Published November, 2018
The terms “Blockchain” or “Bitcoin” were alien to the general public in the United Arab Emirates (UAE) when Satoshi Nakamoto began the Bitcoin phenomenon in 2008. However, today with one of the world’s first cryptocurrency deep “cold storage” companies operating in Dubai, it is clear that tides have shifted.
In a bid to become a pioneer in blockchain technology, the UAE has launched the UAE Blockchain Strategy 2021 pursuant to which, 50% of government transactions will be conducted using blockchain technology by 2021. To solidify it vision, regulations on the use of crypto assets, including cryptocurrencies have recently been issued.
The Financial Services Regulatory Authority (FSRA) which is the financial regulator of the Abu Dhabi Global Markets (a free zone in Abu Dhabi) (ADGM), has become the first regulator in the UAE to issue comprehensive guidance and regulations on carrying out activities relating to cryptocurrencies.
On 25th June 2018, through its publication of the Regulation of Crypto Asset Activities in ADGM (the Regulations), the FSRA introduced a regulated activity of ‘Operating a Crypto Asset Business’ pursuant to which, an entity may set up Crypto Asset Exchanges, act as Crypto Asset Custodians or intermediaries engaged in Crypto Asset activities in or from ADGM. The Regulations do not apply to Initial Coin Offerings and mining of crypto assets. To understand the formalities governing the operation of a Crypto Asset Business, it is important to read the Regulations together with the existing ADGM legal framework including the FSMR and the FSRA Conduct of Business Rules (COBS). This article provides a summary of the procedures required in order to obtain a license to operate a Crypto Asset Business.
The Regulations refer to the existing procedure where, an entity must obtain a Financial Services Permission (FSP) from the FSRA to operate a Crypto Asset Business in ADGM. Once you have an FSP you become an Authorised Person in ADGM. If you are already an existing Authorised Person and you want to operate a Crypto Asset Business, then you can apply to the FSRA to extend the scope of your existing FSP to allow this. The FSRA has the discretion to decide whether or not to grant the FSP and will considervarious factors such as security risks associated with the proposed crypto assets The Regulations also impose capital requirements to operate a Crypto Asset Business.
Regulatory Requirements relating to Anti-Money Laundering (AML) Compliance
Due to the greater anonymity that crypto assets give their holders the FSRA is of the view that crypto assets require a more robust regulatory framework to ensure compliance with AML. In doing so, the FSRA has recommended that organisations authorized to operate a Crypto Asset Business adopt a risk-based approach whereby they understand the general risks associated with their activities and allocate appropriate resources to mitigate those risks. Such businesses areencouraged to:
Technological Governance and Controls
Organisations authorised to operate a Crypto Asset Businessare required to ensure technology governance and controls. To this end, the Regulations impose an obligation on such businesses to establish and maintain systems and controls to ensure that the affairs of the crypto asset business are properly monitored and are compliant with existing regulations. When establishing its systems and controlsa crypto asset business should focus on crypto asset wallets, private keys, origin and destination of crypto asset funds, security and risk management.
Another key recommendation in the Regulations is the requirement of crypto asset risk disclosures. In essence, crypto asset businesses are required to, prior to entering into transactions, disclose all material risks to their clients in a clear and effective manner.
The Regulations provide a summary of fees payable to the FSRA for applying and operating a crypto asset business. The fees are dependent on the form of crypto asset activity that an entity proposes to carry out. In the case of a Crypto Asset Exchange, the initial authorisation fee is USD 125,000 together with an annual supervision fee of USD 60,000 whereas in the case of all other crypto asset activities, the fees are USD 20,000 and USD 15,000, respectively. If a business is carrying out more than one crypto asset activity such as an exchange as well as a custodian, fees for both activities will be calculated on a cumulative basis. Moreover, Crypto Asset Exchanges must pay a monthly trading levy (in USD) which is calculated on a sliding scale based on average daily value.
Future of Blockchain and virtual currencies in the UAE
Dubai aims to become the first ‘blockchain powered Government’. The Dubai Land Department (DLD) is developing its own blockchain system to record all real estate contracts: the blockchain system will allow tenants to make payments electronically resulting in such transactions being paperless and therefore, cost efficient. The DLD aims to push all boundaries by allowing transactions to be completed without requiring parties to appear in person before any Government entity. Interestingly, certain property developers in the UAE have announced that they now allow buyers to invest in their projects using One-Gram, the Shari’ah compliant cryptocurrency.
Financial institutions such as banks are also turning to blockchain technology. UAE Exchange, a leading UAE exchange house, recently partnered with San Francisco based Ripple to enable real-time cross border payments using Ripple’s blockchain technology. By reducing the requirement to have third-party foreign exchange handlers, UAE Exchange has managed to cut its administrative costs.
The ADGM has been quick to identify the growing trend of crypto assets. The Regulations introduce the operation of a crypto asset business and help to widen the scope of existing ADGM regulations to create a robust framework. The FSRA has identified key risks and areas of concern in relation to crypto assets and recommended appropriate preventive measures. Not only has this provided clarification on the status of crypto assets in ADGM, but this has also shown ADGM’s attempt to boost the economy. Having said that, since the Regulations have been published so recently, we are yet unable to comment on how the Regulations will be used and implemented. Nevertheless, with the FSRA being the first regulator to formally introduce detailed regulations in this sector, it is clear that ADGM is using all its efforts to create a booming crypto asset eco-system.
Adil Shafi, Partner (firstname.lastname@example.org)
Kajal Patel, Associate (email@example.com)
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