Cryptolicense in the United Arab Emirates
The sphere of financial technologies has been actively developing worldwide over the past few years. Cryptocurrencies and electronic exchanges have become the highlight of the modern market. Technological innovations in the cryptocurrency field enable the automation of trading strategies. The UAE is in high demand among investors and ranks among the top countries for obtaining cryptocurrency licenses.
Cryptolicensing is becoming increasingly relevant as cryptocurrencies and blockchain technologies penetrate various aspects of life more widely. With the aim of solidifying the UAE's role as a transnational leader in the development of cryptocurrency initiatives, the government of the country is taking measures to implement advanced innovations at early stages.
If you are interested in registering a cryptocurrency company in the UAE, it is crucial to first understand the nuances of crypto regulation in the country. The publication outlines the conditions that must be met to obtain a cryptocurrency license in the UAE.
Regulation of cryptocurrencies in the UAE
The regulation of cryptocurrencies in the UAE reflects a progressive way to various sectors, including the crypto industry. The government has embraced blockchain technology in its business dealings, implementing the Emirates Blockchain 2021 Strategy in Dubai.
The country aspires to become the first nation to entirely preclude paper transactions, conducting all digital transactions through blockchain technology. The Emirates are also directing their efforts towards implementing digital platforms and innovations in the financial sector. Authorities in the Emirates are actively working on the creation of their own cryptocurrency, named EmCash, intended for various fee payments and government services within the payment system.
Generally, there are several forceful reasons to obtain a cryptocurrency license in the UAE. It may be the availability of financial and technological resources, such as high-speed internet connections and cutting-edge technological innovations. Additionally, the introduction of regulatory requirements and licensing procedures for cryptocurrency companies provides a legal framework for operating in this industry. The auspicious tax conditions for companies operating in the crypto sphere also contribute to the appeal of acquiring a crypto license in the UAE.
Let's center on the oversight scene of the cryptocurrency market in the UAE. A crypto-asset is a virtual currency utilizing digital registry to generate new blocks in a blockchain, cryptographic approaches and peer-to-peer computations to verify transactions, and protect activities without the need for mediators. Cryptocurrencies are inherently decentralized, pointing that they operate beyond the control of a central authority.
Supervisory management in this jurisdiction can be divided into two groups:
- Regulators of free economic zones.
- Regulators overseeing the rest of the UAE (containing onshore and non-financial free zones).
It's important that in Abu Dhabi and Dubai there are different oversight entities, which operate respectively in these locations, individually determine how to classify and control digital currency sphere.
They are Fiscal Services Regulatory Administration (FSRA) of Abu Dhabi City and Dubai Fiscal Services Administration (DFSA).
Regarding the oversight of tokenized sphere in the Emirates inland regions:
- If crypto funds can be classified as investments, they fall under the jurisdiction of the Securities and Commodities Authority (SCA).
- If blockchain assets are assessed a currency, such as AED or USD, transactions involving them will get regulated by the Central Bank of the UAE.
Entrepreneurs looking to register a cryptocurrency exchange in the UAE should approach the exploration of regulatory matters judiciously, as the country currently lacks unified cryptocurrency legislation. However, recent issuance of rules and regulations governing the use of crypto-assets, including cryptographic forms of currency, aims to fortify the UAE's position as a crypto-friendly jurisdiction.
The Dubai Fiscal Services Administration obtained significant strides in legislating and overseeing tokenized money and security coins. On March 29, 2021, the DFSA published a consultative document outlining the monitoring of security tokens for public offerings. This regulatory proposal for tokens classified as securities marks the initial stride toward providing clear guidance for issuers seeking to raise funds from the Dubai International Financial Center using Distributed Ledger Technology and similar ones.
In a pivotal move, the DFSA has undertaken the development of a regulatory framework for digital assets. While the project is still in progress, it signifies a noteworthy advancement in the regulation of digital assets, bolstering investor protection and maintaining the integrity of financial markets. The consultative document also introduces a provision pertaining to cryptocurrencies, asserting that crypto-assets can be created, stored, and transferred using DLT applications. Anticipated is the continued effort by the DFSA in constructing a cohesive framework and rules concerning cryptocurrency regulation.
