The UAE’s Cryptocurrency Landscape
& Regulations
Introduction
The United Arab Emirates (UAE) is determined to establish itself as a leader in technology and blockchain. Thanks to its favorable regulatory environment, marked by the creation of the Virtual Assets Regulatory Authority (VARA) in Dubai, numerous digital currency exchanges and trading platforms have established a presence in the country.
Executive Summary
“The UAE’s legal status of cryptocurrencies has paved the way for a thriving ecosystem with several state-level initiatives in Abu Dhabi, Dubai, and Ras Al-Khaimah.”
In this report we examine the cryptocurrency environment in the UAE as it stands today (September 2024) and describe its legal framework. We analyse the crypto market and look at P2P and OTC exchanges in the context of the UAE regulatory environment.
After an initial reluctance to become involved in crypto, the UAE has for some years been making great strides in positioning the country as a leader in the virtual assets industry. The Virtual Assets Regulatory Authority (VARA) established in Dubai in March 2022 created a favorable regulatory environment, encouraging the establishment of many digital currency exchanges and trading platforms.
The favourable legal environment of the past two years has led to a thriving crypto industry with several (and growing) state-level initiatives in three of the UAE’s emirates, Abu Dhabi, Dubai and Ras Al-Khamiah.
These businesses are bound by strict Know Your Customer (KYC) and Anti-Money Laundering (AML) rules, ensuring security for customers in an environment of transparency and financial integrity. At the same time, however, over-the-counter (OTC) and Peer-to-Peer (P2P) exchanges are operating beyond regulatory oversight.
The UAE’s crypto regulation journey
Abu Dhabi Global Markets (ADGM) founded.
ADGM introduced cryptocurrency and digital asset guidance (via the FSRA), setting a regulatory framework.
Abu Dhabi launched a global technology system, Hub71, to house startups and investors and boost innovation. By 2023, it announced $2 billion in funding to support Web3 projects.
A dedicated court was set up to hear cases of financial crime.
The UAE adopted a penal code to complement existing AML rules.
The DIFC created the Virtual Asset Regulatory Authority (VARA), the first independent regulator for digital assets.
VARA launched full market product (FMP) regulations after several months during which VARA had granted provisional licenses to Virtual Asset Service Providers (VASPs), enabling them to set up offices and employ staff while not conducting customer-facing business. Next, VARA set up a Minimal Viable Product (MVP) license regime which allowed specific providers to operate in a limited capacity in certain authorized markets only.
The ADGM announced revisions to its AML and sanctions rules and guidance. Changes were made to those provisions which were related to digital assets with the FATF’s travel rule.
The UAE announced the first federal-level regulations governing virtual assets, designed to supervise the industry and protect investors.
The UAE Central Bank issued AML/CTF guidance for financial institutions dealing with virtual assets.
The ADGM announced the Distributed Ledger Technology (DLT) Foundations Regulations 2023, providing a framework for DLT foundations and decentralized autonomous organizations (DAOs), enabling them to operate and issue tokens.
The DIFC released its Digital Assets Law and the new Law of Security, with amendments to existing regulations, to provide clarity to investors and to keep up with other technological developments.
In recognition of the two years the country had spent improving its financial regulatory framework, the FATF removed the UAE from its grey list.
Source: Cryptoforinnovation.org
Crypto Asset Usage in the UAE
- Major crypto platforms & channels
The main channels for buying or exchanging virtual assets are direct-access domestic exchange services i.e. Binance, CoinMENA, BitOasis and Rain. There is also an increasing number of P2P exchanges and online marketplaces for specific crypto-redeemable assets such as Binance gift cards.
- Social media and online platforms
Telegram, WhatsApp and blogs have become popular avenues for virtual asset transactions beyond the reach of the country’s regulators, including accounts offering P2P services. Many of these groups also provide offers to buy USDT via in-person cash exchanges or bank transfers.
Market Overview - P2P and OTC Exchanges
Overview of offshore P2P platforms
Offshore P2P exchanges including Binance P2P, OKX P2P, and Bitget P2P offer a choice of payment methods, reflecting the differing requirements of their customers. As of today, bank transfers are the most popular payment method.
“Up to nearly 1500 adverts on a single day via P2P exchanges aptly demonstrates how dynamic the UAE’s crypto market is.”
