Regulating Unlicensed Virtual Asset Providers: A Comprehensive Guide

Introduction:

In recent years, the world has witnessed rapid growth in the popularity and adoption of virtual assets, including cryptocurrencies, non-fungible tokens (NFTs), and various other digital assets. With this rise, however, comes the demanding need for robust regulation to safeguard investors and ensure the integrity of financial markets.

In response to this imperative, the UAE has taken a significant step forward with Cabinet Decision No. 111/2022, aimed at regulating virtual assets and combating the use of unlicensed Virtual Asset Service Providers (VASPs) to safeguard investors’ interests.

Understanding the Scope and Definitions:

Cabinet Decision No. 111/2022 provides a comprehensive framework for the oversight and licensing of Virtual Asset Service Providers operating within the UAE. Central to its objectives is the abolition of unlicensed entities offering virtual asset services, thereby mitigating the risks associated with illicit activities such as money laundering, terrorist financing, and other financial crimes.

Defining Key Terms:

• Virtual Assets: Cabinet Decision No. 111/2022, Article 1, defines virtual assets as digital representations of value that can be traded or transferred digitally, excluding digital representations of fiat currency, securities, or other assets.
• Virtual Asset Activities: These include activities related to the provision of virtual asset services in the UAE, or related transactions subject to licensing following the provisions of the decision.
• Virtual Asset Service Providers: These are entities engaged in activities related to virtual assets, including platform operation, exchange services, brokerage, custody, and financial services relating to virtual asset offerings.
• Virtual Asset Platform: This refers to a digital platform for listing, trading, and transferring ownership of virtual assets, executing related clearing and settlement transactions, and storing and saving information and data through Distributed Ledger Technology or any other similar technology.

Scope of Application:

The provisions of Cabinet Decision No. 111/2022 apply to the virtual asset sector in the UAE, including Free Zones, virtual asset activities within the UAE, and virtual asset service providers within the UAE.

However, they do not apply to virtual assets regulated within Financial Free Zones, digital securities, digital commodity contracts subject to their respective regulations, or virtual assets for payment purposes under the jurisdiction of the Central Bank, except those approved by the Central Bank for listing and trading for investment purposes on the virtual asset platform.

Licensing Requirements and Compliance:

Under Article 4 of the Cabinet Decision, engaging in virtual asset activities without obtaining the requisite approval and license from the Securities and Commodities Authority or Local Licensing Authorities is prohibited.

Moreover, entities providing virtual asset services must be based in the UAE, adhere to licensing procedures, and comply with minimum requirements set forth by the regulatory authorities, particularly concerning anti-money laundering and counter-terrorism financing, as well as cybersecurity standards.

Failure to abide by these provisions may result in severe penalties, including fines, as stipulated in Article 12 of the law, which may not exceed AED 10 million.

Identifying Virtual Asset Service Providers:

Under Article 5 of the decision, Virtual Asset Service Providers include entities engaged in various activities related to virtual assets, such as operating platforms, exchanging assets, providing custody services, and facilitating financial transactions. These include cryptocurrency exchanges, NFT marketplaces, digital wallet providers, and other mediators involved in virtual asset transactions.

Combatting Money Laundering and Terrorism Financing:

The decision ensures compliance with Federal Decree-Law No. 20/2018 on Combating Money Laundering Crimes, the Financing of Terrorism and the Financing of Unlawful Organizations, which is the existing legislation on combating money laundering and terrorism financing.

Virtual Asset Service Providers are mandated by Article 8 to adhere to anti-money laundering laws, implement robust cybersecurity measures, and report any suspicious transactions to the relevant authorities.

Enforcement and Penalties:

Article 12 of the decision outlines penalties for non-compliance, including fines and other measures. Penalties may include issuing a warning, imposing fines not exceeding ten million dirhams, suspending services, or revoking licenses. These measures serve as preventions against engaging with unlicensed VASPs and reinforce the importance of regulatory compliance in the virtual asset sector.

Raising Awareness and Investor Protection:

In addition to enforcement measures, the decision emphasizes the role of regulatory authorities in raising awareness among investors about the risks associated with virtual assets, as stated in Article 6. By educating the public and promoting transparency in the sector, authorities aim to protect investors from illegal practices and foster a safe investment environment.

Conclusion

The UAE’s Cabinet Decision No. 111/2022 represents a significant milestone in the regulation of virtual assets, including cryptocurrencies, NFTs, and related technologies. By combating the use of unlicensed Virtual Asset Service Providers, the decision promotes regulatory compliance, investor protection, and the integrity of the financial system. As the virtual asset sector continues to grow, adherence to regulatory guidelines will remain essential for sustainable growth and innovation.

Awatif Mohammad Shoqi Advocates & Legal Consultancy is a full-service law firm in UAE committed to delivering sound judgment to its clients on their most difficult and important matters.