Original | Odaily Planet Daily (@OdailyChina)
Author | Fu Ruo (@vincent31515173)
2024 is a year when the crypto industry takes significant steps towards mainstream acceptance. The U.S. Bitcoin and Ethereum spot ETFs have been approved and are now trading, with traditional asset management giants like BlackRock and Fidelity entering the crypto space. As the cryptocurrency market rapidly evolves, governments and regulatory bodies worldwide are increasingly aware of the potential risks involved, such as money laundering, fraud, and market manipulation. More countries are beginning to strengthen regulations and introduce relevant laws to protect investors and maintain market stability.
Different regions have adopted unique approaches to crypto asset regulation. The U.S. leverages its strong financial foundation to exert considerable influence in the crypto industry, with the SEC intensifying its regulatory efforts. Hong Kong, as a long-established financial center, continues to roll out new policies to embrace Web3, with rigorous licensing and stablecoin sandbox testing showcasing its commitment. Southeast Asian countries like Singapore, Thailand, and Vietnam are also actively embracing Web3, with frequent industry summits and the establishment of emerging crypto enterprises injecting new vitality into the Asian crypto sector.
Odaily Planet Daily launches a series of reports titled "New Trends in Global Crypto Regulation," aimed at providing cutting-edge regulatory information for Web3 builders. By clarifying the regulatory landscape from a global perspective, Web3 builders can accurately grasp policy directions in different regions and innovate within a legal and compliant framework, fully leveraging technological advantages to promote the healthy, orderly, and innovative development of Web3.
In this issue, our focus is on the new hub for Web3 builders—the UAE. As a financial center in the Middle East, the UAE is actively adjusting its cryptocurrency regulatory policies to enhance its competitiveness in the global financial market. The UAE government is committed to creating a secure and transparent virtual asset ecosystem to attract international investors and innovative enterprises. Dubai has rapidly emerged as a hub for cryptocurrency companies, drawing a large pool of global crypto talent and capital.
The UAE is a federal state composed of seven emirates: Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al-Quwain, Fujairah, and Ras Al Khaimah. Each emirate enjoys independent autonomy, leading to unique policies regarding cryptocurrencies, particularly in Abu Dhabi and Dubai. This situation makes the overall cryptocurrency regulatory policy in the UAE complex and diverse.
Odaily Planet Daily will gradually analyze the UAE's regulatory policies regarding cryptocurrencies and reveal why Dubai has become one of the most favored regions in the crypto industry.
UAE's Complex Crypto Regulatory Strategy: Three Major and Two Special
In the UAE, the GDP of the two major emirates, Abu Dhabi and Dubai, accounts for 80% of the national total, giving them significant influence in the national economy and leading to relatively independent cryptocurrency policies. Additionally, these two emirates have established multiple economic free zones, with Abu Dhabi hosting the Abu Dhabi Global Market (ADGM) and Dubai having the Dubai International Financial Centre (DIFC), Dubai Multi Commodities Centre (DMCC), Dubai World Trade Centre (DWTC), and Dubai Airport Freezone Authority (DAFZA). Ras Al Khaimah has also established the Ras Al Khaimah Digital Asset Oasis (RAK).
When studying the UAE's cryptocurrency policies, they can be summarized as "Three Major, Two Special." The "Three Major" refers to:
The Central Bank of the UAE: Responsible for regulating cryptocurrency payments.
The UAE Securities and Commodities Authority (SCA): Responsible for regulating cryptocurrency investments.
The Dubai Virtual Assets Regulatory Authority (VARA): The world's first dedicated virtual assets regulatory body.
The "Two Special" refers to:
Abu Dhabi Global Market (ADGM): Independent of other regulatory bodies, with its own cryptocurrency regulatory policies.
Dubai International Financial Centre (DIFC): Also has independent cryptocurrency regulatory policies.
