adv. Justyna Maria Bartoszek
Dubai, one of the seven emirates that make up the United Arab Emirates (“UAE”), is one of the most interesting jurisdictions for projects based on blockchain technology and cryptocurrencies. According to Chainanalysis, the share of UAE cryptocurrency transactions worth about USD 25 billion in the global market is about 7%, while between July 2020 and June 2021, this market increased by 500%.
The first attempts at regulating cryptocurrency and blockchain appeared in Dubai as early as 2020. On March 11, 2022, a new law, i.e. the Dubai Virtual Assets Law, called Act No. 4 (“DVAL”), entered into force. This regulation was approved by Sheikh Mohammed bin Rashid Al Maktoum on February 28, 2022. The law applies to Free Zones and Special Development Zones, but does not apply to the Dubai International Financial Center (“DIFC”), i.e. the Dubai Special Economic Zone, established in 2004 as a financial center for companies operating on the markets of the Middle East, Africa and South Asia. DIFC is regulated by the Dubai Financial Services Authority, an independent regulator operating exclusively in the zone, and has its own judicial system, the DIFC Courts, separate from the legal system of the Emirate of Dubai and the UAE Federal Government. Its aim is to regulate the global virtual asset industry in Dubai. The regulation is intended to balance the need for business development of virtual assets with the need for their regulation.
The Act has a wide scope and its definitions are vague. This allows the provisions of the Act to be adapted to the rapidly developing world of blockchain technology and cryptography. According to the DVAL provisions, virtual assets are digital representations of value that can be traded, transferred or used as an instrument of exchange or payment, as well as for investment purposes. The act is therefore intended to cover tokens, cryptocurrencies and any other virtual assets as defined by the Dubai Virtual Assets Regulatory Authority (“VARA”).
DVAL not only introduces regulations related to cryptocurrencies, but also establishes the public authority responsible for this sector - i.e. VARA. VARA is intended to have authority over all issues related to digital assets. This includes both NFT and tokenization as well as ETH and Bitcoin. The purpose of the new regulations is to create a well-thought-out legal framework that will be a solid structure for the cryptocurrency financial market.
VARA is responsible not only for the oversight over compliance with the new regulations, but also for licensing local and global financial entities. The provision of all services related to the operation, trading and management of virtual resource platforms requires the prior approval of VARA. This authority oversees all of the above services and may suspend or terminate trading in the virtual asset in the Emirate of Dubai. In addition to being authorized by VARA, the provision of such services also requires establishment of a company in Dubai and the possession of an appropriate license issued by a commercial licensing authority.
So while the virtual asset industry is still at an early stage, Dubai has taken real steps to establish laws, regulations and a dedicated government body that will allow the industry to grow safely within the established regulatory framework. Considering the preferential tax regulations as well as the general, positive attitude to the development and implementation of new technologies, the Dubai jurisdiction is eagerly chosen by entities basin its operations on cryptocurrencies and blockchain technology.
Sources:
Chainalysis, “The 2021 Geography of Cryptocurrency Report”, October 2021, source: https://go.chainalysis.com/rs/503-FAP-074/images/Geography-of-Cryptocurrency-2021.pdf (access on: 13 December 2022).
D. Murphy, E. Graham, “Crypto exchange Kraken is set to launch in UAE as regional competition, 26 April 2022, source: https://www.cnbc.com/2022/04/25/crypto-exchange-kraken-to-launch-in-uae-after-full-regulatory-approval.html (access on: 13 December 2022).