The UAE Virtual Assets Market

A report on the regulatory landscape, with special focus on financial crime compliance

In a statement released on 3 May 2022, Dubai’s Virtual Assets Regulatory Authority (VARA) announced its MetavHQ hub in ‘The Sandbox’ (SAND), a diverse metaverse built on the Ethereum blockchain. This makes VARA the world’s first regulator to make its metaverse debut. The Dubai Government media office stated that expanding VARA’s resources to a borderless audience is part of Dubai’s strategy to create a prototype decentralised regulator model.

Founded less than six months ago, on 28 February 2022, under the aegis of the UAE’s Virtual Asset Law, VARA is an independent regulator, tasked with the regulation, governance, and licensing of cryptocurrencies, Non Fungible Tokens (NFTs) and other virtual assets in Dubai.

VARA seeks to facilitate collaborative engagement between global Virtual Asset Service Providers (VASPs), industry thought leaders, and international regulatory authorities.

The excitement on ground is mirrored by international interest in the UAE’s developing crypto market, as evidenced by the entry of global players Binance, Kraken, Bybit, FTX and most recently, Web3 Holdings FZE, Ex-Singapore Parliamentarian, Calvin Cheng’s NFT investment holding company.

Given these interesting developments, several questions arise:

What is driving the growth in virtual assets in the UAE?
How does the UAE market and regulatory landscape compare with the global market?
What are the regulatory implications especially in terms of financial crime risks?
What should be the key considerations for the UAE regulators?

This report seeks to answer these questions by setting the backdrop, clear linkages, comparative analysis, and expertise driven regulatory recommendations. The intended audiences are VASPs, banks, and regulators in the UAE.

Future direction for UAE regulators

Governments want to foster innovation and market growth, but they’re also cautious about the potential misuse of crypto for sanctions evasion, fraud, terror financing and money laundering. Facilitative crypto regulation should have appropriate space for innovation and healthy competition while clamping down on illicit conduct.

The UAE has been harbouring an encouraging environment for the growth of its crypto industry, especially with Dubai’s enactment of the Virtual Assets Law and establishment of VARA, and while the industry was largely unregulated a few years ago, recent legislative measures have shown the government’s keenness to reduce the potential financial crime risk in the nascent industry.

The way forward

The crucial policy and strategic question for the UAE is how to maintain the fine balance between inviting innovation, technology and wealth generation and owning the future of crypto and blockchain, being the ‘Wall Street of Crypto’, as recently termed by Bloomberg, versus having robust regulations in place to control the potential risks related to financial crime that such new, technology frontiers may unwittingly bring.

Beyond financial crime regulatory considerations, locally and internationally, the UAE will have to consider consumer protection and benefits, ensuring financial access and economic inclusion, and a level playing field, if it wants to establish itself as a pioneering virtual assets regulator.

Leading regional and international coordination to eliminate regulatory arbitrage and making cross border compliance easier, is another aspect that can distinguish the UAE as a reputable player in the global crypto industry.

Our recommendations for UAE regulators

We recommend a three-stage facilitative model for UAE regulators, which is based on Jonathon W. Lim’s model “A Facilitative Model for Cryptocurrency Regulation in Singapore”, published in the book “A Handbook of Digital Currency, Bitcoin, Financial Instruments and Big Data”.

Step 1: Clear regulations
Step 2: Industry self-regulation
Step 3: International coordination and cooperation

Step 1: Clear regulations

The crucial building block is clear and unambiguous legislation, backed by law enforcement. The UAE requires a comprehensive, all-encompassing framework that covers all AML/CFT and financial crime aspects. Niche regulation on areas like DeFi and NFTs is also essential given the luxury real estate and arts market in the UAE, as this will not only help eliminate ML and TF risks but also help to expand the market.

Institutional investors, who seek clarity and protection through regulations, invest in regulated markets. Also, regulatory certainty makes it easier for small firms to seek financing and establish banking relationships and retail investors are more confident when there is government endorsement.

Step 2: Industry self-regulation

In addition to clear legislation, self-regulating approaches can also be extremely beneficial, especially in high tech and rapidly advancing industries such as crypto where industry players have much greater expertise than external regulators.

The UK’s Financial Conduct Authority (FCA) recently concluded a two-day ‘Crypto Sprint’, in May, to ‘explore how the evolving world of crypto assets could be regulated in the UK’. With 100 diverse participants this was the first of such planned industry engagements, before the FCA developed its overarching crypto regulation. This is an excellent example of regulators reaching out to the industry to gather expert opinions and diverse thoughts before drafting a regulation.