This classification is based on the fact that the Central Bank of the UAE focuses on regulating cryptocurrency payments, while the SCA and VARA represent the main licensing authorities. ADGM and DIFC are not directly governed by the aforementioned policies and independently formulate their own cryptocurrency regulatory policies.
In addition, the Dubai Multi Commodities Centre (DMCC) also has an independent license, but the relevant laws do not exclude DMCC, so this free zone should be regulated by the Dubai Virtual Assets Regulatory Authority (VARA), while the rest should be governed by the "Three Major" based on their physical location.
Central Bank of the UAE
The Central Bank of the UAE (CBUAE) has implemented several strategies for cryptocurrency regulation to ensure market compliance and security. First, the UAE has enacted anti-money laundering (AML) and counter-terrorism financing (CFT) regulations based on international standards, particularly the recommendations of the Financial Action Task Force (FATF), aimed at combating money laundering and terrorist financing. Financial institutions must conduct customer due diligence, monitor transactions, and report suspicious activities promptly to fulfill their legal obligations.
Additionally, in February 2023, the Central Bank of the UAE issued the Guidance for Licensed Financial Institutions on Risks Related to Virtual Assets and Virtual Asset Providers, helping regulated financial institutions understand and effectively implement these regulations to adapt to the evolving compliance environment.
At the same time, in June 2023, CBUAE released the Payment Token Services Regulation (PTSR), specifically regulating stablecoins and related services. This regulation applies throughout the UAE, excluding the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). In the PTSR, payment tokens are defined as stablecoins priced in fiat currency, and the regulation requires entities registered in the UAE to apply for a payment token service license, prohibiting the provision of payment token services or the use of virtual assets for payments without permission. To ease the transition, the PTSR sets a one-year adaptation period for existing participants to gradually comply with the new regulations.
Overall, CBUAE primarily formulates AML and CFT regulations and requires crypto enterprises to comply with these provisions. The Payment Token Services Regulation leans more towards the regulatory direction of stablecoin payments, with Tether, the issuer of USDT, announcing last August a partnership with the Abu Dhabi-listed cryptocurrency group Phoenix Group (PHX) to launch a token pegged to the UAE Dirham.
UAE Securities and Commodities Authority (SCA)
The UAE Securities and Commodities Authority (SCA) aims to establish a comprehensive regulatory framework for virtual assets (VAs) and virtual asset service providers (VASPs) to promote market stability, protect investors, and maintain financial integrity. The SCA recognizes the diversity of virtual assets, including cryptocurrencies and non-fungible tokens (NFTs), and their unique characteristics pose challenges to the traditional financial system. Therefore, in 2023, the SCA released the Regulatory Guidelines for Virtual Assets and Virtual Asset Service Providers to regulate the use of virtual assets and the activities of service providers.
According to these regulatory guidelines, the SCA categorizes virtual assets into two types: virtual assets for investment purposes and virtual assets for payment purposes. Investment assets are regulated by the SCA, while payment assets are regulated by the Central Bank of the UAE, unless specifically approved by the Central Bank for investment purposes. Additionally, certain digital assets, such as digital securities and NFTs not intended for investment, are also outside the SCA's regulatory scope.
The SCA's regulatory objectives include ensuring investor protection, maintaining market integrity, and reducing risks associated with virtual assets. These objectives form a strict licensing framework, ensuring that only qualified and financially sound entities can operate in the virtual asset market. The SCA stipulates that the following activities involving virtual assets must be licensed:
Operating and managing virtual asset platforms: Any entity providing operational or management services for virtual asset trading platforms.
Providing virtual asset exchange services: Facilitating exchanges between different types of VAs or between VAs and fiat currencies.
Providing virtual asset transfer services: Enabling the transfer of virtual assets between users or platforms.
Brokerage services for virtual asset trading: Acting as an intermediary for virtual asset transactions between buyers and sellers.
Custody and management of virtual assets: Providing secure custody and management of VAs, including control over them.
Financial services related to virtual asset issuance: Engaging in financial services related to the issuance or sale of virtual assets, such as token issuance.