Furthermore, the DFSA has crafted the Regulatory Laboratory (RegLab) Framework, offering a sandbox for innovative financial technologies, encompassing blockchain and asset tokenization. RegLab permits companies engaged in asset tokenization to operate under the guidance of the DFSA, allowing them to assess and test their products and services before obtaining full authorization for regulated activities.
Conforming to the Fiscal Services and Markets Regulations (FSMR) of 2015, the Fiscal Services Regulatory Administration (FSRA) posted its first manual on administering crypto operations in 2018. Subsequently, it underwent a few amendments. On February 24, 2020, the FSRA published an updated manual, renaming the term 'crypto-asset' to 'virtual asset'.
The new guidance places primary emphasis on the regulatory framework of the Financial Services Regulatory Authority (FSRA) concerning the following aspects:
- Tokenized assets: the guidance comprises regulatory provisions regarding virtual assets, such as cryptocurrencies and tokens. It establishes standards and requirements for their use, exchange, and storage, disclosing potential risks and methods of risk mitigation.
- Stipulation of financial services: the regulatory system of the FSRA sets provisions regarding the arrangement of financial services related to virtual assets within the ADGM. These services may encompass exchange, transfer, storage, and management of virtual assets.
- Conditions for acquiring a cryptolicense: the guidance elucidates the conditions and requirements for obtaining a cryptolicense in the ADGM. It defines the procedures and provisions that enterprises must adhere to in order to get permission to engage in operations related to cryptocurrencies.
Complying to the FSMR manual, "virtual asset" may be applied as:
- Means of exchange
- Unit for accounting or measurement
- Store of value (without the status of legal tender)
Features of web assets include the following criteria:
- Not issued or guaranteed by any jurisdiction: virtual assets are not issued or guaranteed by any jurisdiction and may be considered in the connection of the mentioned characteristics only by agreement between users.
- Distinguishable from fiat currency and E-money: tokenized assets are distinct from fiat currency and electronic money (E-money).
SCA posted "Chairman of the Board of Directors Decision No (21/RM) of 2020 on the Regulation of Crypto Assets" (Regulation). The purpose of this decision is to regulate the offerings, issuance, business, listing of crypto assets, and related operations.
According to Article 3, the provisions of this Regulation apply to:
- Individuals offering, issuing, or promoting tokenized assets in the Emirates.
- Anyone offering solutions for storing cryptocurrency, managing a platform for fundraising in digital coins equivalent, and conducting the exchange of cryptocurrency assets (accordingly, the registration of a cryptocurrency exchange in the UAE is subject to strict supervision).
- Any individual conducting alternative financial activities within this jurisdiction through the use of decentralized assets.
However, the Regulation does not apply to:
- Crypto money issued by the government or state-owned enterprises.
- Currency, virtual currency, a unit of stored value, or any other payment unit issued through a system licensed, approved, and authorized by the Central Bank of the country.
The Regulation by the Central Bank of the UAE (CBUAE): On September 30, 2020, the CBUAE posted the Value Safeguarding Repositories Regulation, purposed for establishing a legislative system for token assets. These directives were designed to authorize UAE organizations producing or supplying Stored Value Facilities (SVF). Regulation states that this is a means for which the customer pays a sum of money or monetary value (which may include, among other things, crypto assets) in exchange for storing the cost of that money or monetary value on an object.
It determines tokenized actives as "cyber embodiments of value or contractual entitlements, cryptographically protected, that can be transferred, stored, or exchanged electronically via DLT."
At the moment, the CBUAE does not accept crypto actives as legal tender in the United Arab Emirates. However, they can be used only as high-risk investment estate. The UAE Dirham remains the only legal currency in the country.
Getting a license for crypto transactions in the UAE
In 2019 the SCA conducted consultations with industry representatives and the public regarding the formulation of a draft Regulation that describes the licensing system for crypto companies. This regime applies to ICOs, exchanges, crowdfunding platforms, custodial service providers, and related monetary services using crypto assets.
