The Middle East’s first cryptocurrency IPO is landed A quick look at 5 major regulatory details of UAE virtual assets compared

The First Cryptocurrency IPO in the Middle East A Closer Look at 5 Important Regulatory Aspects in UAE's Virtual Assets

Author: Bo Wen; Source: Bailu Meeting Room

Compliance is the well-deserved focus of the encryption industry in 2023, and this is true for global markets.

On November 15th, the news of the initial public offering (IPO) of Phoenix Group’s stocks worth 1.36 billion dirhams ($370 million) on the Abu Dhabi Securities Exchange (ADX) once again attracted attention to the Middle East.

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In recent years, the United Arab Emirates has actively promoted the development of the virtual asset industry in the Middle East, including official entities of the UAE, the Emirate of Dubai, as well as financial free zones such as the Abu Dhabi Global Market and the Dubai International Finance Centre, which have all introduced different regulatory frameworks to meet global demand.

If the Phoenix Group successfully completes its listing this time, it means that the first cryptocurrency and blockchain entity will be listed on the Middle East stock market. It also serves as a reminder to investors to keep an eye on the Middle East market, represented by the UAE, and seek more high-quality opportunities.

The regulatory environment for virtual assets in the UAE is complex, with numerous authoritative institutions. In the following text, Bailu Meeting Room will provide a brief analysis of the UAE’s 5 major regulatory frameworks to help readers better understand the regulatory environment in the UAE and identify high-quality projects.

5 Major Regulatory Frameworks in Parallel

Today, the Middle East and North Africa region is the sixth-largest crypto economy, with a total on-chain transaction value of approximately $389.8 billion from July 2022 to June 2023, accounting for nearly 7.2% of global transaction volume. This achievement is largely attributed to the multiple regulatory measures at the local and federal levels in the UAE, the representative country of the Middle East, which have created an excellent environment for the sustainable growth of the virtual asset industry in the Middle East.

Currently, companies that provide virtual asset services in the UAE, either applying to the UAE or already operating in the UAE, will need to navigate a complex regulatory environment composed of multiple regulatory institutions. These institutions have different regulatory powers depending on the proposed activities and the target geographical location of such services.

Currently, there are 5 major regulatory frameworks governing the provision of virtual asset services within the UAE, including:

(i) Federal regulations promulgated under Cabinet Resolution No. 111 concerning virtual assets;

(ii) Dubai International Financial Centre (DIFC) free zone regulations;

(iii) Abu Dhabi Global Market (ADGM) free zone regulations;

(iv) Regulations applicable within the Emirate of Dubai (excluding DIFC) under the jurisdiction of the recently established Dubai Virtual Asset Regulatory Authority (VARA);

(v) Applicable to the cryptocurrency business licensing framework in the Dubai Multi Commodities Centre (DMCC).

Under different regulatory frameworks, there are differences in licensing entities, jurisdictions, company registration requirements, registration and maintenance fees, and regulated categories of virtual asset activities.

Virtual Asset Federal Regulations

Under the federal regulations, the licensing entities are the Securities and Commodities Authority (SCA) and the Central Bank of the United Arab Emirates; the jurisdiction includes all lands except the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM).

For practitioners in the virtual asset industry within the jurisdiction of the federal regulations, they must have a corporate entity within the lands of the UAE and obtain legal approval from relevant regulatory trade agencies;

Depending on the specific virtual asset activities conducted, they will need to pay initial licensing fees ranging from AED 53,000 to AED 505,000 (USD 14,000 to USD 137,000) and application review fees. In addition, different licensing maintenance costs will be incurred based on the specific virtual asset activities.

The key regulated categories of virtual asset activities under the federal regulations include: brokerage services, virtual asset advisory services, exchanges/multilateral trading facilities (MTF), virtual asset custody, virtual asset management, and investment trading as a principal; it is worth noting that NFT-related activities are not within the regulatory scope.

In addition, the SCA has imposed restrictions on the types of virtual assets that can be accepted, and only virtual assets on the accepted list can be included in the regulatory scope.