To regulate these activities, the SCA provides specific licenses and related capital requirements for the following activities:
Virtual asset platform operators: Only operating virtual asset platforms—paid-in capital of 1 million dirhams; simultaneously engaging in other virtual asset service provider activities—paid-in capital of 5 million dirhams. Both require maintaining six months of operational funds.
Virtual asset custodians: Paid-in capital of 4 million dirhams, requiring maintenance of six months of operational funds.
Virtual asset financial advisors: Paid-in capital of 500,000 dirhams, requiring maintenance of six months of operational funds.
Virtual asset portfolio managers: Paid-in capital of 3 million dirhams.
Virtual asset brokers: Paid-in capital of 2 million dirhams.
Virtual asset dealers: Paid-in capital of 30 million dirhams.
In addition, virtual asset trading platforms are considered equivalent to multilateral trading facilities (MTFs) used in traditional financial markets, meaning they are subject to similar regulatory standards.
In terms of licensing requirements, applicants must meet all regulatory standards set by the SCA, including capital adequacy and compliance with anti-money laundering (AML) and counter-terrorism financing (CFT) requirements. The SCA requires qualified entities to maintain sufficient capital to support operations and implement effective compliance frameworks to detect and report suspicious activities. Additionally, the SCA has established specific standards for virtual asset platform operators to ensure transparency and fairness in their operations.
In terms of technical safeguards, VASPs must implement advanced security measures, including encryption and data protection. At the same time, the SCA encourages VASPs to comply with international AML and CFT standards to ensure the traceability of virtual asset transactions. Furthermore, the SCA emphasizes consumer protection, requiring VASPs to fully disclose risks associated with virtual assets and ensure the secure management of customer assets.
Overall, the UAE Securities and Commodities Authority (SCA) is one of the main regulatory bodies in the UAE's crypto industry. The "Regulatory Guidelines for Virtual Assets and Virtual Asset Service Providers" released in 2023 clearly delineate the functions of the Central Bank of the UAE and the SCA. Additionally, in September 2024, the SCA signed a cooperation framework with VARA, clarifying their respective regulatory scopes. The SCA and VARA will establish rules and procedures for licensing and supervising virtual asset service providers (VASPs). VASPs wishing to operate in Dubai must obtain VARA's license and can be registered with the SCA by default to serve the broader UAE market.
Dubai Virtual Assets Regulatory Authority (VARA)
Dubai's virtual asset regulatory framework is established based on the Law No. (4) of 2022 Regulating Virtual Assets of the Emirate of Dubai. This law came into effect in March 2022 and established a dedicated regulatory body—the Dubai Virtual Assets Regulatory Authority (VARA)—responsible for regulating virtual asset activities across Dubai, including free zones and special development areas, but excluding the Dubai International Financial Centre (DIFC). While establishing the highest global standards, VARA also protects investor rights and aims to promote the development of a borderless economy.
VARA's regulatory framework consists of a comprehensive set of top-down laws and rules. The 2023 Virtual Assets and Related Activities Regulation provides specific regulatory details covering licensing applications, anti-money laundering, counter-terrorism financing, and marketing, among other aspects. This framework emphasizes economic sustainability and cross-border financial security while addressing global money laundering (ML) and terrorism financing (TF) risks arising from the misuse of new technologies.
VARA has identified eight categories of regulated virtual asset activities, and any VASP wishing to provide these services must apply for the relevant licenses before operating. These include:
Virtual asset consulting services: Providing clients with advice and strategies regarding the virtual asset market to help them understand its complexities.
Virtual asset brokerage services: Including arranging virtual asset transactions, accepting orders, facilitating trades, etc., to provide clients with convenient trading channels.
Virtual asset custody services: Responsible for securely holding clients' virtual assets, acting only on client instructions to ensure asset safety.
Virtual asset trading services: Involving the exchange of virtual assets with fiat or other virtual assets to enhance market liquidity.
