As the world moves towards the use of digital and virtual currencies and establishes a more open acceptance of the decentralized nature of the workings of such currencies, Dubai moves to the forefront of embracing the novel way of dealing and exchanging in value-based currencies within the UAE and the region as a whole. Spearheading the implementation of regulations amongst other UAE jurisdictions, the Emirate of Dubai implemented Law No. 4 of 2022 on Regulating Virtual Assets (“Law”).

Virtual Assets

As defined in the Law, a virtual asset is a “digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes”. This means assets such as cryptocurrencies and non-fungible tokens (NFTs) are encompassed within the definition of a virtual asset, and therefore, are subject to the provisions of the Law.

Establishment of a Regulatory Authority

The Law establishes the Virtual Assets Regulatory Authority (“VARA”), an authority responsible for the regulation and oversight of virtual assets with its own distinct legal personality, to carry out its objectives setout therein. The Law outlines VARA’s affiliation with the Dubai World Trade Centre Authority, and that VARA is responsible for the issuance of permits for the relevant activities in relation to virtual assets (“Activity”). This means any entity that wishes to undertake an Activity must be duly licensed by VARA, as well as the relevant commercial licensing authority in Dubai.

Activities that require a permit include, inter alia, the provision of:

• Operating a virtual asset platform,
• Services for the exchange between virtual assets and national or foreign currencies,
• Virtual asset transfer services,
• Services related to virtual wallets, and
• Services related to offering and trading in virtual tokens.

Although the Law sets out the Activities that require permits issued by VARA, the process and application for such permits remains unclear and the implementing decisions are yet to be published.

VARA Authorities

The Law outlines the various functions of VARA including developing policies and strategic plans relating to the regulation of virtual assets in Dubai, oversight and supervision of service providers, the establishment of rules and controls to govern the conduct of Activities in Dubai, and other functions. Evidently, the scope of VARA’s authorities and functions leave it unclear as to whether the regulation and scope of its authorities extend to entities licensed by other regulatory authorities within or outside the UAE, by virtue of operating within the Emirate of Dubai, due to VARA’s broad scope.

Although it can indeed be argued that one of the Law’s main objectives is to facilitate the use and integration of the virtual assets within the economy, VARA’s wide scope may stunt this if VARA’s scope calls for the licensing of entities intending to provide services within Dubai, but are located outside of Dubai and are already licensed by other authorities.

Existing Regulations

It cannot be said that no other laws or regulations have been put in place which, to an extent, relate to or address virtual assets. On the contrary, the UAE, on a federal level has implemented regulations addressing virtual assets, notably the Central Bank of the UAE (“Central Bank”).

The Central Bank’s Stored Value Facilities Regulation ("SVF Regulation") on the regulation of entities that accept non-cash facilities as a payment method for goods and services, including cryptocurrencies and virtual assets, does indicate a possible interplay between not only the SVF Regulation, but between the regulators, the Central Bank and VARA as well. Although the above-mentioned regulation addresses and regulates different activities, both the SVF Regulation and the Law involve or touch upon an element of making payments with or the use of virtual assets.

It should be noted that the Law does clearly state that VARA is to coordinate with the Central Bank on matters relating to the Dubai’s financial stability.

Scope of Application

The Law applies to the Emirate of Dubai, including all freezones, save for the Dubai International Financial Centre (“DIFC”). It also goes as far as stating that any contradicting “Legislation” shall be repealed, emphasizing the scope and authority of the Law and VARA. However, “Legislation” is not comprehensively defined within the Law. Therefore, it is unclear as to whether conflict between existing applicable laws is intended to be superseded by the provisions of the Law, especially since federal laws, including the Central Bank’s regulations, prevail over local/Emirate laws.

The UAE has indeed exerted considerable efforts to conform to international tax regulations, minimum disclosure requirements, as well as combatting anti money laundering practices with the implementation of various laws and regulations such as: UAE Cabinet issued resolution No. 31 of 2019 (concerning economic substance regulations in the UAE), as well as Cabinet Resolution No. 58 of 2020 on the Regulation of the Procedures of the Real Beneficiary which calls for the requirement to register beneficial owners in UAE all companies outside financial free zones and establishes minimum disclosure requirements, and Federal Decree Law No. (16) of 2021 which comes to regulate the factoring and the assignment of accounts receivable requiring debtor finance practices to be exercised solely by licensed institutions. Although the implementation of the Law facilitates recognition of Dubai and the UAE as a global progressive hub, the decentralized nature of some virtual assets and the Law’s permissive use thereof does beg the question as to the possible reactionary effects that may occur, affecting such efforts.