Dubai International Financial Centre Financial Free Zone (DIFC) Regulations

Within the Dubai International Financial Centre Financial Free Zone (DIFC), the licensing entity is the Dubai Financial Services Authority (DFSA); the jurisdiction covers the entire DIFC.

For virtual asset practitioners in the DIFC, the corporate entity must be located within the DIFC, and the company must have legal personality as stipulated by the DIFC company regulations;

In terms of licensing costs, initial licensing fees ranging from USD 15,000 to USD 175,000 need to be paid; depending on the activities conducted, there will also be different licensing maintenance costs.

The key regulated categories of virtual asset activities under the DIFC regulations include: brokerage services, virtual asset advisory services, exchanges/multilateral trading facilities (MTF), virtual asset custody, virtual asset management, and investment trading as a principal; NFT-related activities are also not within the regulatory scope.

Like federal regulations, the DFSA limits the types of virtual assets that can be accepted. Only accepted virtual assets can be regulated and used in the DIFC.

Abu Dhabi Global Market (ADGM) Regulations

Within the Abu Dhabi Global Market (ADGM), the licensing entity is the Financial Services Regulatory Authority (FSRA). The jurisdiction covers the Abu Dhabi Global Market and Al Maryah Island.

Similar to the DIFC, virtual asset practitioners in ADGM, require their company entity to be located within the ADGM and must have a legal entity as per the ADGM Companies Regulations.

Under the ADGM regulations, the initial license fees range from $20,000 to $145,000, and the maintenance fees vary based on different activities.

The key regulated virtual asset activities under ADGM regulations include: broker services, virtual asset advisory services, exchanges/multilateral trading facilities (MTF), virtual asset custody, virtual asset management, and investment trading as a principal. NFT-related activities are not within the regulatory scope.

Unlike the previous two regulatory frameworks, ADGM approves encrypted assets based on different company entities rather than specific types of cryptographic assets (such as Bitcoin or Ethereum). Approved encrypted assets can be circulated and used within the ADGM.

Dubai Virtual Asset Regulatory Authority (VARA)

The Dubai Virtual Asset Regulatory Authority is responsible for issuing licenses and has jurisdiction over the entire Dubai Emirate, excluding the DIFC.

For practitioners, conducting virtual asset-related activities requires having a company entity in the Dubai Emirate and obtaining approval from VARA.

In terms of cost, the initial licensing fees range from 40,000 to 100,000 Dirhams ($10,800 to $27,200), and the license maintenance fees and ongoing costs vary depending on the activities involved.

The key regulated virtual asset activities under VARA include: broker services, virtual asset advisory services, exchanges/multilateral trading facilities (MTF), virtual asset custody, virtual asset management, investment trading as a principal, and NFT-related activities.

VARA has relatively lenient restrictions on encrypted assets and does not have a list of accepted virtual assets. However, VARA retains the power to regulate the circulation and use of certain encrypted assets, such as anonymous high-risk project tokens.

Dubai Multi Commodities Centre (DMCC) Cryptocurrency Business License Framework

The Dubai Multi Commodities Centre (DMCC) is the issuing entity for licenses, and its jurisdiction also covers the entire Dubai Emirate, excluding the DIFC.

Practitioners need to be registered as a legal entity within DMCC, either as a DMCC corporation or a branch of a non-DMCC company.

In terms of registration costs, DMCC has a standardized initial license fee of around 35,000 dirhams (approximately 9,500 USD); maintenance costs may vary depending on the type of activities conducted.

Unlike other frameworks, DMCC only regulates two types of activities: NFTs and investment transactions as a custodian; other activities are not within its compliance scope; also, since compliant virtual asset activities are limited, there are no restrictions on the types of virtual assets that can be offered and circulated.

Overall, the regulatory framework in the UAE is highly flexible, allowing practitioners to register the required licenses according to their business needs, maximizing support for business innovation and promotion. Such initiatives make the UAE a likely candidate for becoming the next global hub for the virtual asset industry, attracting various projects and institutions.

For the virtual asset industry, this flexible regulatory approach sets an example for other countries in the global market to learn from. Providing different and optional regulatory environments for different practitioners is likely to be an effective method in fostering more financial innovation.

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