Virtual asset lending services: Providing flexible funding management options, allowing users to borrow and lend as needed.
Virtual asset management and investment services: Managing virtual assets on behalf of clients and implementing investment strategies to achieve asset appreciation.
Virtual asset transfer and settlement services: Ensuring the secure and efficient transfer of virtual assets between different entities or wallets.
Virtual asset issuance category 1: Primarily involving the issuance of stablecoins pegged to fiat currencies, providing a stable medium of exchange for the market.
Each license has detailed compliance requirements to ensure that VASPs comply with relevant regulations while providing services and protecting client rights.
In Dubai, all companies wishing to engage in virtual asset activities must obtain VARA's permission before operating, with the application process divided into two main phases:
Phase One:
Submit the Initial Disclosure Questionnaire (IDQ) to the Dubai Economy and Tourism Department (DET) or the relevant free zone.
Provide a business plan and detailed information about the company's owners and management.
Pay the initial fee for application review (usually 50% of the licensing application fee).
Obtain preliminary approval to complete the legal establishment and operational preparations of the company, such as leasing office space and onboarding employees.
It is important to note that at this stage, even with preliminary approval, the applicant company is not allowed to engage in virtual asset activities.
Phase Two:
Prepare and submit relevant documents according to VARA's guidance.
Engage in feedback interactions with VARA, which may include meetings, interviews, and submission of supplementary documents.
Pay the remaining application fees and the first year's regulatory fees.
Finally obtain the VASP license, which may come with operational conditions.
VARA reserves the right not to issue licenses, especially if the company's activities exceed the regulatory scope or do not meet regulatory standards.
For companies that began virtual asset operations before February 2023, VARA established a traditional program allowing these legacy operators to register by filling out the Initial Disclosure Questionnaire (IDQ) and obtain a transitional license (LOP) to transition to a fully regulated system within a limited time. This mechanism not only provides a 50% discount on the licensing fee but also lowers capital requirements, giving VASPs ample time to adjust to comply with new regulations.
On September 30, 2024, VARA amended several regulations. The new VARA regulations will officially take effect on October 1, 2024, marking a significant shift in Dubai's virtual asset regulatory framework. The new regulations expand the regulatory scope to include not only marketing and promotional activities for virtual assets but also consulting services, decentralized finance (DeFi), and custody services. The definition of virtual assets has also been updated, particularly regarding payment tokens, stablecoins, and NFTs (non-fungible tokens).
The new regulations require businesses engaged in virtual asset marketing to obtain specialized licenses and disclose all significant risks in promotional materials, ensuring that information is fair, clear, and not misleading. Regulation of aggressive marketing strategies has also become stricter, with exaggerated claims of potential returns explicitly prohibited.
Additionally, the new regulations introduce a tiered penalty system, imposing different penalties based on the severity of violations, with minor infractions potentially leading to administrative fines, while serious violations could result in the revocation of business licenses. Existing businesses may continue certain activities before the new regulations take effect, but new marketing and promotional activities must comply with the new standards.
According to the VARA Public Register, there are currently 19 companies that have applied for VARA licenses, including Binance, OKX, and Crypto.com; three companies are awaiting approval: Bybit, WadzPay, and Deribit.
Overall, VARA plays a key role in Dubai's virtual asset regulatory framework, not only setting detailed compliance requirements but also establishing a two-phase application process for companies to obtain licenses. Starting in October 2024, the newly enacted regulations will expand the regulatory scope to cover marketing, consulting services, decentralized finance (DeFi), and custody services, while introducing a tiered penalty system to address improper marketing and exaggerated claims.
Abu Dhabi Global Market (ADGM)
The Abu Dhabi Global Market (ADGM) is an international financial center established in Abu Dhabi, UAE, in 2013. ADGM aims to promote the development of the financial services industry locally and in the Middle East, attracting international investors and businesses. As an independent economic zone, ADGM adopts a common law system, providing a transparent and efficient regulatory environment covering banking, asset management, insurance, and fintech, among other fields. In recent years, ADGM has begun to focus on cryptocurrencies and digital assets, striving to establish a robust regulatory framework in this emerging field.
