Tim Elliot: Welcome to Lawgical, the U.A.E.’s first, and still the only, regular legal podcast. My name’s Tim Elliot. Lawgical comes to you from the Dubai-based legal firm, HPL Yamalova & Plewka. And as always, here is the Managing Partner, Ludmila Yamalova. Nice to see you.
Ludmila Yamalova: Good to be here with you, Tim.
Tim Elliot: This time, it’s a press release, and these are a string of words, but you’ll understand why this is important in a moment. It’s from the National Anti-Money Laundering and Combating Financing of Terrorism and Financing of Illegal Organizations Committee based in Abu Dhabi. It was made available last month. Now the title is this: The U.A.E. delivers a progressive and secure regulatory ecosystem for virtual assets with strongly aligned supervisory controls for market growth and investor protection. That means, Ludmila, I guess, regulation of cryptocurrency transactions that happen in a virtual realm, which of course is good news, but I wanted to just ask you before we get into this in a little bit more detail, traditionally and historically, two years or so or three years or so–
Ludmila Yamalova: A long time ago.
Tim Elliot: Exactly. What has been the U.A.E.’s stance towards cryptocurrency?
Ludmila Yamalova: Well, traditionally, as you said, time is a very fast-moving concept these days, especially when you talk about technology and in the U.A.E. as well. I think in the last two or three years when crypto became more of a routine concept, in our speak, the U.A.E. has been very encouraging and very embracing of cryptocurrency, unlike so many other jurisdictions. So, on the one hand, it’s been welcoming and encouraging at a public level of virtual assets technology and investment, including virtual technology and cryptocurrencies and professionals in that industry. It has been encouraging and yet, I guess one issue has been anything to do with virtual assets and cryptocurrency in general is a heated and debatable subject. The reason it is so popular is because it is decentralized, it is anonymous, and it is a highly technological development, so it is kind of cool. But most importantly, it is decentralized. It is not regulated. What makes it cool it is not regulated. What makes it so desirable it that it is not regulated.
But on the other hand, in order for it to become a mainstream commodity or a business concept of a developed society, it needs to be regulated in order for it to be a mainstream commodity. While the U.A.E. has been, at a high level, encouraging and welcoming of cryptocurrency and virtual assets, on the other hand, from a regulatory and legal standpoint, for obvious reasons, because it is a fairly new technology still, the legislative framework was still being developed and is still being developed.
The enthusiasm and excitement is there, but in practical terms, what does that mean? Do we have the substance to rely on in order to really attract and make use of anything to do with virtual asset businesses? We hear this from a lot of our clients. They are excited about the U.A.E.’s excitement and enthusiasm about virtual assets as an industry. But in practical terms, they come here and they set up shop here, but can they actually trade with cryptocurrency the way that they wish? That is where the legislative foundation is required.
Tim Elliot: Right. But things are changing, aren’t they? We’ve got a Cabinet Resolution that came into force in January 2023 that is building on similar measures that were introduced last year. We have got VARA, which as the Virtual Assets Regulatory Authority, and we’ve got now as well a number of free zones starting to spring up where you can feasibly see a crypto future, if you like.
Ludmila Yamalova: Indeed. That is an interesting angle because yes, there are a few free zones. We can talk about them shortly. There are a few types of licenses that have already been available in different other free zones, for example, proprietary crypto trading licenses. These kinds of options are starting to become available. However, ultimately, all of these businesses are still relying on the traditional mainstream banking system.
Let’s say if you have cryptocurrency somewhere and you are trying to bring this cryptocurrency into the U.A.E. You can transfer it while being in the U.A.E. into your crypto wallet, but what can you do with this money? You still ultimately need to rely on the traditional banking system to be able to convert that money. First of all, to open a bank account right here, and then convert that crypto into cash, into money, into local currency. That is where a legal framework is required in order for these businesses to really take hold here and to develop and continue to invest and continue to grow in the U.A.E.
As far as the mainstream banking system is involved, obviously there has been a lot of resistance, and that’s because the mainstream – I guess I am using these words broadly and loosely at the same time – the banking system views virtual assets and cryptocurrency with suspicion. Therefore, if you have a crypto license, and you want to open a bank account in the U.A.E. as well, because it involves a traditional bank, they are very skeptical and suspicious about opening up bank accounts for anything to do with crypto. That we know firsthand from our many clients who are in the cryptocurrency and virtual asset industry.