Cryptolicensing in the UAE: who can supply crypto assets?
Providers seeking to supply tokenized actives or connected services are demanded to enroll as a local enterprise in the UAE or an enterprise within one of the country's special commercial domains, which comprise Dubai Airport Free Zone, Dubai Multi Commodities Center, Abu Dhabi Global Market, Sharjah Research Technology and Innovation Park with Intercontinental Free Zone Authority (since 2018)
The procedure of receiving a cryptolicense in the UAE involves pivotal stages:
- License category deliberation: carefully selecting the license type that aligns most effectively with the set business objectives.
- Cryptocurrency entity enrollment in the UAE: opting between establishing the crypto company on the mainland or in specialized financial domains. Each zone presents distinct advantages and requirements, necessitating meticulous exploration before reaching a decision.
- Paperwork preparation: crafting documents, encompassing a comprehensive business plan, evidence of fiscal stability, resumes of key executives, and more.
- Application submission: supplying a meticulously composed application and document package to the competent authority answerable for issuing crypto certificates in the UAE.
- Scrutiny and approval: the regulatory body conducts a thorough examination of the application and provided documents. Additional documentation or interviews may be required.
- Adherence to AML/CTF, cybersecurity standards, and data protection protocols.
To meet AML provisions, the company must formulate and implement an internal protocol to combat money laundering. This protocol should encompass all necessary procedures for the identification, prevention, and detection of money laundering-related transactions.
The company is demanded to appoint specialists in operational management responsible for AML and related activities. This includes:
- AML manager: this specialist is answerable for developing, implementing, and monitoring policies and procedures related to anti-money laundering efforts. They provide training to staff in AML matters and coordinate communication with regulatory authorities.
- Internal auditor: this specialist is liable for independently assessing and verifying the company's activities in accordance with internal procedures and external requirements. The internal auditor may analyze systems and procedures related to AML and recommend improvements.
- Compliance manager: this specialist is responsible for developing and implementing policies, procedures, and control mechanisms to ensure compliance with AML requirements. The compliance manager plays a crucial role in ensuring that the company adheres to AML regulations and standards.
The specified specialists play a pivotal role in ensuring the company's effective functioning within the context of combating financial fraud. Licensees have the ability to "passport" the listing of crypto assets on one or multiple cryptocurrency exchanges. Providers aspiring to establish a crypto business in the UAE must hold an SCA license.
Service providers are required to deploy computer systems (or cloud computing resources) in the offshore segment of the UAE, adhering to international standards. Typically, this entails that service providers (or their subcontractors) can demonstrate compliance with, at a minimum, ISO9001 and ISO27001 standards, as well as the cybersecurity standards established by the federal government.
In the case of using offshore servers or publicly available cloud assets for storing, processing, or transmitting crypto assets/personal data, SCA requirements may include using onshore cloud computing services to ensure parallel backup and contingency recovery measures.
Such measures ensure more reliable data protection and provide the ability for quick recovery in the event of failures or emergencies. Additionally, using onshore cloud computing services allows for higher system availability and reliability.
Before registering a cryptoexchange in the UAE, it is crucial to consider that there are stringent regulations governing the utilization of subagents and personnel engaged with cyber asset suppliers, custodians, conditional depository companies, and other contractors.
Licensees have the authority to assign subagents but bear the risks and obligations associated with any violation of the SCA Resolution by their subagents. Consequently, the SCA mandates certificate holders and their subcontractors to delineate the division of responsibilities regarding cyber defense and data protection in their agreement. This is essential to ensure the security of payment data and prevent fraudulent activities. The delineation of duties aids in defining the roles and duties of each party in adhering to SCA requirements.
The SCA explained that the regulator is empowered to conduct audits of licensees and monitor online transactions. In the event of any infractions, the SCA reserves the right to impose fines, cease, or revoke a licensee's privilege to supply crypto actives, and disclose the names of violators.
Who can provide crypto assets to?