The popularity of P2P exchanges is illustrated by the volume of advertising: In a single measured 24-hour period in July 2024, a total of 1,467 adverts buying and selling crypto worth over 10M AED (United Arab Emirates Dirham) were counted:
- ‘Buy Ads’, which sell crypto, accounted for 392 adverts worth 2.6M AED, with a single (1) USDT being sold for 3.77 AED on average.
- ‘Sell Ads’, which buy crypto, accounted for 1,075 adverts worth 7.4M AED, with 1 USDT being bought for 3.67 AED on average.
The UAE’s centralized crypto exchanges
In the UAE, several Over-the-Counter (OTC) crypto exchanges have emerged, specializing in facilitating face-to-face transactions, particularly renowned for managing substantial cash exchanges. Notably challenging to track, these exchanges provide a discreet avenue for individuals to seamlessly convert large amounts of cash from various currencies into cryptocurrencies and vice versa.
Operating on a discreet level, these OTC exchanges prioritize user privacy and anonymity. One distinct operational characteristic is the utilization of private personal wallets that enhance transaction confidentiality, making it difficult for authorities and Blockchain Analytics tools to identify them.
OTC exchanges in the UAE cater to high-volume transactions, attracting both individual and institutional investors seeking to conduct sizable trades in fiat currency for cryptocurrencies and vice versa. The direct, face-to-face nature of these exchanges fosters transparent communication and negotiation, establishing a heightened level of trust among participants.
The UAE crypto regulation environment
By requiring cryptocurrency companies to obtain licenses and comply with regulatory obligations, the UAE is taking a proactive step towards managing these risks while fostering innovation and growth in the industry:
The current legal framework governing virtual assets
- The Virtual Assets Regulatory Authority (VARA) was established and authorized by Law No. 4 of 2022 Regulating Virtual Assets in the Emirate of Dubai (Dubai VA Law) to regulate VASPs and is affiliated with the Dubai World Trade Centre Authority (DWTCA). It is responsible for overseeing and regulating the activities of VASPs and investors in all areas of Dubai, including Free Zones and Special Development Zones.
- In early 2023, VARA issued its comprehensive Virtual Assets and Related Activities Regulations 2023. These were designed to provide a comprehensive framework for regulating virtual assets, focused on addressing the risks that investors and the market face when it comes to the activities of virtual asset platforms. The regulations also establish standards for a compliance framework consistent with other regulatory bodies’ requirements.
Licensing regime and requirements for VASPs in the UAE
- All entities must get authorization and a license from VARA before commencing any virtual asset (VA) activities and must adhere strictly to all VARA’s periodically updated licensing regulations.
- VASPs with a VARA license who expand their business beyond the UAE, adherence to the Emirates’ rules, regulations and directives will remain compulsory.
- VASPs are obligated to meet every licensing condition stipulated by VARA. This includes a broad spectrum of Regulations, Rules, and Directives communicated during the licensing process or at various intervals.
- For VASPs with a VARA license who wish to expand beyond the UAE, adherence to the Emirate’s Regulations, Rules, and Directives is compulsory.
- While some professionals such as lawyers, accountants and certain business consultants may be exempt from the licensing requirement, this will apply only if their virtual assets activities remain adjuncts to their primary profession. They must also remain under the guidance of their professional body within the UAE and must keep up the relevant professional indemnity insurance.
- Exempt entities are not bound by standard regulations but need to inform VARA about their operations and receive a no-objection confirmation before starting any VA Activities.
- Entities handling vast volumes of virtual assets – equivalent or more than USD 250K within any 30-day span – have a mandatory registration with VARA.
- Entities can also choose to register voluntarily with VARA, especially those seeking commercial or free zone licenses in the Emirate for specific activities related to virtual assets.
VARA’s rulebooks for VASPS
All VASPs that are licensed by VARA must follow four compulsory rulebooks:
VARA also developed seven activity-specific rulebooks to address the risks associated with the operations of virtual assets:
Find out more about the UAE’s regulatory landscape here.
Crypto crime in the UAE
Instances of illicit activities that accept crypto assets for payment, including prostitution services, gambling groups, and drug dealer scams, have also been identified:
- Prostitution: In the UAE, prostitution is illegal, although Crystal’s investigations found six crypto-accepting prostitution services advertised on the messenger app Telegram.
- Gambling: In the UAE, gambling whether online or offline is illegal. However, Crystal discovered at least four crypto-accepting private gambling sites with UAE IP addresses.