The Financial Services Regulatory Authority (FSRA) of ADGM is responsible for formulating and implementing regulatory policies regarding crypto assets. In 2020, the FSRA released documents coordinating the operation of digital securities within ADGM and issued the "Guidance on the Regulation of Virtual Asset Activities" in 2022. These guidelines clarify the regulatory requirements for virtual asset providers, including capital prerequisites, personnel control, anti-money laundering (AML), and customer due diligence (KYC) compliance measures.
Additionally, in 2023, ADGM introduced a formal regulatory framework for decentralized autonomous organizations (DAOs) and other digital asset entities, allowing DAOs to operate legally and issue tokens to members. These policies not only provide clear guidance for market participants but also promote Abu Dhabi as a leader in digital asset innovation in the region.
Companies engaged in crypto asset-related businesses in ADGM must apply for the appropriate licenses. The application process typically includes the following steps:
Submit an application: Companies must provide detailed information about their background, business plans, and compliance measures.
Due diligence: The FSRA will conduct due diligence on the applicant company to ensure compliance with regulatory requirements.
Obtain approval: Upon passing the review, the company will receive the relevant license, allowing it to operate legally within ADGM.
Licensed companies must also adhere to strict compliance requirements, including regular reporting and audits, to ensure ongoing compliance with regulatory standards.
Furthermore, ADGM has established a fintech sandbox, allowing companies to test their crypto-related products and services in a controlled environment. The main functions of the sandbox include:
Promoting innovation: Companies can develop and test new technologies in a relatively low-risk environment, driving fintech innovation.
Lowering entry barriers: Startups can explore market opportunities without bearing excessive regulatory burdens.
Real-time feedback: Companies can receive real-time feedback from the FSRA during testing, helping them adjust and optimize their products.
This mechanism not only supports the rapid development of innovation but also ensures that new products comply with regulatory requirements, thereby protecting the interests of market participants.
Overall, the reason the Abu Dhabi Global Market can independently regulate itself apart from other regions in the UAE is primarily due to its established legal framework and regulatory authority. As an independent economic zone, ADGM has a flexible regulatory mechanism that can quickly adapt to changes in the global financial market, especially in the cryptocurrency and digital asset sectors. Currently, Binance has obtained a Financial Services License (FSP) issued by the FSRA, allowing it to conduct custody regulatory activities related to virtual assets.
Dubai International Financial Centre (DIFC)
The Dubai International Financial Centre (DIFC) is a free zone in Dubai, UAE, established in 2004, aimed at becoming one of the world's leading financial centers. DIFC provides a favorable business environment for financial institutions, attracting numerous banks, insurance companies, asset management firms, and other financial service companies. Its unique legal framework and tax policies make it a popular destination for international investors and businesses.
The Dubai Financial Services Authority (DFSA) regulates the crypto industry through two key policies:
In October 2021, the DFSA released the Investment Token regime, providing an initial regulatory framework for investment tokens (such as security tokens or derivative tokens). Investment tokens are defined as digital representations of rights and ownership, aimed at ensuring that institutions participating in the marketing, issuance, trading, or holding of investment tokens within the DIFC comply with necessary regulatory requirements.
In November 2022, the DFSA subsequently launched a comprehensive Crypto Token regime to regulate the cryptocurrency industry and market. The goal of this regime is to promote innovation while ensuring that businesses adhere to best practices in anti-money laundering (AML) and counter-terrorism financing (CFT). It covers various areas, including financial crime, technology, fraud, governance, and risk, providing consumer protection and market transparency.
Companies operating in the DIFC need to obtain a license from the DFSA to provide crypto services. The application process includes the following steps:
Eligibility assessment: Submit an application, and the DFSA will evaluate the applicant's business model and compliance capabilities.
