Regulations for Issuing and Offering Crypto-Assets in UAE (ICARs)
Over the past decade, the financial technology market has evolved substantially. With the introduction of cryptocurrencies, policymaker and framers of legislations find the need to implement legislation that will help regulate this growing market. Since cryptocurrencies operate beyond the banking system, it tends to present some challenges. Several jurisdictions around the world have embraced the challenges that come along with cryptocurrencies while others have outright rejected recognition thereof.
In the UAE, cryptocurrencies and terms associated therewith were somewhat foreign; however, over the years, UAE has become an active participant in this global trend. In keeping with the aim of its UAE Blockchain Strategy 2021, the Government has made several attempts to transform UAE into a crypto hub. The FSRA, being the regulator of securities in ADGM, has issued several supplementary and comprehensive guidance for carrying out activities related to cryptocurrencies, other authorities like the SCA and DFSA have followed suit.
The Securities and Commodities Authority (SCA) has recently issued Regulations for Issuing and Offering Crypto-Assets (ICARs). The ICARs aim to regulate crypto-assets right from issuing, licensing, promotion, exchanging and all such other aspects that govern it.
The Regulation aims to regulate matters connected with the promotion, offering and trading of crypto assets in the state and related financial activities. The Regulation authorizes the SCA to exercise discretion in the following matters:
- Protecting investors and other individuals against the risks connected with dealing in crypto assets.
- Preventing financial crime and ensuring proper application of laws with regards to the prevention of financial crime in the state.
- Ensuring proper application of laws for the use of financial instruments.
- Protecting the reputation of the state and maintaining all such protocol that ensures the maintenance of the state’s international commitments.
- Promoting innovation, competition and evolving new means of financing enterprises operating within the state.
- In admitting a new licensee under the regulations, examining the suitability and reputation of the applicant and all other parties connected to the applicant.
Scope of application
The introduction of these Regulations is a turning point for crypto-asset Regulation in the country. The ICARs applies to any person who:
- Is engaged in promotion, issuance, or offering crypto assets for sale to persons in the UAE or persons who are engaged in such activities. It aims to capture a wider audience through cross border dealing in crypto assets.
- It aims to provide services with respect to, custody, operation of exchanges that deal with cryptocurrencies and providing a platform for raising funds for cryptocurrencies that are issued in the UAE.
- Any other person who conducts Financial Activities within the territory connected with crypto assets.
There are certain exemptions that have been made regarding persons/ entities that fall under these Regulations. Therefore, the scope of application is limited to the aforementioned and does not include:
- Crypto assets issued by the local or federal governments, institutions, authorities or companies that are wholly owned by the Government.
- Currency (virtual or otherwise), units of stored value or any other such items that have been issued in a facility that have acquired or are required to acquire prior approval from the Central Bank.
- Dematerialized securities in a clearing or settlement system not issued as a crypto asset but administered using an electronic record-keeping method controlled by the issuer or approved registrar, unless it qualifies as a crypto asset due to other connected features.
- Activities conducted within the financial free zones within the territory of the state.
Listing on a crypto-asset exchange
Article 8 of the ICAR stipulates that no crypto-asset shall be listed and made available for trading on a crypto-asset exchange within the state, unless:
- Where the crypto-asset exchange is limited to accepting on qualified investors following the filing of the offer documentation with the Authority.
- Where the crypto-asset exchange becomes available to persons other than qualified investors, with prior assent of the Authority.
The Regulations further provide that, approval shall be granted to the applicant subject to the satisfaction of the following:
- All crypto-assets except the ones falling under-recognized cryptocurrencies under Article 19 must comply with the provisions that are applicable to commodity tokens under these Regulations.
- Further, the Regulations also require the appointment of a crypto asset custodian unless the need for this requirement to be satisfied can be waived due to the satisfaction of custody arrangements in accordance with the requirements of the Authority.
- Disclosure of all fees and commission paid or to be paid, to the issuer or an offering person must be made to the investors.
- Any and all such requirements as may be mentioned in Article 17 of the Regulations.
Duties and obligations of the crypto asset custodian
A crypto-asset custodian is essentially a third-party entity that provides storage and security solutions for crypto assets. The main aim of such crypto asset custodians is to facilitate institutional investors who hold large amounts of cryptocurrencies and hedge funds to manage their funds.