The SCA's decision has created two classes of entities enabled to provide crypto assets:
- Qualified investors: institutional investors (e.g., banks, financial establishments, or enterprises) possessing funds exceeding AED 75 million or holding a net turnover of AED 150 million. This category also includes foreign governments and international organizations.
- Other Individuals or entities not meeting the criteria for expert investors.
Licensees should submit relevant documents to the SCA before supplying crypto assets to qualified investors. For all other cases (nonqualified investors), license holders are obligated to seek prior approval from the SCA before offering crypto assets.
An expert investor, broadly determined, can be:
- Institutional investor: such as banks, funding establishments, or companies with assets totaling more than AED 75 million or holding a net turnover of AED 150 million. This category also includes international governments and international organizations.
- Individual: holding assets of AED 4 million or an annual income of AED 1 million, with profound knowledge and awareness of the dangers associated with investing in tokenized actives.
For combating illicit monetary operations and conduct due diligence on potential investors through the "Know Your Customer" (KYC) process, the SCA clarified that all clients must be classified and assessed as if they were "subject to high risk." Broadly, this entails conducting an "enhanced comprehensive check" of the source of clients' funds, the ultimate ownership structure, political risks, potential risks of clients being used as channels for money laundering operations, and any geographical risks presented by clients, their directors, shareholders, and associated suppliers and intermediaries.
Obtaining a license for a cryptocurrency exchange in the UAE requires conformity with a set of regulatory requirements. In other words, the exchange should have a comprehensive range of supervisory processes, such as:
- Market surveillance strategies, especially regarding market abuses and payment informing;
- KYC and Anti-Money Laundering (AML) protocols;
- Clearing processes;
- Transaction recording;
- Public disclosure mechanisms;
- Exchange operating systems and control measures.
You can seek consultation with subsequent support for opening a cryptocurrency exchange in Dubai or any other emirate from our specialists.
Registration of licenses for crypto exchange in the UAE: requirements
Cryptolicensing is an attempt to regulate and standardize the cryptocurrency space to ensure its legitimacy and integration into the modern economy and financial system. The main goal of cryptolicensing in the UAE is to provide security and protection for users and to prevent illegal activities associated with the use of cryptocurrencies. To obtain a cryptocurrency license in the UAE, a company must meet several requirements:
- Confirm the sufficiency of capital, an amount that allows conducting business for at least 6 months.
- Adhere to strict Know Your Customer (KYC) standards.
- Disclose information related to violations of Anti-Money Laundering (AML) / Countering the Financing of Terrorism (CTF) policies to competent authorities.
- Disclose information to other government entities upon request.
- Ensure the protection of client financial information (protection against cybercrimes).
During its operations, the company can only use cryptocurrencies that have been approved by regulators (accepted cryptocurrencies). It's also worth mentioning the tax conditions. In the UAE, there is no unified tax regime, and tax rates may vary in different emirates and special economic zones. The UAE authorities do not impose taxes on income from cryptocurrency trading or on the ownership of cryptocurrencies. The country has a low VAT rate of only 5%, making it one of the lowest VAT rates in the world. However, tax legislation may change in the future, so consulting with a legal expert to obtain up-to-date information on the legal regulation of cryptocurrencies in the UAE is a prudent decision.
The UAE is among the popular jurisdictions for registering cryptocurrency companies and providing services in the cryptocurrency and NFT sectors. The advantages of launching a crypto project in the UAE include low taxes, openness to innovation, developed financial infrastructure, and stable legal and regulatory frameworks. The Emirates serve as a strategic intersection between the East and West, allowing investors easy access to various markets and scalability of their cryptocurrency operations.
If you plan to obtain a cryptolicense in the UAE, it's essential to note that there is no unified regulation for the cryptocurrency market in the country at the moment. However, strict regulatory frameworks for supervising crypto activities, including compliance with AML/CTF regulations, have been implemented on the mainland and in special financial zones.
For detailed information about the process of obtaining a crypto license in Abu Dhabi, Dubai, and other emirates, you can consult with the experts at TK Deal. We provide a range of consulting services and support for cryptocurrency startups in the UAE to our clients.