Why Crypto Companies Are Gaining a Foothold in the UAE
On July 10, the Dubai Virtual Assets Regulatory Authority (VARA) suspended BitOasis’ conditional license for activities related to digital assets. This action by the Dubai regulator is representative of and lends credibility to the novel approach taken by the United Arab Emirates (UAE) and its domestic regulators to regulating digital assets.
The UAE’s approach emphasizes providing regulatory clarity and guidance to companies looking to engage in activities related to digital assets – with guidance on the types of activities that are permitted and prohibited.
Bret Johanneson received his law degree from New York University and will join a law firm in New York this fall.
In contrast, as evidenced by the indictments against Coinbase and Binance in early June, US regulators have organized themselves around an approach that provides no prior notice to industry participants, opting instead to file charges based on untested and new legal theories. (Another example is the SEC’s lawsuit against Ripple for issuing unregistered “securities,” which ended Thursday when the judge determined that XRP is a security only under certain circumstances.)
The United Arab Emirates and the The digital asset industry has followed a different path, it noted. AskFX has named two cities in the United Arab Emirates as major crypto hubs in 2023, and industry participants are largely voting with their feet. Numerous companies are either relocating their wholesale business to the country or opening branches there.
To understand why the UAE has managed to introduce such an advanced and responsive regulatory regime for digital assets, a look at the UAE’s form of government is the right way to go. In short, the UAE is made up of seven emirates, with each emirate (i.e. state) having the power to legislate on all matters that do not fall within the exclusive competence of the federal government of the UAE (e.g. foreign affairs, defense and security ).
It is left to each emirate to determine how it regulates digital assets – a situation that has fostered domestic competition through the regulation of business and investment achieved through incentives including tax breaks and designated free economic zones. Abu Dhabi and Dubai in particular have taken a leading role in attracting participants in the digital asset industry to their jurisdictions.
Abu Dhabi and Dubai have each developed comprehensive regulatory frameworks for the regulation of digital assets that remove many of the pitfalls of other jurisdictions’ approaches, not the least of which is the definition of the subject of regulation, digital assets.
For example, the Abu Dhabi Global Market (ADGM) has provided clear guidance on the classification and treatment of various digital assets, making a clear distinction between “virtual assets” such as Ethereum and Bitcoin, “digital securities” and other tokens providing different types of utility. Like the ADGM, VARA defined digital assets specifically, but opted for a broader taxonomy, defining “virtual assets” as “any digital representation of value that can be traded digitally, transferred, or used as an instrument of exchange or payment for investment purposes”, where VARA reserves the right to monitor the limits of this definition in its sole discretion.
These policies, while different, stand in stark contrast to the US approach, which is characterized by agency infighting over who can regulate what, with industry participants caught in the crossfire.
Another complaint raised by industry participants to US regulators concerns a lack of clarity in registration. In this area too, ADGM and VARA have excelled by providing clear roadmaps on registration and licensing requirements for digital asset companies looking to engage in regulated activities.
To be eligible to operate an ADGM-approved digital asset business, a business simply needs to apply for a financial services license and comply with applicable laws. Those seeking a license to operate as a VARA-approved Virtual Asset Service Provider follow a similar process.
As evidenced by VARA’s suspension of BitOasis’ conditional license for its exchange’s Minimum Viable Product, these permissive frameworks aren’t just a blank check for industry participants to operate with impunity, and they certainly have bite.
However, even bearing in mind the enforcement efforts of BitOasis and others, ADGM and VARA’s straightforward registration regimes far outweigh compliance with the SEC’s guidelines on registration pathways, which, by contrast, are downright opaque.
The digital asset industry is in constant flux, years fly by in weeks, and breaching the norm is a norm in and of itself – such an industry deserves dynamic regulation to match. The UAE appears to be on track to meet such a goal – whether the US can match their efforts remains to be seen.