Documentation requirements: Provide a detailed business plan, technical architecture, and risk management strategy.
Module checklist: Businesses must meet the DFSA's comprehensive standards, including business model, corporate governance, qualifications of senior management, financial resources, and anti-money laundering measures.
Fees: The cost of obtaining a license may range from $2,000 to $70,000, depending on the type of services applied for.
In addition, the DFSA has launched a regulatory sandbox to support fintech companies in innovating within a controlled environment. Its main functions include:
Safe testing: Companies can test their products within a limited customer base to validate technology and market demand.
Regulatory support: The DFSA provides guidance and feedback to help companies understand compliance requirements and optimize product design.
Promoting innovation: The sandbox encourages companies to explore new technologies while ensuring market safety.
Within the DFSA regulatory sandbox, several fintech companies have successfully tested their innovative solutions. For example:
InstaRem: After successfully testing a cross-border payment solution, it obtained an operating license in the DIFC.
Sarwa: Verified its smart investment advisory service through the sandbox and rapidly expanded its customer base.
BitOasis: Tested the compliance of its cryptocurrency trading platform within the sandbox and successfully obtained a license.
Overall, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) share a similar starting point, with both legal systems based on common law, which is significantly different from other regions in the UAE.
How Dubai Became One of the Global Crypto Hubs
In recent years, Dubai has rapidly emerged as one of the global hubs for cryptocurrency and blockchain technology. Its success stems not only from its geographical location and robust infrastructure but also from government policy support and an open business environment. The following explores the reasons for Dubai's rise from both hard and soft power perspectives.
Hard Power
Geographical location: Dubai is strategically located in the Middle East, bordering Asia to the east and Europe to the west, serving as an important bridge between the East and West. This geographical advantage has made Dubai a global trade and financial center, attracting the attention of numerous multinational companies and investors.
Talent pool: Dubai is committed to attracting top global talent in the crypto space. By providing good living conditions and career development opportunities, Dubai has attracted many blockchain experts and technical talents. This talent concentration provides strong support for the development of the crypto industry.
Capital strength: With the influx of global wealthy individuals moving to Dubai, investor interest in the crypto market has been steadily increasing. The city has become a popular gathering place for high-net-worth individuals and investment institutions, with capital inflows providing ample support for local crypto companies' growth.
Infrastructure: Dubai has also developed a robust infrastructure for the digital economy, including the widespread availability of 5G networks, providing strong support for technological innovation and business development. Efficient communication networks and advanced financial infrastructure enable rapid development of crypto trading and blockchain applications.
Soft Power
Openness: Compared to other regions in the Middle East, Dubai exhibits greater openness in its economic and social policies. This open environment creates more opportunities for crypto companies, allowing foreign enterprises to conduct business more easily.
Legal and regulatory framework: Dubai has established a clear legal and regulatory framework to ensure the healthy development of the crypto industry. This transparency and predictability attract numerous businesses and investors while enhancing market confidence.
Conclusion
Whether through hard power or soft power, the fundamental reason for Dubai becoming a global crypto hub lies in national support, with the UAE government demonstrating a strong commitment to promoting the development of the crypto industry. By implementing favorable tax policies, such as a zero tax rate for individual investors and a 9% tax for businesses, the government has created an advantageous operating environment for crypto companies. Additionally, since 2016, the Dubai government has launched a blockchain strategy, and in 2018, the UAE government introduced the "UAE Blockchain Strategy," which actively promotes the development of the digital economy and provides abundant opportunities.
Looking ahead, the prospects for the UAE and Dubai in the global crypto market remain very optimistic. With the continuous improvement of regulatory policies, the UAE is providing favorable conditions for industry development. Especially against the backdrop of increasingly stringent global cryptocurrency regulations, the UAE, with its open policies and flexible market mechanisms, demonstrates strong competitiveness. As the global crypto market continues to develop, Dubai is expected to continue leading in this field, becoming an important center for the global crypto industry.
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