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UAE Securities and Commodities Authority introduces two new virtual asset regulations

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Gabriella Savastano | CMS, Yasmin Johal | CMS

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New regulatory developments scope out regulations of virtual assets in the UAE.

The UAE has seen a number of developments in the virtual assets space over the last 18 months, including the UAE designating the Securities Commodities Authority (SCA) as the UAE’s federal regulator for virtual asset service Operators (VASP).

In addition to this, there has also been the introduction of a virtual assets regime in the Emirate of Dubai and the establishment of the Virtual Assets Regulatory Authority (VARA), which, through the delegation by the SCA pursuant to Cabinet Decision 111 and 112, is the regulatory authority in the Emirate of Dubai (excluding the Dubai International Financial Centre (DIFC). VARA in turn has issued its own laws and regulations.

The SCA has now issued two new regulations relating to virtual assets which repeal the existing “Crypto Regulations” (the Authority’s Board of Directors’ Decision No. 23/Chairman of 2020 concerning Crypto Assets Activities Regulation), which previously governed this space. The new regulations issued by the SCA include:

  • SCA Chairman of the Board of Director’s Decision No. (26/RM) of 2023 in relation to Virtual Assets Platform Operators (the SCA VA Exchange Regulation); and
  • SCA Chairman of the Board of Director’s Decision No. (27/RM) of 2023 amending SCA Chairman of the Board of Director’s Decision No. (13/RM) of 2021 in relation to the SCA Rulebook (the SCA Rulebook Amendments Regulation),

together the “SCA Virtual Asset Regulations”. The key points are summarised in this article.

The SCA VA Exchange Regulation

The SCA VA Exchange Regulation sets out the scope of regulation that applies to VASPs and the relevant rules and requirements. The SCA VA Exchange Regulation applies throughout the virtual assets sector in the UAE. It crucially does not apply to the regulation of virtual assets in the Financial Free Zones (including the DIFC and the Abu Dhabi Global Market) as this would duplicate existing legislation.

The SCA VA Exchange Regulation covers the licensing of virtual assets which are subsequently defined as “digital representation of a value which is negotiable and digitally transferable. It can be used for investment purposes. However, they exclude the operations of digital representation of bills, securities or other monies.” Only virtual assets that are approved on the SCA’s official list of virtual assets or by another competent authority (ie those that are registered under VARA’s remit) are permitted to be traded in the UAE. The SCA VA Exchange Regulation also requires VASPs to be licensed by the SCA.

The SCA VA Exchange Regulation includes five key obligations on virtual asset platform operators, when licensed and continuously after licensing. These relate to:

  • operational efficiency;
  • technology related governance;
  • monitoring and testing systems and controls;
  • disclosure requirements;
  • prescriptive rules regarding protection and custody of virtual assets;
  • strong compliance and anti-money laundering (AML) arrangements, along with compliance with the UAE Federal Decree-Law No. 20/2018 on Combating Money Laundering Crimes, the Financing of Terrorism and the Financing of Unlawful Organizations; and
  • rules regarding short selling and trading related controls.

Furthermore the Addendum No 1 to the SCA VA Exchange Regulation includes prescriptive rules regarding how to benchmark the suitability of virtual assets as part of adding them to the official list.

SCA Rulebook Amendments Regulation

The SCA Rulebook Amendments Regulation amends the SCA Rulebook in relation to virtual assets and includes virtual assets to the list of products that may be dealt or brokered by firms that are regulated by the SCA. Existing SCA licensable activities, such as (but not limited to) brokering, portfolio management and custody all now extend and cover to virtual assets. The rules, requirements, and compliance obligations in the SCA Rulebook have also been updated to reflect the extension of the SCA Rulebook to virtual assets.

Furthermore, a new Category 7 License in relation to VASPs has been added to the SCA Rulebook, and the following capital requirements will apply to VASPs within scope:

  • a capitalization of AED 1 million plus six months of operating expenses if the activity is operating a VA Exchange Platform only;
  • a capitalization of AED 2 million if the activity is the Brokerage of VAs;
  • a capitalization of AED 4 million plus six months of operating expenses if the activity is the Custody of VAs; and
  • a capitalization of AED 5 million plus six months of operating expenses if the operator of a VA Exchange Platform provides any other VA service.

Finally, further to the “Guidelines for Financial Institutions adopting Enabling Technologies” document jointly issued in November 2021, the SCA Rulebook Amendments Regulations outlines a robust technical framework for virtual assets. This includes details regarding the:

  • creation, management and controls of virtual asset wallets;
  • procedures relating to private keys;
  • origin and destination of virtual assets;
  • security measures on storage and transmission of data;
  • risk management;
  • safeguarding processes and systems testing;
  • use of automation;
  • third party outsourcing;
  • management of personnel and decision making;
  • cryptographic keys and wallet storage;
  • password protection and encryption;
  • origin and destination of virtual asset funds;
  • security measures and procedure;
  • transactions signatories;
  • suspicious transactions; and
  • validation of virtual assets and safeguarding.

Interaction with VARA

Cabinet 112 confirms that VARA is the competent regulatory authority in the Emirate of Dubai. As such firms who operate within VARA’s remit are unlikely to require separate authorisation by the SCA with respect to activities carried from or within the Emirate of Dubai. 

The SCA VA Regulations  have been published within the Official Gazette and have now come into force and apply immediately.

Firms operating within this space should seek advice on the scope and remit of the new SCA VA Regulations and how these affect their current or future business models.

Gabriella Savastano is head of Financial Services for the UAE. Yasmin Johal is an associate at CMS specialising in FinTech and sits in the Financial Services Regulation team.

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