The United Arab Emirates (UAE) has passed a new law that governs virtual assets, setting up the country's initial regulatory regime for the cryptocurrency space at the federal level.
Before the federal-level regulation, the UAE already introduced several supervisory initiatives for digital assets in economic free zones like the Abu Dhabi Global Market (ADGM). Last year, Dubai also established its own crypto regulator called the Virtual Asset Regulatory Authority (VARA).
Legal experts spoke to Cointelegraph about the major changes introduced by the new law.
Irina Heaver, a UAE-based crypto and blockchain lawyer, explained that the move has several implications. According to Heaver, the new law ensures that entities that engage in crypto activities must secure a license and approval from the new regulator. Non-compliance could lead to a hefty fine. She explained:
“Failure to comply leads to heavy sanctions, such as a fine of up to 10 million AED ($2.7 million), disgorgement of profits and even criminal investigation by the public prosecutor.”
Heaver highlighted that the law is expected to come into force on Jan. 14 and would require crypto entrepreneurs operating in the country to conform. “Every crypto and Web3 project operating in the UAE will have to structure a way to comply with the new federal law and all of the existing laws,” she stated.
Marwan Alzarouni, CEO of Dubai Blockchain Center, explained that the new legislation "will encompass a comprehensive technical requirements list, including cybersecurity controls and custodial measures to ensure the safekeeping of virtual assets, such as the utilization of cold wallets." To prevent potential abuse of customer funds by custodians, additional measures include financial credit guarantee requirements. He also noted:
It is crucial to be aware of the scope and limitations of the recent federal regulations on virtual assets in the UAE. These regulations do not apply to Virtual Asset Service Providers operating within the financial free zones of the UAE, but are applicable to all other entities within the country.
Meanwhile, despite the minimum requirements for virtual asset service providers (VASPs) being attainable, Heaver thinks that many firms may have some difficulties. “Those are actually rather realistic. However, the practice shows that most crypto companies fall short of even basic requirements,” said Heaver.
The lawyers also highlighted that the law has set up minimum requirements for VASPs. Alzarouni explained that "depending on the nature of the VASP's operations, there may be various new technical and compliance requirements, such as Know Your Customer and Anti-Money Laundering regulations."
Regulators will be granted the authority to implement inspection programs and control procedures. All legal entities that fall into the VASP category will have three months to adapt and comply with the new law, Heaver told Cointelegraph.
Despite establishing a new law dedicated to protecting consumers, Heaver believes that preventing FTX-like entities from attempting to commit fraud would be challenging. Dubai’s VARA still previously gave FTX approvals before revoking it in November. She noted:
“From the evidence that emerged, FTX is a case of serious fraud of a level that will look Madoff look like an angel. Unfortunately, no levels of laws can protect us from people wanting to commit crimes intentionally.“
Overall, the Heaver believes that this new development is good for founders, investors and consumers within the UAE and that regulatory clarity gives the country the right ingredients to be the “Web3 capital of the world.”