The new law establishes the Dubai Virtual Assets Regulatory Authority and identifies activities to be regulated, such as operating virtual asset platforms.
By Andrew Moyle, Ksenia Koroleva, and Matthew Rodwell
On March 11, 2022, Dubai Law No. 4 of 2022 on the Regulation of Virtual Assets in the Emirate of Dubai (Virtual Assets Law) was published in the Official Gazette of the Government of Dubai. The new law is a landmark piece of legislation for Dubai, which aims to become one of the leading jurisdictions for virtual assets.
The Virtual Assets Law regulates activities with virtual assets and related services across the Emirate of Dubai, including its special development zones and free zones with the exception of the Dubai International Financial Centre (DIFC), which has its own regulatory framework for virtual assets. The Virtual Assets Law does not apply on a federal level.
The Virtual Assets Law entered into force on the date of its publication, and further implementing regulations are yet to be issued.
The Virtual Assets Law defines key notions pertaining to virtual assets and related activities, and requires virtual assets service providers to obtain an authorization and establish a local presence (in one of the legal forms approved by the relevant authority in Dubai). The authorization must be obtained from the Dubai Virtual Assets Regulatory Authority (VARA) — which the Virtual Assets Law establishes as the competent regulatory and licensing authority — prior to obtaining a commercial license and commencing the relevant regulated virtual asset activities.
The Virtual Assets Law sets forth certain key definitions.
A virtual asset is defined as a digital representation of value, which should be (a) digitally tradable/transferable, or (b) used as either an exchange or payment tool, or for investment purposes. According to the Virtual Assets Law, VARA may determine that digital representations of other values qualify as “virtual assets.”
This broad definition can encompass various types of virtual assets, including non-fungible tokens (NFTs). The Virtual Assets Law provides as an example a virtual token, which digitally represents a set of rights that can be issued and traded through a specific digital platform. Such a platform is defined as a virtual asset platform enabling the issuance and safeguarding of and transacting with virtual assets through the use of a distributed ledger technology (DLT). (A transaction may include a sale, purchase, offering, clearance, or settlement.) The platform can be centralized or decentralized but has to be managed by a VARA-authorized virtual asset service provider.
DLT is defined as a digital database (public or private) through which transactions with virtual assets are recorded, created, safeguarded, and shared in a network of a set of nodes that automatically spread across multiple locations and places (e.g., blockchain) in order to prove their authenticity and ownership.
Virtual assets are managed and transferred through a digital application or other digital or electronic media that is referred to as a virtual asset portfolio. This term can also denote any operation carried out to transfer a virtual asset from one account to another.
A virtual asset needs to be transferred to a person’s virtual asset portfolio and recorded/validated through a DLT before the person can own the virtual asset. The Virtual Assets Law refers to the relevant owner as a beneficiary, and specifies that both natural and legal persons can be beneficiaries. The Virtual Assets Law does not require beneficiaries to obtain authorizations from VARA to own or transact in virtual assets but authorizations are necessary for virtual asset service providers.
VARA, an independent authority affiliated with the Dubai World Trade Center (DWTC), will cooperate with the UAE Central Bank and the Securities and Commodities Authority (SCA) to conduct its activities. VARA itself is not allowed to own or issue virtual assets.
VARA’s powers include implementing the requirements of the Virtual Assets Law, adopting additional rules and regulations (including on classification of virtual assets, scope of regulated activities, and fees and charges), as well as formulating a general policy and strategic plans related to the regulation of virtual assets in Dubai.
VARA will also be the key supervising authority in the Dubai virtual assets market and, in addition to issuing authorization for certain activities related to virtual assets, it has the power to monitor trading and other activities and ensure imposition of liability for violations. The Virtual Assets Law also requires VARA to protect the rights of beneficiaries.
The new law allows VARA to delegate any of its mandates to entities (public or private) under agreements with such entities setting forth the duration and the rights and obligations of the relevant parties.
Neither VARA nor its delegates shall be liable for the actions of any persons authorized by VARA (including virtual asset service providers) to perform activities related to virtual assets.
Activities Requiring Authorization under the Virtual Assets Law
Entities that intend to engage in the following activities in Dubai must obtain authorization from VARA before commencing those activities and before obtaining a commercial license:
- Virtual asset platform operation and management services
- Exchange between (a) virtual assets and currencies (foreign or domestic), and (b) one or more forms of virtual assets, as well as transfer of virtual assets
- Custody and management of, as well as control over, virtual assets
- Virtual asset portfolio services
- Virtual token offering and trading services
VARA may issue regulations to divide the activities above into sub-categories and impose additional rules for any relevant category and sub-category. Moreover, subject to the approval of the DWTC Board of Directors, VARA can add any activities, businesses, practices, or services to the list of activities that require VARA authorization. VARA may also issue a list of activities and products that are not permitted to be performed or traded in Dubai.
VARA may waive authorization with its prior written consent issued pursuant to the regulations of the DWTC Director General.
Restrictions and Penalties
The DWTC Board of Directors shall determine the types of violations under the Virtual Assets Law and the fines to be imposed. In addition to fines, VARA can suspend (for up to six months) or cancel a holder’s authorization (and coordinate the cancellation of the corresponding commercial license with the relevant authorities).
Interplay with Federal Regime
The interplay between the Virtual Assets Law and VARA’s new authority on the one hand, and SCA’s ostensibly overlapping federal authority on the other, is currently not clear. (The Virtual Assets Law applies in Dubai outside of the DIFC, while the SCA’s authority applies to the wider UAE, including Dubai outside of the DIFC).
In this regard, in parallel with the announcement of the Virtual Assets Law, on 8 March 2022, the SCA issued a statement declaring that its “regulatory and supervisory framework related to virtual assets issued for investment purposes” would be issued imminently, and stated that the SCA “is the sole authority in the UAE mainland — except the financial free zones, ADGM and DIFC — for licensing, supervising and overseeing the virtual assets activities and services issued for investment purposes (not virtual assets issued for payment purposes) as well as monitoring the compliance of the licensees by the [SCA]”.
Once the implementing regulations are issued, they are expected to shed further light on the interplay between the Virtual Assets Law and the SCA’s expected new virtual assets regulatory framework (which, in principle, would apply in Dubai outside of the DIFC).
Latham & Watkins will continue to monitor developments related to virtual assets in the Middle East, including the forthcoming additional rules and regulations.
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