The web3 regulatory landscape in the United Arab Emirates

Irina Heaver, a crypto lawyer based in the Middle East, wrote the following guest post.

2022 was an eventful year for Web3 founders, crypto lawyers, and financial regulators. The industry witnessed multiple bankruptcies and fraud allegations that would make Madoff look like an angel. Regulators went after some of the highest profile sports stars and influencers for illegal token promotions. An open source software developer was jailed and a DAO was sued.

I’ve been practicing law for 20 years, and if you ask me, this was too much regulatory action in one year.

However, some things are now true. Regulators will come after Web3 and crypto projects with a vengeance, and the days of hiding in offshore jurisdictions happily avoiding them are over.

The Smart Founders, with a long-term view, now realize that in order to raise funds from Tier1 Funds and to openly onboard users, their projects must meet certain regulatory requirements to the extent possible today.

As such, several countries around the world have openly declared an ambition to lead regulatory efforts in the crypto and Web3 space to bring the desired certainty to consumers, founders, and investors.

The United Arab Emirates is certainly leading the way, offering a wide variety of Economic and Financial Free Zones, attracting Founders with ‘crypto licenses’ of various shapes and sizes.

Let’s examine the UAE jurisdictional options for Web3 and Crypto Founders and Investors.

Financial regulation in the UAE

Financial regulators regulate financial services activities in the UAE. So, suppose your Web3 project incorporates traditional financial activities such as banking, brokerage, custody, payment services, or investment management. In that case, it would probably fall under the jurisdiction of a financial regulator in the UAE.

Corporate jurisdictions in the UAE:

• Continental or on land – those companies registered with the Economic Department in one of the 7 Emirates, Le. Dubai Economic Department (DED), Abu Dhabi Department of Economic Development (ADDED).
• Free Economic Zones – there are more than 40 free zones in the United Arab Emirates, with more than 30 in Dubai alone.
• DMCC is the most prominent, with its flagship Crypto Center now home to over 500 web3 and crypto companies.
• Financial Free Zones – There are two Free Financial Zones, Abu Dhabi Global Markets (ADGM) and Dubai International Financial Center (DIFC).
• extraterritorial jurisdiction – Two Free Economic Zones offer offshore jurisdiction for incorporation, the Jebel Ali Free Zone and the RAK International Corporate Center.

There are two financial regulators in the UAE’continent‘ either ‘on land‘:

• (a) the Emirates Securities and Commodities Authority (ESCA), which regulates the issuance of securities in the mainland UAE, as well as in the UAE free zones (except Financial Free Zones: DIFC and ADGM);
• (b) The Central Bank of the UAE is the supervisory and regulatory authority for the activities of the banking and insurance sector in the UAE.

There are two specialized Ffinancial Free zsome in the UAE with its own financial regulators:

(a) the Dubai Financial Services Authority (DFSA), which regulates financial activities at the Dubai International Financial Center (DIFC), a financial free zone in Dubai that is independent from the landward UAE; Y

(b) The Financial Services Regulatory Authority (FSRA) regulates financial activities in the Abu Dhabi Global Market (ADGM), a free financial zone in Abu Dhabi that is independent from the UAE on land.

In addition to the mainland jurisdiction and the two Financial Free Zones, the UAE has more than 40 Economic Free Zones. Each has varying degrees of autonomy in granting licenses for various business activities.

And to confuse those still paying attention, two of the Free Economic Zones offer Offshore Jurisdictions to incorporate suitable legal structures for foundations and family trusts.

In the United Arab Emirates, when a company is incorporated, it is issued with a Business License, which is a misleading term and should be called “Company Formation Document” in English to reflect its nature.

It is sometimes referred to as a ‘license’ in short, and is often confused with regulatory approval and oversight provided by a financial regulator. You would often hear from a newbie, “my Web3 VC Fund has an Airport Free Zone license.” First, the Airport Free Zone is not a Financial Regulator and cannot issue licenses for venture funds. Second, you have a ‘Company Formation Document’ with some ‘business activity’ vaguely similar to an investment activity.

