A quick look at the details of the five major virtual asset regulations in the UAE

Author: Bowen, Source: Bailu Lounge

Compliance is a well-deserved focus for the crypto industry in 2023, and this is true for global markets.

On November 15, the news of the initial public offering (IPO) of Phoenix Group’s AED 1.36 billion ($370 million) shares on the Abu Dhabi Stock Exchange (ADX) once again drew attention to the Middle East.

In recent years, the UAE has actively promoted the development of the virtual asset industry in the Middle East, including the UAE official, the Emirate of Dubai, as well as financial free zones such as Abu Dhabi Global Market and Dubai International Financial Centre, and have introduced different regulatory frameworks to meet global needs.

If Phoenix Group successfully completes the listing, it will mean that the first cryptocurrency and blockchain entity will be listed on the Middle East stock market, and it also reminds investors that they still need to focus on the Middle East market represented by the United Arab Emirates and look for more high-quality opportunities.

The regulatory environment for virtual asset activities in the UAE is complex and there are many authorities. In the following section, we will briefly analyze the five major regulatory frameworks in the UAE to help readers better understand the regulatory environment in the UAE and identify high-quality projects.

5 Major Regulatory Frameworks in Parallel

Today, the MENA region is the sixth-largest crypto economy, with approximately $389.8 billion worth of on-chain transactions between July 2022 and June 2023, accounting for nearly 7.2% of global trading volume. This is largely due to a number of regulatory measures at the local and federal levels in the UAE, the representative country of the Middle East, which has created an excellent environment for the sustainable growth of the virtual asset industry in the Middle East.

Currently, companies that apply to the UAE, or are in the process of providing virtual asset services in the UAE, will need to deal with a complex regulatory environment comprised of multiple regulators. Depending on the proposed activity and the geographical location of the target of such services, these institutions have different regulatory mandates.

Currently, there are 5 main regulatory frameworks governing the provision of virtual asset services in the UAE, including:

(i) Federal Regulations promulgated pursuant to Cabinet Resolution No. 111 on Virtual Assets;

(ii) Dubai International Financial Centre (DIFC) Financial Free Zone Regulations

(iii) Abu Dhabi Global Market (ADGM) Financial Free Zone Regulations;

(iv) the regulations applicable in the Emirate of Dubai (excluding DIFC) within the purview of the recently established Dubai Virtual Assets Regulatory Authority (A);

**(v) Licensing framework for cryptocurrency businesses applicable to Dubai’s Multi Commodities Centre Free Zone (DMCC). **

Under different regulatory frameworks, there are differences in the licensing entity, jurisdiction, incorporation conditions, registration and maintenance fees, and types of regulated virtual asset activities.

Virtual Assets Code of Federal Regulations

Under federal regulations, the licensed entities are the UAE and the Commodity Regulatory Authority (SCA) and the Central Bank of the United Arab Emirates**, and the jurisdiction covers all land except the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM).

For those in the virtual asset industry who are subject to federal regulations, it is necessary to have a corporate entity within the UAE land and have legal approval from the relevant trade licensing authority;

Depending on the underlying virtual asset activity undertaken, an initial licence fee ranging from AED 53,000 to AED 505,000 (US$14,000 to USD 137,000) and application review fees will be paid. In addition, different license maintenance costs will be incurred depending on the activities related to virtual assets.

Under the federal regulations, the categories of virtual asset activities that focus on regulation include: brokerage services, virtual asset advisory services, exchange/multilateral trading facility (MTF), virtual asset custody, virtual asset management, investment transactions as principal, etc., and it is important to note that NFT-related activities are not regulated.

In addition, the SCA restricts the types of virtual assets that can be accepted, and only virtual assets that are on the virtual asset acceptance list can be included in the regulation.

******DIFC Financial Free Zone ****** (DIFC) ****** Regulations ****

Within the DIFC Financial Free Zone, the licensed entity is the Dubai Financial Services Authority (DFSA) and has jurisdiction over the entire territory of the Dubai International Financial Centre.