- Drug dealer fraud: Several Telegram groups posing as drug dealers have emerged, claiming to sell drugs in the UAE. These groups, which are scams, falsely advertise the sale of drugs and accept payments through various methods, including bank transfers, VISA payments, and cryptocurrencies.
- Illicit Pharmaceutical Sales: Illicit online sales of abortion pills have been identified, with transactions and advertisements traced on platforms such as Reddit, Quora, and Telegram. According to the UAE law, it is a crime to abort a pregnancy unless certain conditions are met. Black market contraception is often linked to human trafficking and prostitution, child abuse and other forms of serious crime.
Get detailed analyses of criminal activity in the UAE’s crypto industry and case studies by contacting us here.
Risks to the UAE’s crypto industry
Unregulated OTC and P2P exchanges pose significant risks to the UAE. While they prioritise privacy and convenience for both vendors and customers, they avoid supervision and oversight, thus enabling criminal activity and escaping the UAE’s VA regulatory and supervisory framework and breaking the law.
- Unregulated P2P and OTC Exchanges: The report identifies potential risks associated with unregulated P2P and OTC exchanges, emphasizing the need for users to exercise caution when engaging with such platforms.
- Russian Community Influence: The significant presence of Russian-speaking P2P exchanges raises questions about potential regulatory challenges and the need for international cooperation to address cross-border crypto activities.
- Prostitution, Gambling, and Illicit Pharmaceutical Sales: The report highlights illegal activities such as prostitution, gambling, and illicit pharmaceutical sales involving cryptocurrencies. Addressing these issues requires collaboration between regulatory bodies and law enforcement.
Get detailed analyses of risk factors in the UAE’s crypto industry by contacting us here.
Popular activities in the UAE’s crypto industry
Social media groups engaged in P2P or OTC services
- Crystal identified at least eight Telegram groups which provide P2P and OTC services for customers in Dubai. Some of them frequently change their Telegram identities to avoid detection by authorities.
- Pakistani social media groups were identified as often using social media as P2P trading platforms. The most prominently used platforms are Facebook and WhatsApp. Many Facebook pages advertise themselves as exchanges but work as points of contact for P2P trade.
They link to WhatsApp accounts, mostly with Pakistani and European mobile numbers, where a customer can inquire and pay via Easypaisa (a Pakistani money transfer app) and the “exchanger” transfers the pre-agreed cryptocurrency to the customer’s wallet.
Marketplaces accepting crypto as payment for goods
There is a growing trend among several companies and developers who are accepting cryptocurrencies in exchange for goods. Crystal identified:
- Twelve companies accept crypto as payment for real estate.
- Three companies accept crypto as payment for gold and jewelry.
- Four companies accept crypto as payment for cars.
Get detailed analyses of crypto uptake in the UAE’s business sector by contacting us here.
Recommendations
- Regulatory Vigilance: Introduce and reinforce regulations ensuring compliance and monitoring of P2P and OTC crypto platforms to deter illicit activities and scams.
- Public Awareness: Launch awareness campaigns to educate users about the risks associated with crypto transactions, emphasizing the prohibition of illicit activities and scams.
- Collaborative Actions: Encourage collaboration between regulatory bodies, financial institutions, and crypto exchanges to establish a comprehensive monitoring system. Shared intelligence can enhance the detection of suspicious transactions involving real estate, gold, cars, and other high-value assets.
- Enhanced Due Diligence: Implement stricter verification measures and due diligence procedures by crypto service providers to counteract illicit activities.
- Seizure and Asset Forfeiture: Strengthen mechanisms for the seizure and forfeiture of assets linked to crypto-enabled crimes. Disrupting the financial incentives of criminals can significantly impact their operations and serve as a deterrent.
Conclusion: The future of cryptocurrencies in the UAE
The UAE’s progress in its crypto regulation journey was best expressed by its removal from FATF’s grey list in April 2024. The impact of improved AML/CFT regulation and compliance is also seen in the uptick of crypto businesses and dealers moving their operations to the UAE to enjoy its safe and accommodating virtual asset legal framework. If the risks described in this report are constantly addressed, the next step for the UAE is to harmonize crypto regulation throughout the Emirates.
To learn more about how Crystal can help you navigate the evolving crypto industry landscape, please book a demo here.
