the definition of ‘Goods’, which is “physical property that can be supplied including real estate, water and all forms of energy”. The definition of ‘Services’, on the other hand, is extremely wide and covers “anything that can be supplied other than ‘Goods’”, which would obviously enable the FTA to catch cryptocurrency if it so desired.
If, however the FTA takes the view that cryptocurrencies are ‘financial services’ or a currency, then the purchase value of the crypto is likely to be exempt from VAT. Financial services are defined in the VAT Law as ‘services connected to dealings in money (or its equivalent)’. In relation to such financial services, where there are express transaction fees (such as a commission), those fees in relation to the financial service provided may still be subject to VAT. This means any transaction fees in relation to buying or selling cryptocurrencies could be subject to VAT.
In any event, it seems fairly certain that if cryptocurrencies are used to purchase goods and services in the UAE, then VAT will be payable on such goods or services to the same extent that they would if payment had been made in UAE dirhams or other fiat currency.
Currently in the UAE corporation tax is only levied on oil and gas companies and foreign banks. To the extent that such corporations make a profit from cryptocurrencies, one would assume the normal treatment of corporation tax would apply equally to such profits.
There are currently no personal income, capital gains or inheritance taxes in the UAE, so none of these would be applicable in any event on any gains in the value of cryptocurrencies.
Money transmission laws and anti-money laundering requirements
Under the Crypto Regs, the FSRA requires OCAB licensees to have adequate controls in place which include setting appropriate daily limits, e.g. on cash deposits, and to have adequate technology to meet their regulatory obligations (e.g. KYC, transaction identification and reporting) and risk management requirements (e.g. margin limits, large exposure monitoring).
In the Rest of the UAE there are both individual transaction limits and maximum daily limits for retail PSPs set out in the E-Payment Regs but, as stated above, these expressly do not apply to cryptocurrencies.
There are numerous anti-money laundering laws in the UAE including Federal Law No. 4 of 2002 combating money laundering and financial terrorism (as amended by Federal Law No.9 of 2014) (“AML Law”) and Cabinet Resolution No 38 of 2014 (“AML Regs”).
The AML Law has a wide definition of ‘Property’ used in the commission of an offence, which is "assets of every kind, whether corporeal or incorporeal, movable or immovable, including the national currency and foreign currencies and the documents or instruments, of whatever kind, whether in electronic or digital format, evidencing title to those assets or any right attached thereto".
In our view, the definition is therefore wide enough to cover cryptocurrencies. Indeed, there have been a number of cases in the UAE where financial institutions have suspended payments from cryptocurrency accounts due to suspected non-compliance with the AML Law or AML Regs. If convicted of a money laundering offence, the AML Law provides punitive measures including fines ranging from AED 10k to AED 1 million and imprisonment of up to 10 years.
There are also additional AML regulations depending on the location of the company – such as the SCA Decision 2010, the AML Module of the DFSA Rulebook and the AML Rules of the FSRA. For OCAB licensees, the FSRA supplements its normal AML Rules with requirements to adopt international best practices (including the Financial Action Task Force recommendations) for cryptocurrency activities.
Promotion and testing
There are a number of private sector Fintech collaborations such as the Emirates NBD Future Lab (which has provided AED500m over three years to support digital innovation) and hackathons (such as Emirates Islamic Banks ‘appathon’ to create the next banking app). In addition, the key financial regulators have developed promotion and testing programmes and schemes, however they are more generic ‘Fintech’ sandboxes rather than blockchain- or cryptocurrency-specific.
In January 2017, the SCA announced its initiative to support innovation-based Fintech. The general idea is to offer an appropriate environment for the testing and launch of Fintech services and products, and to provide regulatory support and advice. The SCA requested comments and suggestions from various market participants on how to best formulate the initiative.
ADGM launched RegLab in 2016 which offers a ‘Developing Financial Technology Services’ licence to start-ups for up to two years. ADGM provides support in terms of co-working spaces and a network of collaborators and mentors. Applicants must establish a company in the ADGM and pass certain tests and milestones within the two-year period.
The DIFC initiative is called the Fintech Hive and was launched in January 2017. It offers an ‘Innovation Testing Licence’ for a period of 6-12 months. The initiative provides similar support such as workspace, mentoring, workshops, etc. The requirements are similar to ADGM’s and applicants have to have a business model and a product or service that uses new, emerging or existing tech in an innovative way.
Ownership and licensing requirements
The licensing and ownership requirements for the OCAB licence under the Cyber Regs are essentially the same as any other Authorised Person under the FSRA regulation, i.e. to be authorised as an OCAB, the applicant must satisfy FSRA that all applicable requirements of FSMR and the relevant FSRA Rulebooks have been, and will continue to be, complied with. This includes the FSRA General Rulebook, the FSRA Anti-Money Laundering and Sanctions Rules and Guidance, and the FSRA Rules of Market Conduct. The definition of OCAB is drafted such that investment advisors or fund managers dealing in cryptocurrencies from the ADGM are likely to be caught by the definition and require appropriate licensing as well.