For example, to your earlier point, you have opened up a cryptocurrency trading license here, a proprietary trading license in the U.A.E. in one of the free zones. You have a license and you can operate, but now that company should have a bank account. The banks here, for the time being, will not open a bank account for you if they hear anything or see anything about cryptocurrency. That is basically the practical nuances and perhaps inconveniences and shortcomings, if you will, of the system, and that is just because it is very new still. But these are real life comments and feedback we are hearing from our cryptocurrency and virtual asset clients.
But why is the traditional banking system so resistant to the idea of opening a bank account and letting cryptocurrency businesses or virtual asset blockchain technology businesses here to have a bank account? Again, at a very, very high level and in broad terms, it is because in legal terms it is considered to be high risk. It is considered to be high risk because it is deregulated and decentralized historically.
What the U.A.E. has done with this press release is it acknowledges that obviously anything to do with virtual assets and related transactions and services are perceived to carry inherently higher money laundering and terrorist financing risks. That is due to the decentralized and potentially anonymous nature of the operations, and this is because of the technological basis of this particular virtual asset industry, that being the distributed ledger technology that can be deliberately misused to mask identities and with services like mixers and tumblers and on chain cross border transactions being concluded in real time and instantaneously.
Those are the nuances of this technology that make anything to do with virtual assets potentially high risk because it is decentralized, it is anonymous, and it is simultaneous. These are the arguments that are used to perhaps question and treat cryptocurrency and virtual assets with caution. But the U.A.E. acknowledges that this does exist, and this is why cryptocurrency, historically and traditionally, carries that reputation as being high risk.
On the other hand, the U.A.E. states that the same technology can be used to its advantage. The blockchain technology can equally be used to make the entire transaction chain fully secure because it is inherently immutable, undeletable, and traceable.
In simple terms, there are risks associated and in the very nature of virtual assets, but on the other hand, the same underlying technology, being the blockchain technology, also can be utilized to protect and trace any of these transactions. The technology can be used to make the virtual assets secure.
But how do you do that? The U.A.E. has basically stated and this is the announcement, the press release, that the U.A.E. now deems virtual assets, as far as the U.A.E. is concerned, as fully regulated. This is really key. The country says that as far as we are concerned, anything to do with virtual assets has been classified as fully regulated by the Ministry of Economy and the Anti-Money Laundering Department in particular. This is because, according to the Ministry, the U.A.E. has created a regulatory ecosystem for virtual assets which synchronizes the country’s federal and local regulations, and at the same time, aligns supervisory and enforcement levers.
That sounds like a mouthful, but what it really means is the country says, we know over the last several years different emirates, different economic zones, have led the way in terms of encouraging, welcoming, and developing cryptocurrency and virtual asset options and opportunities, such as licenses, free zones, transactions, and such, but it has been done in a decentralized way.
Let’s say Dubai, as I mentioned earlier, has had options for cryptocurrency, the proprietary cryptocurrency licenses for businesses. But that is in Dubai in some of the economic zones, not all.
Ras Al Khaimah recently issued its first and fully dedicated digital and virtual asset free zone, and it is called the Digital Assets Oasis, which was established by Ras Al Khaimah Law 2 of 2023, so a very recent, very new law. This particular free zone is reported to be the world’s first and only free zone that is set up exclusively to host digital and virtual asset companies. Think about it. This is history in the making, if you will. This particular free zone plans to operate in this new and emerging sector, such as metaverse, blockchain, utility tokens, virtual asset wallets, NFTs, and other web-related business. According to the Ras Al Khaimah law, which established the Digital Assets Oasis Free Zone, and that is Law 2 of 2023, it is important because – I am not making this up, this is in the law – the Digital Assets Free Zone has been granted financial, administrative, and legislative independence. Again, the first of its kind, and apparently, at least by the accounts of the Ras Al Khaimah authorities, this is the first in the world of a dedicated virtual assets free zone. It also will be affiliated with the Department of Future and obviously subject to other laws in Ras Al Khaimah. This is as far as Ras Al Khaimah is concerned. But this is only one of the emirates in the U.A.E.