Holding such large amounts of funds and crypto-assets presents its own challenges. Therefore, the Regulations impose certain duties and obligations in custodians of such cryptocurrencies, and these requirements may be subject to modifications by the SCA accompanied by certain licensing conditions that may be imposed as it may deem fit.
The custodian of crypto assets is required to:
- Create a separate wallet or account for each of their clients that contains information such as details of the holder and the transactions that are conducted on its account.
- The custodian must maintain all accounts separately from its own assets and property.
- The custodian must not transfer, pledge, hypothecate, grant security interest, lien or loans to a third party with respect to the customer’s crypto assets, and neither should the custodian engage in adverse claims.
- The custodian shall be permitted to transfer crypto-assets out of the customer’s account only when specifically instructed to do so. No such initiative is permitted to be taken by the custodian on their own accord.
- Store cryptographic keys and other such sensitive data that may be subject to an online attack outside the ambit thereof. Further, where rights regarding such cryptographic keys exist, no individual in a company is permitted to authorize or take any action regarding crypto assets held for clients.
- Certain procedures and policies shall be put in place regarding actions to be taken in case a crypto asset becomes compromised, or any such loss has been caused to a client.
- A written agreement shall be entered into by the crypto asset custodian with their client, which lays down all the duties and obligations as per the provisions of the Regulation.
- In case there is a conflict between the functions of the crypto asset custodian and any other related activities associated thereto, it shall be referred to the Authority is no action can be taken to avoid such conflict, along with information regarding the system that is used and controls that mitigate the issue and must ensure that all such disclosures have been made to the clients.
The Regulations also lay down certain rules for the operation of crypto-asset exchanges, a broad enumeration of the same is provided below:
- Ensure that all information regarding trading and transactions are provided to the Authority.
- Effectively carry out surveillance to identify, monitor and detect any such practices that lead to market abuse or financial crimes.
- Ensure that the crypto-asset exchange is subject to adequate Financial Crimes Controls and the rights granted to users are protected.
- Permission to access the crypto-asset exchange is to be granted to specific persons who are able to demonstrate a good track record of regular investment in crypto assets; those persons who access the exchange merely for the purpose of acquiring and selling crypto assets.
- Ensure fair and transparent rules are put in place which ensures suspension or termination of access to markets in case a person does not meet the obligations imposed with respect to crypto transactions, and all such other rules enumerated under Article 16 of the Regulations.
Crypto fundraising platforms
Funding is a necessary prerequisite for any type of investment, similarly for any new or existing crypto project funds are required. Any person desirous of starting a crypto project needs to fist raise funds, these funds, however, cannot be raised from just any source. The Regulations lay down certain standards for raising funds in Article 14 thereof.
- Fundraising is permitted to be conducted only by such persons who have received the assent of the Authority to conduct such an activity.
- A cap of AED 50,000 has been imposed on the amount permitted to be invested by customers.
- The regulations also lay down that, fundraising can be accepted only in those currencies and crypto assets that can be subject to the Financial Crime Controls in accordance with Article 22.
- All the disclosure requirements mentioned in the regulations are required to be complied with, and the person raising such funds shall be answerable to the Authority for such compliance.
- The fundraising platform must not permit any trading or exchange activities of issued crypto-assets unless that same has been approved by the Authority.
The Regulations also impose certain requirements for operating a fundraising platform. Any person desirous of operating a crypto-asset fundraising platform must obtain a license from the Authority, this application shall be subject to certain modifications by the Authority as per their requirements.
The requirements are as follows:
- The applicant must be a corporate person in any of the forms as prescribed by the Custody Regulations or; a person authorized to operate a crypto-asset exchange.
- An offering person of crypto-assets where the scope of the proposed crypto fundraising platform is limited to being in respect of the relevant crypto-asset.
- The applicant complies with all such requirements as mentioned under Article 21 and 22 of the Regulations.
- Any such additional requirements may be imposed by the Authority in case the customers are exposed to any risk that cannot be adequately covered.
The SCA takes into consideration the possibility of financial crime and introduces requirements that would help mitigate risks related to these crimes. It lays down various requirements such as business risk assessment, the effectiveness of financial crime controls, monitoring financial crime, carrying out due diligence, assigning a high-risk rating to clients that deal in crypto assets, designating bank accounts through which such transactions can be effected, tracing transactions involving crypto-assets and so on.
It is to be noted that, crypto assets which are not permitted to be traced are not permitted for use in order to fund accounts or make transactions through persons authorized through the Authority.