At the date of writing this article we are not aware of any companies that have received an OCAB licence, although the regulations are only a month old. This is a development which will be monitored with interest, going forward.
As stated above, the DFSA has not yet issued any licences to cryptocurrency companies.
Rest of the UAE
As mentioned above, cryptocurrencies are currently unregulated by the Central Bank and SCA so there are no applicable ownership or licensing requirements from those federal-level regulators.
In addition to the Financial Freezones, there are a number of freezones in the Rest of the UAE that fall under the umbrella of the Central Bank and SCA but are free to set their own rules and regulations in relation to areas such as company licensing, foreign ownership restrictions, etc. One of these freezones, the Dubai Multi Commodities Centre (“DMCC”) serves as a global marketplace for commodities to drive trade flows through Dubai, and is also a member of the Global Blockchain Council.
In February 2018, DMCC licensed Regal RA DMCC (a gold trader and storage provider) as the first company in the DMCC free zone to expressly trade in cryptocurrencies. The company apparently offers storage of Bitcoin, Ethereum and other cryptocurrencies in a vault located at DMCC. At the time of the announcement, it was stated that "DMCC is the only Free Zone in the Middle East to have a government-issued license to trade in crypto-commodities and offers unparalleled full market value insurance on such investments.”
The DMCC Authority appears to have taken the view that these specific activities are trading in commodities rather than currencies or securities. We understand that the licence is available for proprietary trading in crypto commodities only, and that no ICOs or exchanges are permitted. Other than the innovative licence category, we understand that DMCC’s normal corporate ownership and licensing regulations apply.
The DMCC is considered by many to be Fintech-friendly as it has a wide range of categories of company licences and takes a flexible approach to licensing. In addition, companies in the DMCC would not need to meet the requirements of the Crypto Regs that they would have to if they set up in the ADGM.
ADGM mentioned in the circular in October 2017 that it did not view mining of cryptocurrencies as a regulated activity, whereas DIFC remains silent on the matter.
There are no regulations in the Rest of the UAE specifically regulating the activity of mining cryptocurrencies but, due to the uncertainty and unavailability of licences, we would caution against it. If the mining is on a sufficiently large scale (which nowadays requires substantial sophisticated hardware), it could be deemed to be ‘carrying out business in the UAE’ without a business licence.
Border restrictions and declaration
As with many countries around the world, the UAE has regulations requiring the declaration of cash (aptly entitled ‘Regulations regarding declaration by travellers entering or leaving the UAE carrying cash and monetary or financial bearer instruments’), which came into effect on 1 September 2011.
Under the regulations, any cash money (inclusive of currencies and traveller cheques) above AED100,000 or the equivalent in other currencies, needs to be declared. In our view, it is unlikely that this is intended to cover cryptocurrencies held in a digital wallet, although we are unaware of any clarification of this by the Federal Customs Authority to date.
As mentioned above, under the Crypto Regs, the FSRA requires OCAB licensees to have adequate controls in place, which include meeting their regulatory obligations in relation to reporting. Again, no specific regulation in DIFC.
We are not aware of any reporting requirements in the Rest of the UAE for cryptocurrency payments made in excess of a certain value.
Estate planning and testamentary succession
We are not aware of any regulations or cases of how cryptocurrencies will be treated for the purposes of estate planning in the UAE. The treatment will depend on a number of factors such as whether the owner is a Muslim, whether there is a will in place, and whether the will has been registered with one of the Financial Freezones such as the DIFC Courts Wills Registry (available for non-Muslims in Dubai and Ras Al Khaimah) or is subject to Shariah rules.
In practice, whoever knows the unique password/private key for the cryptocurrency will effectively have control over the asset, therefore succession planning will need to take this into consideration.
Name: Joby Beretta
Tel: +971 56 683 0775
Joby Beretta is the Founder of The Bench, an award-winning innovative legal services provider offering cost-effective legal services. Joby is recognised as one of the leading TMT lawyers in the UAE by Chambers & Partners (Band 1), The Legal 500 (Leading Individual), and Who’s Who Legal. Prior to establishing The Bench, Joby was a Partner and Head of TMT for the Middle East at Dentons, the world’s largest law firm. He was advising financial institutions on technology projects long before the recent Fintech frenzy. Who's Who Legal 2016 described Joby as a “standout” lawyer in the Middle East and noted he is “incredibly gifted”. Clients appreciate his “industry insight” gained while working in-house, and having been based in Dubai since 2003, he has a “great appreciation for the cultural nuances of the region”.