For a virtual asset practitioner of a DIFC, the corporate entity must be within the DIFC and the company must have a legal person as defined in the DIFC Companies Act;

In terms of licence costs, there is an initial licence fee ranging from US$15,000 to US$175,000, and different licence maintenance costs depending on the activity to be carried out.

Under the DIFC regulations, the key categories of virtual asset activities to be regulated include: **broker services, virtual asset advisory services, exchange/multilateral trading facility (MTF), virtual asset custody, virtual asset management, investment transactions as a principal, etc., **NFT-related activities are also excluded from the scope of regulation.

Like the federal regulations, the DFSA limits the types of virtual assets that can be accepted, and only accepted virtual assets can be regulated and used in circulation in the DIFC.

Abu Dhabi Global Market Financial Free Zone (ADGM) Regulations**

The Abu Dhabi Global Market Financial Free Zone (ADGM) is licensed by the Financial Services Regulatory Authority (FSRA) and has jurisdiction over Abu Dhabi Global Market and Al Maria Island.

Similar to DIFC. For the virtual asset practitioner of the ADGM, the ** corporate entity must be in the ADGM, and the company must have a legal person as defined in the ADGM Companies Act;**

Within the ADGM, the initial license fee ranges from US$20,000 to US$145,000, and maintenance costs vary depending on the activity.

Under the ADGM regulations, the key categories of virtual asset activities to be regulated include: **Broker services, virtual asset advisory services, exchange/multilateral trading facilities (MTFs), virtual asset custody, virtual asset management, investment transactions as principals, etc.;

Unlike the previous two regulatory frameworks, the ADGM does not approve cryptoassets according to the type of cryptoassets (e.g., Bitcoin, Ethereum) but on the basis of different corporate entities, and the approved cryptoassets can be circulated and used within the ADGM.

Dubai Virtual Asset Regulatory Authority (A)

The Dubai Virtual Assets Regulatory Authority is the licensed entity with jurisdiction over the entire Emirate of Dubai, excluding the DIFC.

For practitioners, carrying out VA-related activities requires a corporate entity in the Emirate of Dubai and approval from A.

In terms of costs, the initial licence fee ranges from AED 40,000 to AED 100,000 (US$10,800 to US$27,200), and licence maintenance fees and ongoing costs vary depending on the activity in question.

The categories of virtual asset activities that focus on regulation include:**Broker services, virtual asset advisory services, exchange/multilateral trading facility (MTF), virtual asset custody, virtual asset management, investment trading as principal, and NFT-related activities. **

A’s restrictions on crypto assets are relatively free, and there is no list of accepted virtual assets, but at the same time, A retains the right to circulate and use certain crypto assets (such as anonymous and high-risk project tokens).

Dubai Multi Commodities Centre (DMCC) Cryptocurrency Business Licensing Framework

The Dubai Multi Commodities Centre (DMCC) is the licensing entity and has jurisdiction over the entire Emirate of Dubai, excluding the DIFC.

The practitioner** needs to be a corporate entity within the DMCC, which must be a DMCC corporation, or a branch of a non-DMCC company**.

In terms of registration costs, DMCC jurisdictions have a flat initial licence fee of approximately AED 35,000 (approximately US$9,500), while maintenance costs continue to vary depending on the activity undertaken.

Very different from other major frameworks, the DMCC only regulates two types of activities: NFT and investment transactions as a principal, and other types of activities are not within the scope of compliance, and because the types of compliant virtual asset activities are limited, there are no longer restrictions on the virtual assets that can be provided and circulated.

**Overall, the overall regulatory framework in the UAE is very flexible, and practitioners can self-register the required licenses according to the different businesses they need to engage in, so as to maximize the support for business innovation and promotion, and it is also this initiative that makes the UAE very likely to become the next global virtual asset industry hub, attracting various project parties and institutions to settle in. **

For the virtual asset industry, the flexible regulatory approach is also a model for countries in the global market to learn from. Providing different and alternative regulatory environments for different practitioners is likely to be an effective way to enable more financial innovation