Then, as you said, there is also VARA, the Virtual Asset Regulatory Authority in Dubai. And then we have the specific crypto trading licenses. What the U.A.E. is saying now is that virtual assets are considered to be regulated because we are taking all of these different regulations, local regulations such as the Dubai regulations, the Ras Al Khaimah regulations, and federal regulations, and we are synchronizing them into one. We are synchronizing the country’s federal and local regulatory landscape, on the one hand, and equally so with supervising and enforcement authorities that will all be centralized and regulated in a cohesive manner. This is what will give the U.A.E. the ability to regulate virtual assets.
The way they are doing it, the ecosystem they are creating, is not supposed to be going backwards and being so heavily regulated that you become basically synonymous with a traditional banking system. They are making it progressive and secure at the same time. We are able to do this because we have drafted in collaboration with the U.A.E. Securities and Commodities Authority for Investment Purposes and with the U.A.E. Central Bank for Payment Purposes, these very comprehensive and detailed guidelines. It is called the Special Guidelines and they ultimately make this industry a regulated one. These guidelines further qualify the previous U.A.E. Cabinet Resolution 111 of 2022 on regulation of virtual asset activities and service providers in the U.A.E. Again, this is a federal law. Now there are these new guidelines, a comprehensive set of guidelines, which at a high level set out supervisory controls to ensure market growth on the one hand, and investment protection on the other, with the ultimate objective of operating virtual assets with agility and yet mitigating and managing the risk associated with virtual assets.
In more simple terms, the U.A.E. has looked at the different initiatives and efforts that have been done at local levels and individual emirate levels, and is now bringing all of those ideas, initiatives, and lessons and creating a centralized comprehensive set of guidelines that give the country the confidence and security to deem virtual assets as a regulated industry and therefore creating and offering options to the business community on that basis, which I would say in more practical terms means that soon with these kinds of regulations being implemented, as time goes on, we should be seeing more of an appetite for traditional banking system to start transacting with virtual asset businesses that are based in the U.A.E., which we do not have right now. We have the excitement, but we don’t have the practical ability for these businesses to actually conduct business in the U.A.E. So now, the hope is and the theory is that with the U.A.E. designating virtual assets as being fully regulated because of this kind of legal and business ecosystem that we would see more cohesion and perhaps more cross border collaboration between the different types of authorities, including the banking sector, to allow virtual asset industries to flourish here and have the practical ability to do business and grow.
Tim Elliot: That is one unifying framework really that we now see here in the U.A.E. So, if you live here, you can own cryptocurrencies, you can deposit, you can trade them. If you want to operate a cryptocurrency business, you need an appropriate license, but you can do that. The Central Bank hadn’t previously recognized cryptocurrencies or recognized them as legal tender until now. With the banks starting to come onboard, I know First Abu Dhabi is very progressive in virtual terms, and I think with the other banks it’s a matter of time until they all fall in line, I guess. That’s the hope.
Ludmila Yamalova: That’s the hope and that’s the idea, because until now, there has been a lot of excitement and individual efforts and initiatives, but with this announcement and with the introduction of these guidelines, and now ultimately the U.A.E. officially designating virtual assets as a regulated industry, that we will see more practical and business options available to the virtual assets industry that are similar to those that are available today to other types of industries. That’s the hope and the reason this will be possible is because of the underlying legislative framework that’s being put in place to basically protect investors and the community and at the same time encourage the flow of new ideas and new technology into the country.
Tim Elliot: Okay. That’s another edition of Lawgical, virtual assets law in the U.A.E. As ever, thanks for watching or listening, or both. Thanks to our legal expert, the Managing Partner of Yamalova & Plewka, that is Ludmila Yamalova. Thank you very much.
Ludmila Yamalova: Thank you, Tim.
Tim Elliot: Find us at LYLAW social media, Facebook, Instagram, TikTok, LinkedIn, and YouTube. You can find all our podcasts at LYLawyers.com. If you’d like your legal question answered in an episode of Lawgical or you really want to talk to a qualified U.A.E. experienced legal professional, click Contact at LYLawyers.com.