This point is important for Investors to understand and not be fooled that they are investing in a regulated entity when they are not.

crypto Regulationyes in the United Arab Emirates

The ESCA has issued Decision No. 23 of 2020 on the Regulation of Cryptoactive Activities (the Crypto asset regulation), whose objective is to regulate the offer, issuance, listing and commercialization of crypto assets in the UAE and related financial activities.

The Crypto Asset Regulation is not yet in force, as reported by ESCA after our recent conversation with them.

STICK

Two years later, on March 9, 2022, the Dubai Law No. 4 of 2022, relating to the regulation of virtual assets, established a new Dubai regulator called the Virtual Assets Regulatory Authority (VARA). VARA’s mandate includes regulation of virtual asset service providers (i.e., a cryptocurrency exchange, a VC cryptocurrency fund, an NFT platform, etc.) only in the Emirate of Dubai, with the exception of the DIFC, which is a financial free zone with its own financial regulator. .

VARA has yet to publish its regulations on the basis of which it will regulate such virtual asset service providers. However, they have already issued multiple MVP endorsements. The most notable was issued to the infamous FTX.

ADGM

The Financial Markets and Services Regulations 2015 (MRSF) establishes the legislative and regulatory framework for financial services in ADGM. In 2018, the ADGM amended the FSMR to regulate “cryptographic activities.” Licenses were granted to several companies to operate a cryptocurrency exchange or cryptocurrency custody service, the most important being Binance Custody.

Grand Jurisdiction for:

• Regulated Web3 venture capital funds
• Crypto Custody Providers
• Holding companies that invest in the capital of Web3 projects

DIFC

The Dubai Financial Services Authority (DFSA) has recently implemented the ‘crypto token regime’ at the DIFC.

The Cryptographic Token Regime has broadened the scope of many existing financial services activities to apply to the provision of products and services in relation to “cryptographic tokens.” They then limited the use of Crypto Tokens to those “recognized” by the DFSA. Currently, DFSA recognizes as cryptographic tokens: Bitcoin, Ethereum and Litecoin.

Utility and non-expendable tokens (NFTs) are specifically excluded from the financial regulation. My favorite privacy coins (because privacy is a human right) are banned from DIFC.

Also, who will tell DIFC that bitcoin is not a crypto token? I do not.

Grand Jurisdiction for:

• Regulated hedge funds that invest in cryptocurrencies
• family offices
• Traditional financial services activities, including investment advice, investment dealing/arranging, trading and custody, expanded to include some very limited cryptographic activities
• Anyone who thinks bitcoin is a crypto token

Economic Free zsome

There are 3 non-financial Free Economic Zones that have recently started the formation of non-financial companies with a cryptocurrency-related business activity, announced ‘crypto centers’ and signed an undisclosed content MOU with ESCA:

• DMCC- Dubai Multi-Product Center
• DWTC – Dubai World Trade Center
• IFZA – International Free Zones Authority

The above economic free zones are in friendly business competition with each other by announcing various partnerships with leading web3 and crypto projects and are otherwise busy with marketing activities.

DMCC is a very interesting use case; they established a thriving Crypto Center with more than 500 companies already registered, all thanks to the leadership of HE Ahmed Bin Sulayem, the CEO and Mr. Gustavo Figueroa, director of the Crypto Center.

If you want to be a part of a vibrant crypto community, DMCC Crypto Center might be your choice.

Grand Jurisdiction for:

• Launching a Web3, Metaverse or NFT project
• A personal holding company to manage your own cryptocurrencies or investments for experienced crypto entrepreneurs and HNWIs
• single family office

With perfect weather 9 out of 12 months, tax-free living, political stability, and perfect infrastructure for family and business life, it’s no surprise that the UAE is becoming the preferred jurisdiction for Web3 and Crypto Founders.

However, there are still some activities for which the UAE is not a suitable jurisdiction, namely the launch of utility tokens. In such a case, corporate structuring is required where the token is launched in a suitable jurisdiction elsewhere, accompanied by a legal opinion that the token is a utility token and not subject to financial services regulations. The same applies to governance tokens when structuring a Decentralized Autonomous Organization.

In the cases mentioned above, a well-structured investor-ready project would structure the token issuance in a different jurisdiction while still having a presence in the UAE and taking advantage of everything that the correct UAE jurisdiction has to offer.

Ahlan wa Sahlan, welcome to the United Arab Emirates!