The United Arab Emirates is reportedly getting ready to start issuing federal licenses for virtual asset service providers (VASPs) by the end of the first quarter of 2022. The move is expected to become part of a complex regulatory framework that the Middle Eastern nation is looking to establish on its way to becoming one of the world’s most crypto-friendly jurisdictions. What could this trajectory look like for the UAE?
The proposed regime
The UAE’s Securities and Commodities Authority (SCA) is reportedly finalizing rules that would allow digital asset firms to set up shop in the country. While working on the legislation, the SCA bore in mind both Financial Action Task Force guidelines and the current legislative developments in the United States, the United Kingdom and Singapore.
In what was described as a “hybrid approach,” the SCA will oversee the digital asset marketplace in a dialogue with the Central Bank of the United Arab Emirates without directly interfering with the daily licensing procedures of the financial institutions in the country’s key financial centers, such as Dubai and Abu Dhabi. The government also reportedly intends to create a regulated environment for crypto mining.
Current outlook
The United Arab Emirates is a federation consisting of seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain. Usually, the federal government has the final say over financial matters, and the two principal bodies that define financial regulation are the UAE Central Bank and the SCA. Still, the federation includes several free zones, which are granted a degree of autonomy when crafting financial rules.
In fact, there are already around 30 VASPs, operating in the country’s free zones. Dubai Multi Commodities Centre (DMCC) accommodates 22 VASPs, Abu Dhabi Global Market (ADGM) has six, and Dubai Silicon Oasis Authority (DSOA) hosts one.
Each of these centers is overseen by its own regulatory body. ADGM corresponds to the Financial Services Regulatory Authority, while the Dubai zones are under different agencies’ authority: The Dubai International Financial Centre is regulated by the Dubai Financial Services Authority (DFSA), while DMCC is directly under the nationwide SCA’s purview.
Patchwork of regulations
Current rules — quite naturally, in the light of the regulatory diversity — present a varied picture. For example, the DFSA started rolling out its rules as recently as 2021. According to them, any entity operating a crypto exchange should seek DFSA approval. At the moment, though, that regulation covers only those digital assets that qualify for “investment tokens” status. The DFSA intends to include cryptocurrencies and utility tokens in its framework at a later stage.
At the same time, the SCA, which oversees DMCC and “onshore” UAE, provides a much more detailed framework titled “Crypto Assets Activities Regulation.” It contains a clear definition of crypto assets and applies to the majority of their forms.
Overall, despite the need to navigate this regulatory diversity, the UAE appears to have a largely crypto-friendly legal environment. As Kokila Alagh, founder and CEO of Karm Legal Consultants, previously told Cointelegraph, “The regulations provided certainty and have opened new opportunities in the UAE, which makes SCA a progressive regulator in the global landscape.”
In December 2021, news emerged that the Dubai World Trade Centre would become yet another zone of regulated digital asset activity, with rigorous standards for investor protection and Anti-Money Laundering and Counter-Terrorist Financing requirements in place.
The major intrigue regarding the incoming federal legislation is whether it will successfully unify this patchwork of rules under one roof.
A path to crypto oasis
The UAE government started on its crypto-friendly course years ago. The first regulations for the digital asset sector were established back in 2018 in ADGM. The same year saw the nation put its “Emirates Blockchain Strategy 2021” into action, which was to use blockchain technology to “save time, effort and resources and enable individuals to conduct most of their transactions in a timely manner that suits their lifestyle and work,” according to statements made at the time by Vice President and Prime Minister Mohammed bin Rashid Al Maktoum.
The initiative laid out some impressive goals, such as saving $3 billion per year in government paperwork spending and millions of work hours.
The strategy came with several declarations of more specific intentions, including a blockchain-based vehicle lifecycle management system to be launched by Dubai’s Roads and Transport Authority and the creation of a blockchain-based business-to-business platform for local hotel operators and tourism companies.
In November 2021, the United Arab Emirates’ postal operator announced it would be the first in the Middle East to issue nonfungible token (NFT) stamps, celebrating the federation’s 50th anniversary. Several months earlier, the UAE Central Bank revealed it would start trials of a national digital currency.
The launch of a central bank digital currency project is a move often accompanied by a turn toward restricting decentralized digital currencies. In the UAE’s case, however, the announcement of a CBDC seemed to have little effect on the nation’s willingness to embrace private innovation.
Why so friendly?
Speaking to Cointelegraph, Brad Yasar, co-founder and CEO of automated liquidity pool aggregator EQIFi, described the UAE’s openness to crypto as a pragmatic approach taken by the country’s leadership to ensure the diversification of its sources of wealth:
“The country’s historical reliance on commodities such as oil could be seen as a key driver behind its dive into digital assets. The government was quick to recognize the many benefits to be derived from digital assets for institutions and retail users, and so acted quickly to implement the necessary support measures in place to allow financial innovation to flourish.”
Christian Borel, senior executive officer and branch manager at Switzerland-based SEBA Bank — which has moved to open a regional office in the UAE — highlighted the vast opportunities provided by the nation’s approach to financial regulation alongside the strategic geographical advantages:
“The UAE has a number of features that position it as an ideal global hub for the digital asset and blockchain industry. It is ideally positioned in terms of existing business networks to take advantage of connectivity between the Middle East, Northern Africa, India and the West.”
Both experts are optimistic about the nation’s digital asset prospects, with Yasar emphasizing the significance of the freshly proposed nationwide licensing system for virtual-asset firms.
Borel expects the UAE to be “at the forefront of regulation in the industry,” anticipating that the new legal framework will be integrated into the country’s legal system within the next 12 months.
As some major jurisdictions impose bans and severe restrictions on crypto, and as Europe and the U.S. tread slowly and carefully, the UAE is moving fast to become a place with clear, safe rules for the digital asset industry.
Source: https://cointelegraph.com/news/the-crypto-oasis-how-the-uae-became-the-middle-east-s-digital-asset-champion