There are many benefits to this approach. By collaborating with industry experts, fintechs, crypto firms, academics, consumer interest bodies and subject matter experts, regulators can reduce their monitoring and enforcement costs and encourage greater cooperation and compliance to mutually agreed and set standards. Added benefits can include advanced training programmes and sharing of insights and research.

A case in point is the Japanese Virtual Currency Exchange Association (JVCEA), the oficial Self-regulating Organisation (SRO) that was formed after the 2018 hacks to Coincheck and Zaif exchanges of $500 million and $60 million, respectively. The Japanese government is relying on the JVCEA, which is currently drafting proposals for Japan’s crypto travel ban. In April 2020, the Japanese Financial Services Authority (JFSA) recognized another SRO, the Japan STO Association, to target crypto securities, specifically security token offerings (STOs).

Another example is the Crypto Market Integrity Coalition (CMIC), formed by Solidus Labs and a number of other familiar names in the crypto world, which has pledged a commitment to safe markets and working with regulators. The launch of the CMIC, as stated by the group, is “an industry-defining pledge focused on cultivating a fair digital asset marketplace to combat market abuse and manipulation and promote public and regulatory confidence in the new asset class.”

Self-regulation, is proposed as a complement to legislation, and not as a replacement, and requires the involvement and support of legislators for success.

Step 3: International coordination and cooperation

As brought out earlier, with reference to the IMF report calling for greater international coordination, the Sunrise issue and borderless nature of crypto can not only cause friction and misalignment but also make compliance difficult for firms, especially where extraterritorial treaties exist.

Greater international harmonisation, communication and cooperation is required with other jurisdictions for the UAE to succeed in this last stage of our proposed model.

How can PwC help?

Undoubtedly, where the apparent endorsement of digital assets in the UAE comes as welcome news to virtual assets firms, especially given the mixed signals from other jurisdictions, there are several challenges on how to ensure that transparency and trust form the foundation for the long-term growth in this sector.

Added to this is the expectation of greater regulatory oversight within the UAE and internationally, and challenges around compliance, and the risks of unwittingly committing a breach

If you are a regulator

If you are a bank

If you are a VASP

As highlighted in our proposed ‘three-stage facilitative model for UAE regulators’, we believe that regulators can benefit immensely in establishing clear and comprehensive regulations, collaboration with industry experts, and international cooperation.

Given our global standing and expertise in financial crime regulations and our work in virtual assets space, we can assist in collating and analysing industry feedback through consultations; assessment, integration, and enhancement of existing regulations in light of international guidance, and co-creating new regulatory standards, as well as regional/internationally applicable guidance in conjunction with regulators in other jurisdictions in the areas of licensing requirements, KYC, ‘fit and proper’ test, compliance officer requirements, UBO disclosures, KYT, threshold based reporting requirements, Travel Rule, etc.

On an ongoing basis, we can assist in formulating supervisory procedures, update typologies, and to perform an advisory role as new products/services and technologies come up in this innovative industry.

Together with our global network of PwC firms, we strive to deliver solutions that provide trust, transparency, and security. Traditionally banks aren’t equipped to perform due diligence for VASPs. We can offer due diligence of VASPs as a managed service to your bank, thereby allowing you to onboard this upcoming customer segment with the confidence of compliance checks that assess risks considering the cross-border nature of virtual assets and their pseudonymous transactions and validate the VASPs’ own financial crime compliance programmes.

These type of managed services, including custodial services in Wealth Management, will become even more relevant and beneficial to you in future, given the merging of crypto in mainstream finance and given that more and more institutional investors are now investing in virtual assets.

We, at PwC can help you smoothly navigate the domain of current and future regulatory requirements applicable to your virtual asset business. We provide a turnkey solution to all your regulatory and financial crime compliance requirements, right from assistance in your licensing application, developing compliant frameworks and to defining your compliance roadmap, catering to existing and expected regulations in the UAE.

While we take care of carrying out your risk assessment, developing control frameworks, creating Compliance Manuals and AML/CFT and Sanctions policies, in line with local and international guidance such as the FATF Standards, we can also assist with your KYC and due diligence processes, compliance monitoring, training and regulatory reporting obligations in the UAE.

With your compliance needs catered for, you can focus on expanding your client base, developing your market, and harnessing new technologies for innovative products and services. Our strategic partnership can propel your business towards secure, compliant, and future proofed growth.

Download the full report The UAE Virtual Assets Market

Contact us

Mahmoud Al-Salah

Partner, Financial Services and Deals, Financial Crime Compliance, PwC Middle East