Regulatory overview of crypto assets in UAE

Legislative overview

The civil law system in the UAE is largely influenced by shariah law and there are several legislative codes including the Civil Transactions Law, the Commercial Transactions Law, the Penal Code and the Commercial Companies Code. The industry of financial and capital market is overseen by UAE central bank and Securities and Commodities Authority (hereinafter: — “SCA”). UAE federal government consists of seven emirates, (Dubai, Abu Dhabi, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah). In addition to UAE federal Law, each one of the seven emirates has its own laws and policies in certain industries where the federal law is absent.

In addition to common operational rules for virtual-asset service providers and individuals engaged in these activities must adhere, crypto-assets activities regulation sets forth further AML/CFT, KYC provisions. these provisions necessitates to establish sound compliance network, in particular it requires:

Moreover, the regulation examines the traceability of virtual assets, with the purpose of establishing legitimate transaction history. If a virtual asset is not properly traceable, it may not qualify for funding accounts or making transactions through a licensed entity, as the control mechanism of financial crime includes, inter alia, depositing and withdrawing fiat currencies through accounts in designated banks.

ICAR is designed for delivering firm investor protection, as well as to monitor acts of money laundering. While ICAR is applicable to any financial activity with cryptocurrencies in the UAE, it is not enforceable within UAE free financial zones.#nbsp; However, it is noteworthy that federal criminal legislations, such as anti-money laundering and countering terrorist financing laws are enforceble in both in onshore and offshore UAE.

Free zones

ADGM

Licensed entities must maintain minimum regulatory capital in fiat currencies at the standard of a recognised investment exchange that equals to 12 months’ operational expenses. The rate might be higher in cases when FSRA determines that the virtual asset exchange is high-risk.

Since the introduction of a clear legislative position, ADGM has been the prosperous jurisdiction to carry out the virtual assets services business.

DIFC

DMCC#nbsp;

Taxation

In this line, it is worth discussing the taxation of transactions with virtual currencies. There is no corporate or income tax rate in the UAE. Absence of capital gains and withholding taxes and/or foreign exchange controls affecting cross-border crypto transactions can make UAE a perfect tax haven.#nbsp;

While the issue about value added tax (VAT) is still unclear, as there has not been any official guidance by federal tax authority to identify if the sale of cryptocurrencies can be taxable under VAT law.

Hopes for the future

In 2021, the federal government conducted its crypto-asset risk evaluation, which included14 public sector agencies and 16 public sector entities private sector. The government concluded that proper regulation as opposed to a complete ban, can better mitigate the risks attached to virtual tokens. The UAE government anticipates that a nationwide crypto-licensing scheme will attract fintech companies to the region and serves a purpose of building a crypto ecosystem.

The content of this article is intended to provide a general guide to the subject matter, not be considered as a legal consultation.

The article was published on 21.04.2022

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